European Firms Urged to be Ahead of Curve Over ‘Complex’ Solvency II Rules

Terry Flanagan

Insurers and asset managers are being urged to have the correct data management and reporting tools in place ahead of the introduction of the European Union’s Solvency II directive.

Interactive Data, a provider of financial market data, has launched its new Solvency II service in advance of the new EU capital adequacy and risk management rules, which will come into force from January 1, 2014, and are aimed at reducing the risk of insolvency for insurers.

“Addressing Solvency II remains one of the most important pre-occupations of European insurers,” said Nicolas Michellod, senior analyst at Celent, a research consultancy. “They need to not only evaluate how they can leverage existing IT infrastructures, but also to find the right balance between their internal IT applications and specific technology offerings from expert providers to meet qualitative and quantitative reporting requirements.

“This is particularly true when examining the data management requirements that are extremely complex due to the sheer quantity and quality of data that is required to identify, manage and monitor the various risk categories.”

The new service by Interactive Data is designed to support cross-asset data management and reporting requirements under the Solvency II directive by drawing on pricing and reference data for instruments not on liquid markets and will allow firms to set aside adequate capital to match their investment risks.

“Data volumes and complexity will increase due to changes in investment profiles triggered by Solvency II asset risk weightings,” said Brendan Beith, managing director, pricing and reference data, EMEA, at Interactive Data. “Aggregating that detailed asset information from multiple sources could prove to be a difficult and time consuming task.”

Interactive Data says its new service will help to streamline data management, improve accuracy and enhance transparency, by providing insurers and the asset managers that work on their behalf with more granular information on their investments and on the entities issuing the assets.

“The new service really concentrates around the data that is required by organizations in order to really help them with their Solvency II reporting, mainly in the pillar three quantitative reporting templates and also on the pillar one requirements predominantly around market risk and default risk,” Darren Marsh, business manager, risk and compliance services at Interactive Data, told Markets Media.

“As a market data vendor, we are looking to drive the new attributes as well the standard pricing and reference data information that is required to fulfill those reporting requirements.

“Organizations are being guided down a route of looking at asset information and risk in general in a more holistic way. It is about higher volumes and higher quality data but also at the same time about being able to understand and maintain the connections between that data as well and manage this on an ongoing basis in order to fulfill the Solvency II requirements.

“We understand that, in some cases, organizations will already consume a lot of this information but there will be areas such as the hard-to-find pieces or the hard-to-collect information that they won’t be able to. Our service is flexible in that it will support requirements around a small subset of information from the master service that we can also provide so it is almost two levels of service that we provide.”

Under Solvency II, companies can rely on standard and non-standard models to work out their capital requirements. But for firms using the non-standard model, they will need to provide historical data on securities for a full year before the January 1, 2014 implementation date to comply. This means that Solvency II could be upon firms even sooner than expected.

“Although January 1, 2014 is the implementation date across European Union, that is the standard model,” said Marsh. “There is also the ‘soft’ implementation day of January 1, 2013 for organizations looking to calculate their Solvency II capital requirements under an internal model. The idea is that these models need to be in play a full year before implementation date so as to be signed off by the regulator.”

Marsh also warns that it is not just insurers who need to be fully aware of the upcoming Solvency II rules, which are an attempt by the EU to harmonize insurance regulation across the region.

“Solvency II is an insurance regulation,” said Marsh. “However, what we see is insurers rely on intermediaries to manage asset data on their behalf. So, for example, asset management organizations, TPAs [third party administrators] and custodians also need to be fully aware of Solvency II.”

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