“The European Central Bank (ECB) is also preparing to request data from insurance and reinsurance undertakings for the purposes of market monitoring and financial stability analysis, and to serve the needs of the European Systemic Risk Board.”
EIOPA, Cover note for the Consultation on Guidelines on preparing for Solvency II,
EIOPA-CP-13/015 (para 3.12), 27 March 2013
What the ECB collects today
The ECB has been collecting data for statistical and monetary policy purpose from banks and money market funds for about fifteen years. More recently it expanded to include investment funds and, after the financial crisis, securitisation vehicles.
The data is collected through surveys issued by national central banks which compile national aggregates and pass them on to the ECB. The ECB’s powers to collect the data are mandated by an EU regulation.
The ECB also collects data about insurance firms and pension funds via central banks, but the collection is on a voluntary basis. Often the information is based on existing supervisory data, which is complied into a number of headline series and sent to the ECB. “That method is not good enough in the long run for our purposes, which is to understand the insurance sector’s role for monetary policy and financial stability,” Henning Ahnert, Head of Section Monetary & Financial Statistics, ECB, told Solvency II Wire in an interview. “We will need more timely, more harmonised and higher quality statistics.”
The comment is indicative of a growing recognition among European supervisory bodies that insurance is a systemically important part of the financial system and must, at least in part, be subject to the same transparency requirements as banks and other financial institutions.
What the ECB wants from insurers
The ECB is interested in the balance sheets of insurers because collectively the industry forms a big part of the financial sector in the euro area and European Union. According the March 2013 Monthly Bulletin, the total assets held by euro area insurance and pension funds was €7,500 billion. The figures were compiled using the voluntary basis methodology described above.
“Insurance is a big part of the financial sector,” Mr Ahnert said, adding that information was needed both for monetary policy and financial stability purposes.
“Technical reserves of life insurance companies constitute a substantial part of households’ financial wealth so that’s one of the reasons why they are important for monetary policy. Furthermore, by investing in securities and shares, insurance companies are an important provider of funding for other sectors of the economy, such as non-financial corporations and governments. The insurance sector is also interesting for financial stability purposes, particularly the asset side of the balance sheet, given the size of the sector as a whole.”
Coordination with EIOPA
The ECB is looking to collect data from insurers in the same way it collects it from other financial institutions, via requests from central banks. This message has been filtered through to the industry by EIOPA.
In December 2011 EIOPA launched a draft consultation on the add-on Quantitative Financial Stability Reporting templates (CP 11/011). The outcome of the consultation was published on 9 July 2012 in a report covering both the add-ons and the main reporting consultation (CP 11/009). The add-ons and some of the other quarterly templates were widely understood to represent part of the ECB requirements.
The consultation paper on interim measures reporting guidelines (CP 13/010) published in March, states a number of times that quarterly reporting, “would probably enable insurance and reinsurance undertakings to be prepared to (sic) eventual European Central Bank requirements.” The guidelines propose that quarterly data reporting start from the 3rd quarter in 2015.
Given that EIOPA was working on the Solvency II reporting templates this presented an opportunity to streamline the process, Mr Ahnert explained. “We said from the beginning that in order to minimise the burden on reporting agents let’s work with EIOPA so that the Solvency II data are also used for our statistics. And I think the industry was very positive about this.”
Jarl Kure, Solvency II Guidelines project leader at EIOPA, told Solvency II Wire that while there is a lot of common ground between the ECB and EIOPA reporting requirements, the institutions have different use for the data. “We have been liaising with the ECB to see if we can harmonise the reporting process in order to have one reporting line to prevent firms from having to report twice on something which is almost the same. But of course we have different purposes. At EIOPA we are supervisors while the ECB is collecting data for statistical and monetary policy purposes.”
Mr Kure added that the two institutions have been trying to come up with common ideas related to the granularity of the reporting; for example, in relation to the break-down of technical provisions or asset information.
Similarities and differences
Although the templates are designed to reduce duplication the different use of the data means there are some differences in the requirements.
For example, timeliness of the data is essential for the ECB. “Annual data is not really of use for us,” Mr Ahnert explained. “To be useful for our analysis, most of our statistics are monthly. While we understand that this is unrealistic at the moment for insurance data, we will request quarterly reporting which will cover a high market share, but accept less frequent reporting for more detailed data of the small undertakings, in line with the proportionality principles.”
So far the industry has focused on problems of reporting asset data. But reporting on liabilities may prove just as difficult, if not more so. According to Giovanni Ugazio, Statistician, ECB, “We have had more problems with the liability side of the balance sheet, in particular concerning reporting with a quarterly frequency. Because insurance companies tell us that to give information on technical provisions, risk margins and own funds they need to run their models every quarter, an exercise which could be costly and time consuming.”
No look-through data for the ECB
In other ways the ECB’s requirements are significantly less onerous than those of EIOPA. The ECB collects asset data on a security-by-security basis (similar to reporting template Assets-D1) and it does not require look-through into investment funds.
