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Solvency II: The Journey Continues

26 June 2014

IDS - Solvency II for Insurance Asset Management

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European Solvency II Survey

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Background

► In the fall of 2013, EY conducted a Pan-European survey, which is an update of its

2012 survey. This is one of the largest and most comprehensive surveys in the industry,

spanning 20 countries, with participants from more than 170 insurance companies.

► Implementing Solvency II requirements will have direct implications for businesses, as

our survey reinforces. The results are a self-assessment of the participating companies

and express their views on current topics relating to Solvency II, as well as where they

stand on implementation readiness for Pillar 1, Pillar 2 and Pillar 3.

► The findings also shed light on key areas of interest, including data and IT readiness,

organizational change, application of internal models, regulatory interaction, recovery

and resolution planning, and capital optimization.

► The survey portrays the implementation readiness of all three Solvency II pillars in

Europe’s largest insurance markets: the UK, Germany, France, Italy, Belgium, the

Netherlands, Poland, Spain, Portugal, Greece, the Nordics and other countries.

The study design Participants and features

Countries with the largest number of

participants:

► Second European EY Solvency II study

► Analysis of market trends in the European

implementation

► Extensive international

coverage (20 European

countries)

► Single country profiles

► Participants from more than

160 insurance companies

► Unique examination scope of

the study

► Covers implementation status of Solvency II

pillars and of other current topics like IT-

system readiness, regulatory interaction and

capital optimization

Germany

France

Central and Eastern

Europe

Nordics

Poland

UK

Belgium

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Key Findings (1)

► Overall, our survey findings indicate the insurance industry is on track to implement

Solvency II by January 1st 2016.

► Our findings also indicate that there is a very significant amount of work for firms to do

between now and then to address preparedness across all three Pillars.

► There is considerable variability in the level of preparedness by country with Dutch, UK

and Nordic insurers most confident of meeting the requirements and French, German,

Greek and Eastern European insurers less confident.

► There is a strong consistent message that insurers are seeking to improve the

effectiveness of their risk management and this covers many dimensions including

culture, appetite, control, people and system.

► The challenges of reporting and ensuring robust data and IT remain very significant and

many firms have yet to sufficiently energize this part of their plans.

► The challenges of achieving internal model approval remain sizeable and there has

been a slight reduction in the number of firms planning to go this route. However, the

leading firms remain strongly committed to achieving internal model approval from

inception of the new Solvency II regime and have aligned their work plans to achieve

this.

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Key Findings (2)

► Many insurers are not satisfied with the level of support from their regulators in terms of

providing timely feedback on plans and around interpretation of the new requirements -

in part this is due to the significant resourcing challenges the regulators are facing.

► Insurers classified as systemically relevant are facing increasing requests for recovery

and resolution plans by their authorities.

► Insurance companies are beginning to invest significant effort in understanding how to

manage their capital under Solvency II and ensure they are properly prepared for the

new regime.

Updated regulatory timeline – confirmed 2016 start date

1. First S2 submission required by

early June 2015

2. Asset manager engagement

required in 2014

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Insurance investment trends

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Page 8

Investment trends - from the insurers

0%

10%

20%

30%

40%

50%

60%

70%

80%

Increasingallocations to

higher yieldingfixed incomeinstruments

such as bankloans and

lower rateddebts

Allocatingmore to less

liquidstrategies

Increasingduration

Reducing cashbalances

Reducinginvestment

related costsby using low

cost betaproducts

Other

Source: Economist

intelligence unit;

206 participants

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► Focus on yield – low yields mean that insurers are looking at investing in less liquid,

alternative assets such as infrastructure and real estate loans.

► Low volatility equity investments – insurers (particularly the large German and UK

“participating” insurance companies) have investment guarantees to meet whilst the cost

of these guarantees are now shown on the insurer’s balance sheet. Insurers need to

develop investment strategies to generate real return whilst minimising volatility.

► Focus on fees – the present value of the fee stream paid to an asset manager is now

crystallised on the insurer’s balance sheet. Alpha will not be crystallised, so a focus on

reduced fees may push insurers towards passive investment.

