IDS - Solvency II for Insurance Asset Management

Transcription

1 IDS - Solvency II for Insurance Asset Management Solvency II: The Journey Continues 26 June 2014

2 European Solvency II Survey

3 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.

4 The study design Participants and features Second European EY Solvency II study Analysis of market trends in the European implementation Extensive international coverage (20 European countries) Single country profiles Countries with the largest number of participants: Germany France Central and Eastern Europe Nordics Poland UK Belgium 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 ITsystem readiness, regulatory interaction and capital optimization

5 Key Findings (1) Overall, our survey findings indicate the insurance industry is on track to implement Solvency II by January 1st 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.

6 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.

7 Updated regulatory timeline confirmed 2016 start date 2. Asset manager engagement required in First S2 submission required by early June 2015

8 Insurance investment trends

9 Investment trends - from the insurers 80% 70% 60% Source: Economist intelligence unit; 206 participants 50% 40% 30% 20% 10% 0% Increasing allocations to higher yielding fixed income instruments such as bank loans and lower rated debts Allocating more to less liquid strategies Increasing duration Reducing cash balances Reducing investment related costs by using low cost beta products Other Page 8

10 Insurance investment trends New strategies are gaining traction new balance sheet measures change risk appetite and focus on fees 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. Page 9

11 Challenges for insurance investment New asset strategies require significant investment from the insurer providing opportunities for differentiation for asset managers 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. Page 10

12 What do asset managers need to focus on? 1. Data and reporting 6. Asset valuation 2. Fund Look through Solvency II 5. Modelling the capital requirements 3. Product Development 4. Optimisation

13 The breadth of impact: Solvency II will touch many areas of an Asset Servicer/Manager Enhanced provision of data governance, quality and SLAs over the timely receipt of data into the asset servicer. Consolidated data quality/controls reporting to insurers. 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). Data Quality Reporting Use of Expert Judgement Supplier Management Data Provision Potential touch points Timing of Data Provision Licensing Data Governance Enhanced set of data required to be provided to the insurer. Solvency II reporting requirements mean shorter timescales for data provision and remediation. This may require process changes. Greater consideration of licensing agreements as greater volumes of data are transferred. Greater scrutiny over data governance frameworks by insurers requiring ability to clearly articulate the components. 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. Data Limitations Data Flow Mapping Data Architecture Data Appropriateness Data Quality Assessments Potential to have to report on the level of data accuracy and completeness for key data items. Clear understanding and evidence of data sources and flows to determine appropriateness. 12

14 Data Quality Requirements 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. 13

15 Other key considerations for insurers and asset data providers 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 14

16 Questions

17 The information in this pack should not be regarded as comprehensive or sufficient for making decisions, nor should it be used in place of professional advice. Accordingly, Ernst & Young LLP accepts no responsibility for loss arising from any action taken or not taken by anyone using this pack. If you require any further information or explanations, or specific advice, please contact us and we will be happy to discuss matters further.