European Asset Managers In Solvency II Wake-Up Call

Terry Flanagan

European asset managers have been warned that they are ill-prepared to meet the exacting standards of the upcoming Solvency II directive, and should consider working more pro-actively with the insurance industry, who are more reconciled to the changes, to overcome any problems.

The insurance industry has been gearing up for some time to adopt new European Union capital adequacy and risk management rules, called Solvency II, from 2014 aimed at reducing the risk of insolvency.

However, a new report by accountant KPMG that was commissioned by the European Fund and Asset Management Association (Efama), a trade body, has highlighted some key challenges facing the asset management industry. Asset managers are being warned that the upcoming European directive is not just a problem for the insurance industry, but is also one that rests firmly on their doorstep.

“Detailed data requirements call for a higher level of interaction between asset managers and their insurance clients than has traditionally been the case,” said Daniel Gorton, Solvency II systems and data lead at KPMG.

The report says that asset managers will have to improve their data management as new Solvency II rules will force them to provide information on a security-by-security basis, which may present new challenges as some insurers hold large and diverse investment pools across multiple service providers.

It also warns that asset managers will have to supply insurers with detailed data reports on a monthly basis that meet strict requirements on accuracy as well as being able to reveal to insurers the ultimate asset behind any investment, which will require increased levels of disclosure and exchange of data.

“The absence of a common standard for data transmission between asset managers and insurers greatly increases the complexity of data governance, and the required changes to the asset managers’ model of data provision will require careful preparation,” said Gorton.

Peter De Proft, director-general of Efama, added: “With insurance companies accounting for 42% of total assets under management for institutional investors, asset managers can considerably boost their significance, attractiveness and credibility by working closely with insurance businesses on this directive. As the buy-side players of the financial industry, we hope to strengthen long-term trust among our customers in the insurance business and encourage policymakers to support the development of long-term investment.”

Meanwhile, another report out this week suggests that the European Union’s financial services industry is likely to spend as much as €33.3 billion over the next three years to comply with the multitude of regulatory demands, according to regulatory think-tank JWG.

This figure could even balloon to €50 billion once Basel III—a set of global regulatory standards aimed at toughening up bank capital adequacy rules, which kick in from the start of next year—as well as Solvency II rules begin to bite. JWG spoke to 87 financial services groups in 10 European countries before producing the survey.

However, JWG says that better thought out regulations could actually save the industry €24 billion in implementation costs during a period when it is desperately needed to stimulate economic growth. The industry, it says, is suffering from fragmented operating models and burdensome legacy systems and has been unable to make the step change to an undefined target operating model that regulators are pushing for, but not explicitly mandating.

“Clearly, the fundamental assumption that firms have the ability to produce the data in a way that regulators can understand is being challenged,” said PJ Di Giammarino, chief executive of JWG. “Our analysis shows that the current approach will result in an expensive, untrustworthy picture from which poor judgements could lead to big real-world problems.”

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