Solvency II Challenges U.S. Asset Managers01.24.2013
Asset management firms on both sides of the Atlantic face a steep hurdle in order to comply with new European Union capital adequacy and risk management rules for insurers, called Solvency II.
Solvency II requires insurance companies to prove they have enough capital funding to prevent them from failing, placing a significant reporting burden on asset managers who will be required to provide unprecedented levels of transparency on the investments of their insurance company clients.
While Solvency II is of European origin and primarily targeted at the insurance industry, it has global implications for the asset management community.
“Solvency II is not just about regulation, it’s about a broad wave of demand for transparency from pensions and other institutional investors,” said Conor Smyth, senior vice-president of global sales at MoneyMate, a specialist provider of investment data management solutions. “While the biggest impact of Solvency II will be in Europe, it’s also being felt by U.S. insurance companies with customers in Europe.”
Once Solvency II comes into effect, asset managers will have to facilitate a timely report of line-level holdings for all funds they are managing and must provide a full look-through until the report has just ‘leaf’ level holdings.
Although most of the details of the Solvency II regime have been settled, significant disagreements persist in several key areas, such as the calculation of technical provisions for long-term business and the treatment of third country insurers.
There is also disagreement over the legal framework, according to a client memo by law firm Freshfields Bruckhaus Deringer.
The European parliament considers that the Level 1 text, the Solvency II directive itself, should enshrine all policy choices and strategic decisions.
The European Commission, on the other hand, would prefer most of the rules to be set out at the more detailed Level 2 regulation, the so-called implementing measures. The choice of regulation, rather than directive, in the case of the Level 2 text, which sets out much of the final detail of how the directive will work in practice, means that it will not require transposition into member state law—and individual countries will not be allowed to alter in any way the new standards.
The Solvency II directive, which has suffered many delays already and was meant to be implemented from January 2014 but is not now likely to be in operation until January 2016, requires insurers to develop ’look-through’ transparency over their investments, placing a significant reporting burden on asset managers who will be required to provide unprecedented levels of transparency on the investments of their insurance company clients.
In order to retain the mandates of insurance clients, asset managers are being asked to disclose their holdings data which could reveal the investment strategies they are employing.
MoneyMate has developed a look-through and reporting utility that will enable buy-side participants to provide holdings data to insurance investors in a “permissioned” and controlled environment.
MoneyMate’s Fund Price and Information Exchange utility is a centralized repository which normalizes and stores data before it is offered via permissioned distribution to the relevant insurers.
“Asset managers can meet Solvency II reporting requirements while still controlling access to look-through views of holdings data within a secure environment,” said Smyth.
Furthermore, asset managers are provided with identification of their insurance investors who require access to their data, allowing them to identify which investors are in funds with high capital ratio requirements, giving them the ability to provide these investors with the most Solvency II friendly products available.
Upgrades enable hedge funds and asset managers to gain actionable insights quicker and more efficiently.
They will help investors identify companies committed to improving gender diversity.
Investors are seeking the tax efficiency, trading flexibility and cost benefits of ETFs.
US Department of Labor has allowed pension plan fiduciaries to consider ESG factors.
Goldman Sachs Asset Management agreed to pay a $4m penalty.