SOLVENCY II. Impacts for asset managers and services

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1 SOLVENCY II Impacts for asset managers and services

2 Introduction David Zackenfels Senior Legal Adviser, ALFI Listening to investors

3 European Insurance market EU insurance market represents 33% of the volume of gross premiums worldwide There are 4,325 (re)insurance undertakings in Europe as of June 30th, 2013 Assets under management for life insurance undertakings across Europe was 8.1 trillion euros in June % of life Insurance undertaking s portfolios are composed of investment funds Number of Insurance undertakings Repartition by country Euro area (top 10) Structure life insurer s investment portfolio Euro area 100% FR GB DE LU IE; 243 NL; 223 FR; % 80% 70% 26% 26% 28% 28% 29% 13% 12% 12% 12% 12% Investment funds shares Shares and other equity SE 60% ES IE NL IT ES; 269 SE; 299 GB; % 40% 30% 42% 42% 43% 43% 43% Securities other than shares Loans AT LU; % DE; 389 The top 10 represents 80% of the total Euro area market 10% 0% 7% 7% 7% 6% 6% 12% 12% 11% 10% 10% Deposits

4 Solvency II setting the scene/roadmap/timeline Thierry Flamand Partner, Deloitte Luxembourg Listening to investors

5 Solvency II Impact for Assets Managers/Services Thierry Flamand October 2014

6 Solvency II Basic concept Pillar I Quantitative aspects Quantitative impacts Equity/Property/Currency risk Shock 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Type 1 Equity Type 2 Equity Property Curency Spread risk shock (by duration & rating) 60% 50% 40% 30% 20% 10% 0% Key challenges Delta NAV approach (i.e. change in net asset value) : Require sophisticated modelling techniques to capture interaction between Assets & Liabilities Look-through: In order to properly assess the market risk inherent in collective investment undertakings and other investments packaged as funds, it will be necessary to examine their economic substance. Wherever possible, this should be achieved by applying a lookthrough approach. Where the look-through approach cannot be applied to collective investment undertakings or investments packaged as funds, the SCR may be calculated on the basis of the target underlying asset allocation, provided such a target allocation is available to the undertaking at the level of granularity necessary for calculating the Solvency Capital Requirement, and the underlying assets are managed strictly according to this target allocation. Where this approach is not possible and for all collective investments to which the look-through approach could not be applied, the equity type 2 charge shall be applied. In such cases, undertakings shall demonstrate to supervisors why it has not been possible. Currency: Special reference to currencies pegged to the euro AAA AA A BBB BB B CCC or lower Unrated

7 What is Solvency II? The new solvency system will include both quantitative and qualitative aspects of risks. Each pillar focusing on a different regulatory component. SOLVENCY II PILLAR I Capital requirements PILLAR II Governance & supervision PILLAR III Disclosures Assets & liabilities valuation Technical provisions Governance system Supervisory review Public information Supervisory reporting Own funds Solvency capital requirements Groups control Minimum capital requirement Investment rules Two thresholds: Solvency capital requirements (SCR) Minimum capital requirements (MCR) Harmonised standards for: Valuation of assets and liabilities Eligibility criteria of own funds Effective risk management system Own risks and solvency assessment (ORSA) Supervisory review & intervention Insurers are required to publish details on risks, capital adequacy and risk management Transparency and open information are intended to assess market forces in imposing greater discipline to the industry

8 Solvency II Basic concept Pillar I Quantitative aspects Market risk for the European industry: Market risk is the largest component (56%) of the standard formula SCR for the European industry. The equity, spread and interest rate components are the largest elements within this module, although the relative importance of the sub-modules varies widely by type of undertaking. 160% 140% 10% 6% 8% -36% 120% 100% 30% 100% 80% 60% 42% 12% 40% 28% 20% 0% Interest rate Equity Property Spread Currency Concentration Illiquidity Premium Diversification Market risk

9 Expected reporting frequency Implementation of Solvency II Solvency II deadlines have been settled as follow: The preparatory measures will start as from January 2015 on FY 31 December 2014 figures. The full scope reporting will start as from January 2016 on FY December 2015 figures. FY 2014 Solo reporting (22 weeks) Q Solo reporting (8 weeks) Preparatory phase Solvency II FY 2014 FY 2015 FY 2016 # Weeks Risk management closing deadlines Annual report Quarter report Notes: Content of submission FY 2014 : Partial RSR, Basic Information, Balance sheet, List of assets, Open derivatives, Technical Provisions, Own Funds, SCR/MCR Content of submission Q : Basic Information, Balance sheet, List of assets, Open derivatives, Technical Provisions, Own Funds, MCR

