January 2015

Solvency II Look Through requirements for insurers and asset managers


Ashley Smith

1. Look Through benefits and challenges for insurers

The requirement for insurance companies to Look Through collective investments and products of a similar structure provides many challenges for not just the insurers but also the asset managers. Insurance companies in many cases are invested with tens if not hundreds of asset managers, and in many cases thousands of funds. This creates complexity on both sides , as if it is not addressed by means of an an industry standard both parties will be forced to share data in multiple formats.

The introduction of Solvency II introduces many hurdles that both fund managers and clients will have to overcome. We at Silverfinch feel strongly that the only credible remedy is through a single, purpose-built standard utility to allow fund managers exchange information with their clients in a secure format that remains totally under the fund manager’s control and in-house and where no cost is born by the insurance investor, which would be the case if standard data vendor models were to be applied. To do this Silverfinch has applied the data model issued by the Investment Management Association in the UK and the BVI in Germany and Club Ampere in France.

Insurers need to remember that whilst Solvency II has a 2016 start date for them, the impact of Solvency II will impact asset managers in advance of this. Asset managers will be required to share proprietary data and investment strategy with insurers well in advance of the official start date and to be in a position to do so many will need 6 months to prepare.

Insurers typically have a very detailed understanding of their liabilities, but not of their assets. Solvency II demands that they understand their investments in more detail and the ancillary benefits and possible uses of mining this information can be substantial. The value of the data captured as part of the Solvency II regulatory processes, typically by the CFO’s office at an insurance firm, could potentially have significant value for the investment committee, strategic asset allocation and risk management.  And from the fund manager viewpoint, a happier client is a client that will pass more business your way.

Silverfinch has carried out extensive work over recent months with insurers and has identified several areas where granular data, and specifically look through for collective investment structures, can assist process improvement and ultimately deliver better business outcomes.

  • Capital saving - hard savings can be made by looking through a fund to reduce the capital from a blanket 49% to a level reflecting the fund’s constituents. In effect, this is fee money for insurers to reinvest with their asset managers.
  • Stresses and shocks – when stressing a portfolio’s likely performance given specific market conditions you are likely to achieve different and more robust models with 100% coverage rather than 75% for example.
  • Model calibration – within the risk framework, the addition of granular, real-world data can assist with challenging model assumptions and the accuracy and appropriateness of customised benchmarks.
  • Historical scenario testing and back testing – testing can be performed using previously unavailable data to check the accuracy of previous model outcomes. Re-running a ‘Lehman’ scenario with heightened levels of understanding of your asset book could provide valuable new insights.
  • Overarching risk models – refining market risk and credit risk models based on the actual asset book and separating alpha and beta to see where genuine ‘real’  value is added over and above market movements.
  • Diversification and correlations – calibrating correlation matrices predicting the interaction and interconnectedness of different asset classes in certain market conditions, based on a full understanding of the current asset class exposure and weightings looking through funds that were previously a ’black box’.
  • Designing better proxies to improve speed, not replacing granular modelling.
  • Strategic asset allocation - greater awareness of the current exposures within an asset book, be they concentration or counterparty exposure, geographic, sectoral or asset class exposures indirectly through fund-of-fund structures.
  • Portfolio construction and optimisation –understanding the makeup of collective investments allows for covariance and correlations to be calculated to direct investments within an asset book. This provides a more solid foundation for constructing and optimising portfolios, diversifying and hedging.

Insurers are already identifying quick wins and fringe benefits from their Solvency II programs. Depending upon the makeup of their businesses those benefits could vary from an improved understanding of the importance of variable annuity or unit-linked business they write, or simply better understanding of their asset book.

There are however some important issues that the insurer will need to consider under the new dispensation. Aside from providing risk management and Own Risk Solvency Assessment (ORSA) reports, insurers are also required to report to their local regulators under Solvency II, the so-called third pillar of the regime. This will require significant amounts of data, never before provided, but now required by European Insurance and Occupational Pensions Authority (EIOPA) and also the European Central Bank (ECB). Reporting is an onerous task; gathering the required data from internal sources, let alone external ones, can be difficult and in some cases impossible. Many insurers have investments with more than 100 asset managers, across thousands of funds.

The following are important points for insurers to note:

  • Data for pillar 1 and pillar 3 must be consistent. In many cases pillar 1 and pillar 3 teams work independently, but the data required for both should be sourced once.
  • Pillar 3 data must be backed by granular data that can be used to evidence an understanding of what has fed both pillar 1 and pillar 2 (the governance and supervision part of the new regulations). Sourcing data that is aggregated under complimentary identification codes (the codes used in Solvency II to classify securities with the same capital charge) without the identity of the actual assets being known will cause insurers problems.
  • Insurers should look to industry standards when sourcing data. Insurers need to be aware of the issues they will face should they look to source data across hundreds of asset managers in multiple formats.  A siloed approach is grossly inefficient and is likely to lead to severe business scalability concerns.
  • Insurers must remember that the responsibility for assigning complimentary identification codes sits with them and not with any third party.