Under Solvency II undertakings will require full look-through into collective investments for the SCR calculation and an aggregated look-through for reporting (template Assets-D4), subject to a proportionality threshold. There is also some discussion of introducing a proportionality threshold for the SCR calculation (Solvency II Wire 14/2/2013).
Reference data CSDB
Reference data (information about prices, ratings, etc.) has often been cited as an area of difficulty for Solvency II asset reporting. Data licensing rules can limit the use and sharing of information with third parties, and data variations across vendors can produce inconsistent figures.
For its asset reporting the ECB only requires a small number of details about each asset. For securities and shares, generally speaking, these include identification and the amount held in the portfolio, which eliminates many of the problems associated with reference data.
The ECB uses a single set of reference data for all the securities information it collects. The Centralised Securities Data Base (CSDB) holds information on almost all of the securities traded in the euro area. It is a proprietary database, which also relies on information from commercial providers.
Mr Ugazio explained how having a single source from the reference data both simplifies the data collection process and improves analytical capabilities. “This basically means that when an entity reports the list of its asset holdings it is sufficient for the national central bank to simply receive the ISIN code and the nominal amount held for each instrument. Then, using the CSDB, the statistical compilers can not only aggregate all sorts of breakdowns from the granular information, but also derive, for example, price changes and from these infer net disposals and acquisitions of the instrument.”
Insurers, of course, are being asked to obtain and report the reference data because Solvency II requires them to have a full understanding of the risk in their portfolio of assets.
The granularity of the data has other advantages Mr Ahnert said. “An insurance corporation, or the entities which hold or manage the portfolio on its behalf, keeps all the individual information in micro data sources. Compiling the aggregates by criteria such as country or maturity bracket is quite inflexible. It could be, for example, that in three year’s time our users would want something different. If reporting agents do the aggregations themselves, we would have to go back to the insurance corporation and say the bracket has changed from 1 to 5 years to 1 to 3 years, so please recompile everything. That’s very costly. So the argument for the micro asset by asset reporting is that as soon as they deliver all the granular information to the statistical compilers, they don’t need to worry about the aggregations required for statistical reporting.”
Mr Ahnert also recognises there will be an initial cost for setting up the data reporting. “There is a one-off cost associated with the initial implementation of this security-by-security data transmission. However, once the process is set up, the latter is completely automated and all the statistical work is done by the supervisor or central bank.”
Data already being delivered
The practice of delivering security by security (not look-through) information from asset managers to reporting entities, based primarily on ISIN codes is well entrenched. And in some cases the reporting is delegated to the managing company, according to Mr Ahnert. “Investment funds and financial vehicle corporations resident in the euro area may, and in some cases do, delegate the reporting of their securities holdings to asset managers in order to fulfill their reporting obligation for ESCB balance sheet statistics. So that is not really new.”
Pensions on the radar
Demands for increasing transparency in the financial sector may reach beyond the insurance industry. In the future, requests for more detailed financial information may also extend to pension funds. According to Mr Ahnert, “We would like to have a similar system for pension funds in the long run. Therefore, we are closely following the work launched by EIOPA in this field. Currently, as for insurance, we collect data on a best effort voluntary basis. Security by security reporting in this field would be a significant improvement.”
What if Solvency II is delayed?
One of the outstanding questions about the ECB reporting requirements is what will happen if there are further delays to the Solvency II political process. To answer the question one has to understand the ECB’s legal mandate for collecting data.
The European System of Central Banks (ESCB) comprises of the ECB and the national central banks of all EU Member States, whether they have adopted the Euro or not. Its mandate to collect information from central banks comes from an EU Regulation – Council Regulation (EC) No 2533/98 Concerning the collection of statistical information by the European Central Bank (as amended by Regulation 951/2009).
EU Regulations are directly binding in every member state and are on par with national law. They are different from directives, which are addressed to national authorities, that must then take action to make them part of national law.
A spokesperson for the ECB explained that the non-euro area member states are not exempt from the ECB reporting requirements, even if the requirements can differ between the euro area and non-euro area. “Nevertheless, ECB Regulations, which are adopted by the ECB’s Governing Council, are binding only for the current 17 Euro Area members. The remaining ten EU states, although two of them have an opt-out clause, have an obligation to prepare for euro area membership. That is the overarching principle in the Treaty on European Union,“ the spokesperson said.
Due to delays in the adoption of Solvency II, the ECB timeline has also shifted. The ECB Regulation is currently scheduled to be submitted to the Governing Council for adoption in early 2014 and entry into force is planned for the second half of 2015.
The spokesperson clarified that the plan is for the ECB to go ahead with the first part of the requirements (solo balance sheet reporting, including security by security reporting for assets), even if EIOPA’s schedule is further delayed.
In a second stage, likely in 2015-2016, the ECB will work on the introduction of the forthcoming regulation of financial stability requirements (group balance sheet data, capital requirements data, information on profit and loss accounts).
The Commission is not directly involved in the discussions between EIOPA and the ECB. However, in response to a question about the ECB’s legal powers to request information from central banks under EU regulation 2533/98 a Commission spokesperson said, “The ECB’s powers to request information are not contingent on the Solvency II Directive being applicable.”