► Requirement for transparency and high frequency reporting – in contrast to the focus on

fees, insurers have become the “highest maintenance” investors on the street with

requirement for huge quantities of data and more frequent reporting.

► Focus on hedging strategies – only certain hedging strategies will be counted under

Solvency II, so insurers need to re-evaluate their hedging programmes. In addition to the

“participating” business concerns above, “unit-linked” insurers bring the present value of

their annual management charges onto the balance sheet.

Insurance investment trends

New strategies are gaining traction – new balance sheet measures change risk

appetite and focus on fees

Page 9

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Challenges for insurance investment

New asset strategies require significant investment from the insurer – providing

opportunities for differentiation for asset managers

Page 10

► Particular challenges for insurers include:

► Sourcing appropriate investments or managing

the relationship with a third party asset manager

► Evaluating the attractiveness of such

investments and determining an appropriate

metric to use for evaluation

► Valuing such investments

► Determining capital treatment

► Ongoing management of the illiquid asset

portfolio

► Typically, a company will need to invest in new

infrastructure (systems and tools) as well as

processes (challenge mechanisms and decision

mechanisms) to both assess the opportunity at

outset and to monitor the opportunity.

Asset managers able to

provide enhanced service to

insurers to help mitigate

these challenges ought to be

well rewarded.

What do asset managers need to focus on?

Solvency II

1. Data and reporting

2. Fund Look

through

3. Product Development

4. Optimisation

5. Modelling the capital

requirements

6. Asset valuation

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The breadth of impact: Solvency II will touch many areas of an Asset Servicer/Manager

12

Consolidated data

quality/controls reporting to

insurers.

Enhanced provision of data

governance, quality and SLAs

over the timely receipt of data

into the asset servicer.

Clear understanding as to

where expert judgement has

been applied within the data

flow.

Clearly articulated known

data limitations (e.g., where

quality cannot be assessed;

where errors exist or

thresholds are not met).

Ability to evidence data flow

and control from source to

extract.

Architecture changes may be

required to ensure data can

be stored, supplied and

provided on a timely basis

with appropriate control.

Clear understanding and

evidence of data sources and

flows to determine

appropriateness.

Potential to have to report on

the level of data accuracy and

completeness for key data

items.

Greater scrutiny over data

governance frameworks by

insurers requiring ability to

clearly articulate the

components.

Greater consideration of

licensing agreements as

greater volumes of data are

transferred.

Solvency II reporting

requirements mean shorter

timescales for data provision

and remediation. This may

require process changes.

Enhanced set of data

required to be provided to the

insurer.

Potential

touch points

Data

Governance

Data

Provision Timing of

Data

Provision

Licensing

Data

Architecture

Data Flow

Mapping

Data

Limitations

Use of Expert

Judgement

Data Quality

Reporting

Supplier

Management

Data

Appropriateness

Data Quality

Assessments

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2 EIOPA data quality requirements

Insurers will need to ensure Asset Data provided meets the requirements set out by

EIOPA in relation to data quality:

►Embed a system of data quality management across the entity – this would typically

include third party data sources.

►Define objective data quality measures and apply expert actuarial judgement – the

insurer would need to understand asset data quality measures applied over asset

data.

►Ensure manual and automated data adjustments are auditable – where alternative

data sources or amendments are made an insurer may wish to understand this.

►Define and monitor systems for identification, collection, transmission, processing and

retention of data – understanding how asset data providers perform these tasks.

►Assess the appropriateness, completeness and accuracy of data – identification and

evidencing the processes do the asset data provider and insurer have in place to

control data.

Data Quality Requirements

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Other key considerations for insurers and asset data providers

14

3 Ensure a repeatable process is in place at the appropriate frequency for

asset data provision

3 Understand differences and inconsistencies between asset data sources

(e.g. due to inconsistent valuation points or variances in reference data)

3 Ensure data is provided to an appropriate level of granularity with

appropriate licenses

3 Confirm data meets QRT requirements as well as Modelling requirements

3 Where QRT data is pre-populated consider: aggregation mechanism;

deviations between data providers; responsibilities and evidencing of

completeness and accuracy

3 Insurers may look to store more asset data and provide more validation and

verification

3 Asset Data providers need to consider how their data is shared and used

Questions

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