Solvency II, which came into effect on 1 January 2016, introduces a risk-based approach to the supervision of insurance companies. This approach includes risk-based solvency requirements for insurance companies designed to ensure that risk is measured on consistent principles and that capital requirements are aligned with the underlying risks of the insurance company concerned.

In order to facilitate this risk-based approach, Solvency II requires a greater level of disclosure, transparency and reporting from insurance companies in respect of the assets in which they are invested. This more detailed information on assets is required for regulatory reporting and solvency capital requirement calculations. Obtaining this asset information also facilitates compliance with the prudent person principle and assists in maintaining an effective risk management system as part of the system of governance.

Regulatory reporting

Insurers are required to report to the Central Bank of Ireland (the "Central Bank"), (as part of their quantitative reporting templates), information on the assets in which they are invested by asset category, country of issue and currency. This requires a look-through to the underlying assets of collective investment undertakings/funds in which the insurer is invested. This look-through must be performed until the asset categories, countries and currencies are identified and this approach must also be followed for funds of funds. Insurers must ensure that information, including asset information, provided to the Central Bank is relevant, reliable and comprehensible. In Ireland, insurers are also required to annex a Directors' Accuracy Certificate, signed by at least 2 directors and the chief executive officer, to the annual quantitative templates, each own risk and solvency assessment (the "ORSA") and the regulatory supervisory report or the annual summary thereof attesting the accuracy of the information provided in those templates and reports.

Solvency Capital Requirement (the "SCR")

The Solvency II Delegated Regulation ((EU) 2015/35) provides that insurers using the standard formula must calculate the SCR on the basis of each of the underlying assets of collective investment undertakings and other investments packaged as funds. This means a look-through approach must be applied to gather information to assess the risks of investments in collective investment undertakings and other investments packaged as funds. The EIOPA Guidelines on the look-through approach provide that insurance companies should perform a sufficient number of iterations of the look-through approach to capture all material risks.

Where the look-through approach cannot be applied, the Solvency II Delegated Regulation ((EU) 2015/35) goes on to provide that the SCR may be calculated on the basis of the target underlying asset allocation of the collective investment undertaking or fund, provided this target allocation is available to the insurer at the level of granularity necessary for calculating all relevant sub-modules and scenarios of the standard formula and the underlying assets are managed strictly according to this target allocation. As insurers' capital requirements will depend on the actual risk of their investments, where the look-through information is not available and this alternative approach is not possible for the calculation of the SCR, insurers will have to apply the type 2 equity capital charge which requires the insurer to hold more capital.

Prudent Person Principle and System of Governance

Solvency II requires insurers to invest in assets in accordance with the prudent person principle. As such, they must only invest in assets whose risks they can properly identify, measure, monitor, manage, control and report, and appropriately take into account when conducting the ORSA. The ORSA is an integral part of the business strategy of the insurer and must be taken into account on an ongoing basis in the strategic decisions of the insurer. Obtaining this asset information from asset managers means insurers will gain greater insight into their asset portfolio which will in turn assist in effective risk management.

Challenges of obtaining Asset Information

Insurers require this asset information to comply with their Solvency II obligations and insurers will be looking to their asset managers to provide this information. Depending on the level and type of the insurer's investments, an insurance company may deal with multiple asset managers who in turn may deal with multiple fund structures. Therefore, obtaining this asset information creates challenges for both insurers and asset managers.

Insurers will first need to determine the scope and frequency of the asset information required and then request this information from their asset managers who may have concerns about providing such information on, amongst others, confidentiality grounds. In addition, insurers must provide relevant, reliable and comprehensible information to the Central Bank and submit the Directors' Accuracy Certificate attesting the accuracy of the information. Therefore, insurers will also require assurances from the asset managers as to the accuracy and reliability of the asset information provided.

A single asset manager may not have all the underlying asset information required by insurers and, consequently, information may need to be obtained from several other asset managers or from other service providers, in particular where a fund of funds structure is in place. Facilitating the exchange of asset information where a fund of funds structure exists gives rise to confidentiality issues as it will involve asset managers disclosing information on their investment strategies to other asset managers. This will also mean that asset managers who do not have direct insurer investors may also receive asset information requests from asset managers with insurer investors who have invested in their funds of funds structures.

Despite the challenges that these obligations pose, asset managers who wish to retain insurers as investors will need to facilitate the provision of this asset information to insurers within the necessary timeframes. In doing so, asset managers should seek to limit the use of the asset information provided and ensure that the confidentiality of information provided to insurers or other asset managers is maintained by putting non-disclosure agreements in place. Asset managers of fund of funds will, in turn, need arrangements in place with the asset managers of any target funds in order to obtain the necessary look-through information within the specified timeframes.

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