Data Management Implications of Solvency II on Asset Managers

As Europe’s largest financial services institutions face a growing number of new or revamped regulations including Basel III, UCITS IV, MIFID II and Solvency II, they are caught in a dilemma. They could create separate data management infrastructure for the different regulations or they could implement a single solution that would require minimal tweaking to deliver the reporting required by each of the new regulations. Purchasing separate systems for each can be prohibitively expensive - a converged solution is the way to go.

But even though a unified solution is ideal, data managers must determine which path to integration and implementation will provide the least resistance and the most wins. One way would be to identify the regulation whose data management implementation would come closest to meeting the requirements of the other rules. For insurance firms and financial services organizations with an insurance division, Solvency II would probably come closest to this.

Structured to ensure better risk management in the insurance industry, Solvency II’s extensive requirements have major repercussions on insurers, asset managers and third party data managers. Solvency II, which comes into effect at the start of 2013, places enormous reporting responsibilities on asset managers who will be obliged to adhere to a yet unprecedented degree of transparency and disclosure to clients and investors.

Solvency II will demand that asset managers generate reports with a higher granularity of information than ever before. The degree of granularity required will depend on the asset type in question. Structured products, for instance, will be reported on a position basis while derivatives reporting will take place in a closed and open contract form. Some industry players have gone as far as suggesting that Solvency II reporting will define new benchmarks for data management in the financial services industry. The fact that in the UK alone, insurance firms are responsible for close to a quarter of all assets under management means that the total impact of Solvency II on asset managers is not difficult to envisage.

In the short to medium term, Solvency II data requirements will create substantial challenges for asset managers. As insurance companies ready themselves for the new regulatory framework, it has become apparent that the calculation of SCR (Solvency Capital Requirement) entails the collection of data from a wide range of sources. As such, actuaries will be keen on accurate and detailed asset data as well as quantifiable liquidity and credit risk metrics. This inevitably affects data complexity, quality, timeliness and overall management.

It is important to note that whereas Solvency II demands that data should be complete, accurate and appropriate, it still remains unclear how regulators in each country will define these parameters. That being said, satisfying these parameters will no doubt entail rigorous testing of data flows between in house systems, and between internal and external systems.

Despite Solvency II being less than a year away, several asset managers do not have the processes and systems necessary to locate, collect, verify, standardize and approve data for the new regulation. In the past, asset managers would typically record security identifiers, nominal holders, currencies and prices of securities under their management. With the market risk component in Solvency II, asset managers will have to capture additional information such as derivative attributes, ultimate issuers or counterparties, yields and credit ratings.

Remember that Pillar 3 of Solvency II holds that insurers must submit quarterly reports to regulators no later than the 20 business days after the end of the quarter. This has an impact on asset managers as they have to deliver the input data to insurers well before this deadline - realistically, around the 5 business day after the quarter’s end.

While the Solvency II framework is standard, asset managers will have to engage their clients so as to understand the specific inputs the insurers they serve require. Touching base with the insurance firm well before Solvency II comes into force will also give asset managers to zero in on interface requirements the develop, implement and test the interfaces. Early liaison also allows for ample time to increase storage and system capacity if necessary in order to meet the reporting requirements.