10 Preparatory phase Position of the member states according to EIOPA s guidelines The EIOPA address to the attention of the competent national authorities the procedure during the preparatory phase on the implementation of the Directive. The Guideline n 16 "Individual quantitative quarterly information" and the guideline n 13 Individual quantitative annual information set out the contents of the quantitative requirements. The below table shows the member states position in relation to these guidelines: Comply Intend to Comply Not Comply Greece Austria Iceland Serbia / Montenegro (only annual) Finland Belgium Italy Denmark Ireland Bulgaria Liechtenstein Luxembourg Malta Cyprus Lithuania 9% 19% 72% GUIDELINE 16 QUARTERLY INFORMATION Yes Probably No Romania Germany Latvia Sweden Estonia Netherlands Spain Norway France Poland Croatia Portugal Hungary Slovakia United Kingdom GUIDELINE 13 ANNUAL INFORMATION 6% 75% 19% Yes Probably No Gibraltar

11 Annex 1 Assets specific details List of QRTs Annual A Quarterly (semiannual for groups) Q Preparatory phase Codification Frequency Description Analysis - Detailed Assets Assets - D1 A Investments Data Portfolio list Assets - D1Q A Q Investments Data Portfolio list (Quarterly) Assets - D1S A Structured products Data - Portfolio list Assets - D2O A Q Derivatives data open positions Assets - D2T A Q Derivatives data historical derivatives trades Assets - D3 A Return on investment assets (by asset category) Assets - D4 A Q Investment funds (look-through approach) Assets - D5 A Securities lending and repos Assets - D6 A Assets held as collateral

12 Perspective of the Insurance world Bernard Listening Denis to investors Director, Lombard International Assurance

13 Lombard International Assurance Life Assurance Unit Linked only Open Architecture 24 Billion AUM 200 custodian banks 600 investments managers 17,000 portfolios + 25,000 active assets (of which 11,200 funds)

14 Business Model - Relations Regulated IM Discretionary manager of the fund Agrees on details of the fund: Client strategy CAA requirements Act on the fund underlying assets in line with the client strategy and the CAA regulations Policyholder Subscribes to the fund through their life assurance policy Decides on a risk profile and an investment strategy PCP Private Client Portfolio Custodian Daily transactions Monthly statements of holdings Lombard Int. Assurance Issues policy that invest in the fund Executes the administration and the calculation of the fund NAV Sends quarterly valuations of the policy to the policyholder Monitors the fund underlying assets in regards to the Client strategy and CAA investment rules

15 Solvency II at Lombard International Assurance 5M project Started 5 years ago Focus on Pillar 1 & 2 so far Optimizing Solvency capital ratio calculation (SCR) No direct influence on investment strategy Importance of the look-through

16 Pillar I + Approach ORSA process Free capital e.g. challenge of market risk calibration e.g. operational risks e.g. strategic risks Market Underwriting Insurance Other risks (Lapse + (Operational + Expense) Default) SCR Adjusting SCR assumptions to LIA' specificities Risks not fully covered under Pillar I Material risks not subject to SCR Internal capital requirements Own capital requirement (ICR) Available Own capital capital available Surplus Own SII surplus Pillar I Minimum regulatory requirements Pillar II Own capital requirement assessment

17 SCR Market : What is the idea? Capital requirements will vary depending on the nature of assets underlying technical provisions. Risky assets weight more than less risky assets. Non-quoted Equity non OCDE Equity OCDE Structured products CCY VS EURO Bonds Cash

18 What about investment funds? By default the highest capital requirements But if you can look through It is possible to reduce capital requirements Ex a balanced fund (50% bonds, 50% equity) could see requirement reduced due to its bond exposure portion

19 AUM - Split At Q4 2013, the AUM was 23,225 bn of which: 64% are classified as Investment Funds Unquoted Structures Balanced Fund % Bond Fund % Money Market Fund % Equity Fund % Exchanged Traded Fund % Closed-End Fund % Hedge Funds - UCITS % Private Equity Fund % Simple Hedge Fund % Fund of Hedge Funds % Real Estate Fund % Other Fund % 36% are Direct Investments (Cash, Bonds, Equities, etc.) and considered as already looked-through Reporting obligations As per the specifications (Art.78 - EIOPA Report ), an accurate Look-through has to be performed if the portion of the Investment Funds exceed the threshold of 30% of total investments. Lombard International Assurance has to fulfill the requirements.

