With less than two months until the introduction of Solvency II regulations, it is time for insurance companies to assess where they are with compliance and what they need to do to ensure it. As this is the biggest reorganization to the insurance industry in recent memory, all insurers, regulators, asset managers and third-party service providers need to be prepared for the difficulties of compliance.
However, as these changes loom, insurance companies have made it clear that they expect asset managers to provide them with all the data required to comply with Solvency II in a timely manner. Failure to do so may mean replacing their asset managers with firms that are able to deliver the relevant information as required. This is where the use of a managed data service would protect asset managers from any data requirement and availability challenges.
“Failure to do so may mean replacing their asset managers to find firms that can deliver the relevant information as required.”
Solvency II will cause significant changes
The challenges in ensuring compliance with the Solvency II Directive is as much a burden for asset managers as it is for insurers. As these firms manage the assets for insurance companies, they will need transparency and high-level reporting, which will require data governance systems to not only delivery in a timely manner, but to ensure that they have accurate and high quality data. This will mean that asset managers need additional resources to achieve compliance before the Solvency II start date.
However, there is industry concern among insurance companies that asset managers are not prepared. According to a recent State Street survey of more than 100 insurance executives and fund managers, 36 percent of insurers believe asset managers are unprepared for the investment data requirements under Solvency II.
With this in mind, many insurance companies have begun to rethink their criteria in selecting asset managers after Solvency II takes effect. According to an Insurance Asset Risk Magazine interview with Mark Friend, chief operating officer at Premier Asset Management, the accuracy and timeliness of asset data delivery could end up as the deciding factor for insurance companies.
“An asset manager’s willingness and ability to provide accurate and timely look-through data will become a key factor in their decision-making process,” Friend explained. “Those asset managers who fail to grasp this particular nettle are going to make themselves unattractive to insurers.”
One of the expected changes after Solvency II is that insurers will work with less asset managers. Given the fact that insurance companies will need enhanced mandates to meet the regulatory burdens, they will need to scale back on the number of asset managers they work with because it will not be financially or operationally feasible. Overall, the mandates regarding asset managers will be stricter and more encompassing after Solvency II.
Asset managers need to live up to the new expectations required to manage the portfolios for insurers in the new regulatory environment. In essence, asset managers need to ensure that their value-add for insurers is equal parts investment management to meet capital requirements and back-office data governance to provide the required information within established timelines. Therefore, in their service offerings, asset managers need to assess their own value proposition for insurers to ensure their stake in the market.
Solvency II will require that asset managers have stricter data governance measures in place under the new regulatory regime. To accommodate these changes, they will need to develop internal operating models to integrate stronger data governance measures into their data management systems. This is a large-scale, transformative process for asset managers because it runs against how many have managed and stored their data for decades.
The reality of Solvency II, though, is that insurance companies are spending countless resources to implement mandates and ensure compliance with new regulations by Jan. 1, 2016. However, one of the key factors insurers understand is that the delivery of asset data is out of their control. So while some details of the Solvency II Directive are still being released, insurers are losing their patience for data delivery delays and failing to understand what is expected from asset managers. In short, there is no more time for cutting corners.