Fund managers and insurers are worried that their data governance practices may not be adequate for Solvency II requirements. However, increased data accuracy and transparency are good things. Firms should should embrace the legislative changes and look for data governance solutions that are located outside their walls, mainly in the form of outsourced data management services.
New legislative program will affect fund managers and insurers
Solvency II is an EU legislative program that will be implemented in all European member states. The new requirements will increase regulatory scrutiny of insurers and asset managers for their compliance monitoring and data governance practices. Financial Advisor explained that Solvency II is expected to burden fund managers and insurers with more administrative work, as they work to operate within the limits of the program. Many industry professionals have expressed concern regarding the level of detailed data their insurance clients will require when the new regulations come into effect in January 2016. While the legislative program is based in Europe, it is has implications for asset managers worldwide.
“Solvency II may burden fund managers and insurers with administrative work.”
The challenges of complying with Solvency II will not be localized to insurers, but also apply to the fund managers who manage those investments. Given the level of transparency and reporting that will be involved, fund managers will likely need help with their data governance practices going forward. Colin Parkin, managing director of Ample Financial Services, agreed that additional resources will be needed by many industry players to achieve compliance before the deadline.
“Solvency II is certainly going to place more demands on the sector and I think people will have to put resources into this to get everything done in time,” Parkin, according to the news source.
Most asset managers are not ready for Solvency II
Insurance Asset Risk pointed out that asset management companies are currently exploring how they will improve their data and reporting capabilities over the next five months. A global survey of 100 insurance executives and fund managers, administered by a Boston financial services firm, discovered that 36 percent of respondents felt fund managers for not ready for Solvency II. Many asset managers do not have the resources or capabilities to provide the level of detail required for investment data that their insurer clients will need under Solvency II. Additionally, 8 percent of respondents claimed asset managers are “very unprepared.” The most optimistic of the respondents – 41 percent – indicated that fund managers may be able to deliver the level of data required, but it would be an uphill battle to do it before the deadline comes into effect.
Adding to the already existing state of dismay, some fund managers argued that the reporting requirements may result in some of their strategic positions being leaked. Accordingly, 31 percent of survey respondents were “very reluctant” to share their information with insurers, and 56 percent were “slightly reluctant.” Perhaps most importantly, 65 percent of respondents held the view that sharing proprietary data could have negative repercussions for the industry. Since increased data reporting could lead to insurers opting to take on less risk, that attitude, paired with a low inflation environment, might weaken fund returns – a situation that could lead to insurers being unable to meet their commitments to clients. Under Solvency II, higher capital charges for insurers may dramatically reduce their exposure as well. It remains to be seen whether any of this is actually true.
Are these concerns unfounded?
While increased data governance may in fact lower the risk appetite of insurers for a time, ultimately, better data transparency and reporting is good for the industry. At the end of the day, these moves are aimed at protecting individual investors and the health of the global economy at large. It is important to remember that the financial crisis of 2008 was essentially brought on by a failure to properly assess credit risk. Furthermore, many fund managers and insurers may in fact struggle to improve their data governance practices before the January 2016 deadline, but they are not alone.
From the need for better data management practices, companies that specialize in managed data services have risen to help alleviate this pain point and fill the gaps. Many asset managers face difficulty accessing data, maintaining consistency across data sets and ensuring accuracy, but managed data services companies are able to provide steady and reliable data streams tailored to suit any business need. As previously mentioned, some fund managers worry about the added administrative burdens that Solvency II and other regulations will place upon them, but with outsourced data management services, that concern is unfounded. Firms amending their data governance strategies should incorporate outsourced data management services in their plan.
Informatica Product Strategy Vice President Rob Karel explained the benefits having a data governance plan as part of the overall business strategy.
“The value of having a plan around data governance, no matter how big or small, is to have a set of processes and disciplines in place to help guide you towards the appropriate business priorities and optimal solutions with a clear identification of roles,” said Karel, according to Business 2 Community. “Once you know that, then you can focus on the critical few. Without data governance to facilitate this process, it’s pure luck whether you get to those critical few priorities or not.”
Though Karel is talking about data governance at large, the point made applies to the financial sector. Instead of worrying about impending regulatory deadlines, originating a data governance strategy that considers reliance on data management firms may be the solution to quelling concerns about Solvency II. The processes and disciplines needed for the new data governance landscape don’t all have to be in-house – its important to keep that fact in mind.