Insurers must also take account of the fact that pillar 3 reporting is not a standalone pillar. It is designed to be the output of the pillar 1 capital calculation process and the pillar 2 decision-making process, and is purely for reporting on what data was used to feed both. It is the report that validates the basis for decision making, the risks deemed prudent by an insurer and the capital deemed necessary, in the process of the business the insurer carries out.


2, A detailed look at how Solvency II impacts fund management reporting functions

As providers of outsourced services to insurance firms, asset managers are drawn into Solvency II, and whilst not being regulated under it, they are a significant party. As insurers and pension firms are their largest clients, asset managers become responsible for much of the data that will feed the calculations for the Solvency Capital Requirement (SCR) and pillar 3 reporting.

The engagement of asset managers can be split into three different areas:

  • Direct investments
  • Segregated mandates
  • Investments in collectives

The first two of these can be dealt with through normal reporting; it’s the third that poses problems. Where insurers are seeking data on collective investment funds, asset managers are being asked to hand over their IP to an external party. Under most circumstances we would expect asset managers to seek to protect this information.

However, most asset managers understand that giving out this data is a requirement for their insurance clients so the focus is more on the ‘how’ rather than the ‘if’. It is clear that asset managers’ issues in this area are many:

  • Protection of IP and what the data will be used for
  • Timing of the data requirement, soon after month end and changes to existing embargo periods
  • Quality of data being provided and the exposure asset managers may face

In the current environment the majority of asset managers will require insurers to enter into non-disclosure agreements, and also sign agreements about the potential issues of attaining such data prior to normal disclosure periods, and the quality of the data.

This is leading to a burdensome legal issue for both sides, and this will only be overcome if business leaders from both the asset management and insurance side find a way to standardise this documentation.

The asset management industry has focused to date on what it is capable of providing based on the above concerns. The focus has been on what it can provide once suitable documentation is in place to protect the use of the data and protect the asset manager from liability where data quality could be a potential issue.

The majority of mainstream asset managers have looked at the reporting requirements and grouped them into three distinct categories:

  • Portfolio reporting
  • Internal look through
  • External look through

The first of these is seen as a client reporting function, which asset managers are in a position to do. Where they have an equity or bond fund it is a reporting function which asset managers have in place already, albeit with additional data elements.

Internal look through is perceived to be an expanded version of this. Where an asset manager has a fund-of-fund structure, where they invest solely in their own in-house funds, it means amalgamating each of the funds and reporting based on the combined picture.

External look through however, does create issues for asset managers. As we identified in Section 2, asset managers, where they invest in their peers’ funds in a fund-of-fund structure, have difficulty in attaining the data from their peers to complete the amalgamated view required by insurance investors.

The view taken by asset managers is that this is a small percentage of the entire investment book when they look top down on where and how they invest. That picture may be true when asset managers take this top-down view, as some may have less than 5% of their investments in external fund-of-fund portfolios.

However, asset managers need to look not only where they invest, but also to who invests with them. Many asset managers have investments from their peers into their own equity and bond funds, along with their internal fund-of-fund structures. This means that an asset manager in many cases will have an investment from an insurer needing look through, but via a fund managed by a peer.

Our analysis of 28 fund-of-fund structures showed that 68% of asset managers who had such a framework also had investment from peer asset managers into their own funds. This widens the external look through issue considerably.

So in reality the asset manager should not be solely focussed on which insurers are directly invested with them, but also with insurers that are investing with peer asset management firms, who in turn invest in them. This raises a major issue for many asset managers – giving your data in a timely manner to an institutional non-asset manager client is one thing; giving your data to a peer is a whole different kettle of fish. This raises the specific need for an honest broker to sit between the peer firms and the ultimate investor.

What also became most evident in our investigation was that the largest asset managers also had the greatest quantity of investment from their peers, and would be required to provide data to them to complete look through. The more successful an asset manager, the larger their exposure to external look through.


We have identified that a major difficulty for fund managers is how to meet client reporting expectations while at the same time protecting valuable IP. The advent of Solvency II regulatory requirements for insurers, a major subset of fund management clients, means there will be greater demand for disclosure from fund managers. Significantly, there are fears that disclosure rules may mean asset managers passing on their IP to their competitors.

The purpose-built standard utility to aid fund managers securely interact with their clients is by far and away the optimal solution for both investment managers and their clients, the insurers.

For insurers the purpose-built standard utility:

  • creates a standard that can be applied to all investment managers
  • is zero cost, greatly increasing client satisfaction
  • allows the insurance industry to rapidly and easily meet the new regulatory requirements
  • allows for more effective investing by fully outlining the risk/reward balance of a portfolio

Silverfinch is the only global standard that fits this requirement. Established after consultation with Europe's fund management representation groups, fund management companies, insurers and regulators, the utility is rapidly gaining traction in both the investment management and insurance industries.

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