Solving Solvency II

Terry Flanagan

Solvency II, the European Union’s capital adequacy and risk management rules for insurers, will require 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.

“A year from now, Solvency II will go into its initial implementation, and a lot of buy-side firms and insurance companies are looking to get a handle on their portfolio data, to aggregate and classify that information, and account for risk,” Tim Lind, global head of regulatory financial solutions at Thomson Reuters, told Markets Media.

Asset managers are going to be called upon to assess the capital adequacy of their portfolios and ensure they have appropriate assets to meet liabilities, much like banks have had to do. “Every instrument, every asset class, must be accounted for in terms of its risk profile, and what capital should be set aside to protect the insurance company and policy holders against that risk, much like the sell side has done,” Lind said.

Thomson Reuters last year launched a dedicated Solvency II Data Service designed to help insurers, asset managers, fund administers and custodians meet capital adequacy and disclosure obligations under Solvency II.

The service builds on a portfolio of services that Thomson Reuters has created for compliance with other regulations such as Fatca, FRS, Financial Transaction Tax and Dodd-Frank.

While the sell side has borne the brunt of many of these regulations, the buy side is being increasingly challenged to demonstrate its resilience to the kinds of shocks that triggered the Great Recession.

The U.S. Department of the Treasury’s Office of Financial Research last year issued a report that purports to show how activities in the asset management industry might create, amplify, or transmit stress through the financial system.

The OFR studied the activities of asset management firms and funds at the request of the Council, in connection with the Council’s review of non-bank financial companies. The report notes that significant gaps in data about the asset management industry limit the ability to evaluate potential threats and their implications for financial stability.

The Financial Stability Board in 2013 designated nine large insurance groups as Global Systemically Important Insurers, including three from the United States—American International Group, MetLife, and Prudential Financial.

In June 2014, the Financial Stability Oversight Council voted to designate three non-bank Systemically Important Financial Institutions: AIG, General Electric Company’s GE Capital unit and Prudential.

“Solvency II is a harbinger of future regulations that will require the buy side to hold capital against risk, which is a really profound change,” Lind said.

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