20 Look through Approach CAA File 22,400 lines of data 23,225bn SII retreated Database Internal Funds 200 m 11 funds => 1,200 underlyings Internal Funds 900 m 3 funds => 3 lines External Funds 700 m 50 funds => 8,550 lines External Funds 750 m 113 funds => 10,000 lines Data Provider 4.5 bn 850 funds => 735,000 lines Use of Mandates while waiting for accurate data From largest 1000 holdings Data Quality SII Asset database Unquoted 300 m 15 funds => 60 lines External Funds 100 m 2 funds => 6 lines Use of Mandates => propsectus Apply Market Stresses Dashboard for SCR Calculation Solvency II Q Submission Other Investment Funds to be looked-through Another 250 funds to achieve the 80% (2014 target) LT database c. 1,000,000 lines SCR Market is 46% of the Total SCR Each look-through generates significant calculation requirements Carrying out a look-through calculation on the six sections above generates an additional 750,000 lines of data Currently using spreadsheets which struggle with this volume

21 Look through Approach End 2012 End 2013 End 2014 Total FUM bn bn Investment Funds % Unquoted Eq % Data Provider v Internal Funds v v Internal Funds v v Data Provider v v External Funds v LT v External Funds v 61% v Unquoted v v External Funds v LT 71% Direct Investments % % V = Good data quality V = Poorer quality of data

22 Look through - Unquoted Total Unquoted 10% of FUM Non Listed Underlyings 48%? Equity 2 49% Stress +- Eq Dampener Listed Underlyings 52% Equity 1 39% Stress +- Eq Dampener Bonds/Cash/Etc. 1 largest Unquoted 18% 10 largest Unquoted 62% 50 largest Unquoted 97%

23 Why is Look-through important? We ve got no choice! Lombard International Assurance: 10 % impact on SCR! Different product will have different capital requirement, so impacting product profitability SII is a big cost to insurance companies, they will seek to mitigate by optimizing capital requirements Funds with high transparency will be preferred as they will cost less Opportunity for custodians and data providers to offer a new service

24 What do we need? Fund Asset breakdown, with high degree of granularity Assets details will need to be enriched (rating, domicile ) Data quality is key

25 Data quality Issue Solvency II c 25,000 lines Bonds Equities Funds Others (Rights, Warrants, etc.) Total asset lines 8,590 3,010 11,200 2,323 DATA MISSING ISIN ,017 N/A Classification ,515 Maturity Dates 690 N/A N/A N/A Coupon Rates 882 N/A N/A N/A Credit Ratings 4,266 N/A N/A 1,428 Domicile & Listing N/A N/A DATA INCOHERENCIES Misclassification N/A Wrong Coupon 14 N/A N/A N/A Wrong Dates 243 N/A N/A N/A Wrong Listing 39 5 N/A N/A

26 When and How? When? At least once a year for regulatory reporting Ideally quarterly for monitoring purposes How? Full automation as the data volumes are huge Via custodians and/or data providers

27 Industry outlook Fund managers beginning to work with insurers to provide data, as the deadline for Solvency II draws closer Currently receiving very good quality data from some external Fund Manager. We are receiving data from the other sources on quarterly basis but poor quality. Several independent solution providers are now active in the market Fund Managers have also raised licensing issues, where data providers (e.g. S&P, Moodys) are not happy for their data to be passed on to unlicensed users

28 Impact on our industry A requirement for increased transparency and public disclosure should encourage greater responsibility within the insurance industry This will introduce greater 'market discipline', which will help ensure the soundness and stability of insurers Insurers applying 'best practice' are more likely to be rewarded e.g. by lower financing costs Modifications in product design due to more accurate pricing of risk under SII may result in changes in the pricing of insurance products.

29 Impact on Lombard SII is the new business as usual for regulatory purposes The SII programme has a limited life-span and we are building the new processes and templates for future regulatory reporting and risk management. Combined financial and operational risk management A key factor in achieving SII compliance is ensuring that financial risks are considered alongside operational risk. An enterprise wide view of risks This requirement covers how risks are controlled, how they interact with each other in times of stress, as well as day-to-day volatility, and what framework is in place to manage those risks.

