UK: Solvency II impacts on Investment Managers

Last Updated: 30 November 2010
Article by Deloitte LLP

Most Read Contributor in UK, August 2017

Solvency II is a new solvency regime for all EU insurers to be implemented by 2012. Similar to Basel II for banks, it is sets the capital requirements for insurers on a risk basis, and has a three-pillar structure covering quantitative requirements, supervisory review and market disclosure.

In the 2009 IMA survey, insurance assets accounted for 23% of the total assets managed in the UK. Investment managers owned by large insurance companies are beginning to be engaged in their Solvency II implementation projects and are identifying a number of key impacts on their investment management operations. However, it does not seem as though many other investment managers have started assessing the potential impact on their business. As such, this presents an opportunity for investment managers to be proactive and get on the front foot with their insurance clients and targets.

Solvency II presents investment managers with the opportunity to re-assess their strategy with respect to the insurance market. Certain managers will see this as an opportunity to provide their clients with bespoke Solvency II solutions whereas as others will determine that the costs of compliance mean they exit the market.

Pillar 1 Quantitative Capital Requirements

Pillar I sets out the minimum capital requirements and allows insurance companies to use a "Standard Formula" where capital charges are standardised by asset class or an "Internal Model" whereby insurers calculate their capital requirements using a bespoke model.

Currently the largest money managers are offering auxiliary services, such as advising the insurer's in-house portfolio managers and providing custom benchmarks to managing insurance company investments. These managers are currently attracting more insurance clients because their expertise offers risk mitigation whilst achieving a desired return on investments. It is likely that as Solvency II unfolds this trend is likely to continue.

The new capital requirements may change an insurer's asset allocation and investment managers should be discussing the potential opportunity to develop new products that more closely match the underlying cash flows associated with insurer's cash flow obligations.

An additional challenge for hedge fund managers is the capital charges that are required by insurers who invest into hedge funds and use the Standard Formula. Although we expect that only smaller insurance companies in the UK will adopt the standardised approach (although some larger European insurers may use this approach), investment managers with these clients will need to consider whether offering managed accounts is a better solution to offering pooled vehicles once the final rules on 'look through' have been settled. For large insurers that use the Internal Model under Solvency II, hedge fund managers will need to provide these clients with adequate information to calculate an appropriate capital charge. This is likely to include historical and current risk data.

Pillar II Supervisory Review

Pillar II sets out the qualitative requirements for insurance companies and defines both the principles of risk management and governance as well as the supervisory review.

As part of their ongoing risk assessment and monitoring, insurance companies are expecting there to be significantly more interaction between themselves and investment managers and an increased amount of oversight by the insurer. Therefore, insurers and investment managers will need to review and potentially update the terms of their SLA to ensure that the services provided are Solvency II compliant. It is likely that these discussions will take time to complete and they will need to be amended to reflect the latest guidance.

Insurers will need to be able to conclude that the controls operating at the investment manager are operating effectively through ongoing monitoring. Further guidance regarding the required oversight by insurers on service providers is expected out in early 2011, but a transparent approach to insurance clients is likely to be required.

Pillar III Market Disclosure

Pillar III sets out the market facing elements of Solvency II including transparency requirements, disclosure requirements and competition related elements.

There are significant additional disclosure requirements for insurers arising from Solvency II. There have been concerns raised by the insurance industry around the scope and the timetable of the reporting requirements. Under the current draft, quarterly reporting will be required by insurers within six weeks of the quarter end reducing to four weeks when the transitional period ends in 2015. This will require significant information to be provided by investment managers on a by security basis.

Insurance companies are currently lobbying against the proposed timeframes and the volume of information to be provided. One of the key considerations will be around what defines a "hard close" and the accuracy of data that needs to be provided for quarterly reporting. For certain classes of asset, information may only currently be provided on a six monthly basis and it remains to be determined what will be required.

With the current deadlines (namely quarterly reporting by insurers within four weeks of the quarter end), many insurers would need the data within one week of quarter end. This is likely to be a challenge for any asset manager to finalise data in that time frame, but is an even larger challenge for managers that outsource their back-office. This is likely to require a new SLA with the back office provider that will most likely come at additional cost.

Consideration will need to be given to roll forward techniques or potentially technology solutions to automate data provision.

Additionally, the specific types of data supplied by the investment manager will need to be reviewed both because of the need for detailed data to calculate the capital charge described under Pillar I, but also that Solvency II will require the insurer to disclosure far more detail about their investments. Simply the name of the investment, the amount owned and the current price is not likely to be sufficient under the new regime.

Next steps

The specific requirements for Solvency II are still evolving, but investment managers should begin to assess if their current operations can meet the future demands of insurance clients and whether there is a cost/benefit of changing their operating model to meet these demands. Given the implementation timeframe those firms that start earliest are likely to implement the most effective and cost efficient processes and be the ultimate winners.

How Deloitte can help

Deloitte is one of the leading advisors to insurers implementing Solvency II and therefore remains in the forefront of the evolving requirements and the needs of insurers. Whether the investment manager is part of an insurance group or independently provides or hopes to provide asset management services to insurance companies, we can help managers identify where they stand against the current Solvency II requirements and identify solutions to any gaps.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.