30 Impact on Lombard New reporting requirements Solvency II requires new reporting standards, demanding more reports in a shorter timespan Enhanced capital management An increased focus on our capital and how we use it will ensure that it works harder for our clients whilst providing them with the security that we will be able to fund their needs regardless of the economic situation

31 THANK YOU Bernard Denis Director Investment Administration Lombard International Assurance S.A. Head office: 4, rue Lou Hemmer L-1748 Luxembourg Grand- Duché de Luxembourg

32 Perspective of the Investment Management world Listening to investors Estelle Beretta-Somody Head of Business Implementation ING Investment Management

33 About ING IM International Investment Management Profile EUR 180 bln* (USD 227 bln*) in Assets under Management Active in 18 countries across Europe, U.S., Asia and the Middle East More than 1100 employees Manages assets for: Institutions including Sovereign Wealth Funds and Pension Funds (27% of AuM) Retail Investors (29% of AuM) ING Insurance (Proprietary) (44% of AuM) Applies its proprietary research and analysis, global resources and risk management to offer a wide variety of strategies, investment vehicles and advisory services in all major asset classes and investment styles The asset manager of NN Group, a publicly traded corporation. Our investment history dates back to 1845 through our strong roots in insurance and banking Investments structured as a series of specialist skills-based investment boutiques united by shared global resources

34 Euro Billions ING IM International Assets under Management Assets under Management 44% Type of clients 27% Institutional Retail % Insurance Q Q Q Asset class 20% Institutional Retail Insurance Equity Fixed Income 80% Figures as of 30 September 2014 Asset class data using look through and excluding excess cash

35 Solvency II : main concerns of asset managers (1) Weight of insurers into our Luxembourg domiciled funds? Given that most of our (re)insurance clients have their assets managed through discretionary portfolios, our first estimate was that less than 30% of assets in our funds are from insurance clients. However, looking at the EFAMA statistics, we assessed that there are more third party insurance clients investing though intermediaries and platforms than we think. Cerulli made a survey to estimate the cost origin of Solvency II Source: Cerulli Associates Source: EFAMA Asset Management Report 2014

36 Solvency II : main concerns of asset managers (2) Risk profiles definitions of our (re)insurance clients Understanding the insurers risks and regulation a competitive advantage? Outperforming in a risk controlled environment Asset allocation decisions drivers Capital requirements Risk appetite Diversification Data requirements and management Looking through Data format requirements and delivery Data quality and ownership Costs of development and additional data sources

37 Solvency II : our response Reception of clients requests to provide information, especially in The Netherlands, Germany and France Set up of Solvency II project at NN insurance level with go live for the 1st phase in 2013 Set up of Solvency II project at ING IM level with intermediary actions for a few clients and official go live 1st of Jan 2016 Impact on management: rebalancing of portfolios for our (re)insurance clients Impact on products: new design taking into account the constraints for our (re)insurance clients Impact on data governance and architecture Impact on staffing and split of activities within teams

38 Panel Discussion: Vantage Points to Solvency II Moderator: Thierry Flamand, co-chair ALFI Solvency II WG & Partner, Deloitte Luxembourg David Zackenfels, Senior Legal Adviser, ALFI Panelists : Valérie Nicaise, Head of Risk and Performance Listening to investors Solutions, BNP Paribas Securities Services Mathilde Sauvé, Insurance Solutions Strategist, AXA Investment Managers David Claus, Luxembourg Country Executive, BNY Mellon Bernard Denis, Director, Lombard International Assurance Jeff Rupp, Director of Public affairs, INREV

39 Market risk Asset Shocks Class Applied Shocks under Solvency II Real Estate Standard 25% shock is applied on the market value of all the properties held (land, buildings, immovable-property rights and property investment for the own use of the undertaking). Otherwise, investments are treated as equity (see below) Global Equity (Quoted on EE or OCDE exchanges) 39% base shock is applied and a +/-10% equity dampener is considered. The current dampener is +7.5% Other Equity 49% base shock is applied and a +/-10% equity dampener is considered. The current dampener is +7.5% Financial and Institutional Participations Shock exempt (deducted from own funds) Strategic Participations 22% shock is applied to the market value of the participations Corporate / Government bonds Modified interest curve is used to evaluate the impact of market rate falls and rises. The rating and the modified duration of the corporate bonds are also considered in the application of the spread risk module Intangibles 80% shock is applied to the economic value of the assets Investments in Foreign Currencies 25% shock is applied on the market value of the assets (some currencies get a special treatment)