Carlos Montalvo, Executive Director, EIOPA The reporting for assets on a line by line basis is relevant for the micro prudential supervision as well as financial stability. Solvency II is a risk based regime, and this information is necessary for the undertakings themselves because it will help them to understand the risks they are facing on the asset side and to manage them properly. Line by line reporting is not anything that should be created by the insurance companies specifically for the supervisors. They should have this information first of all to properly manage their own risks and be able to monitor the compliance with the prudent person principle.
One of the benefits Solvency II will bring to insurers is a widening of the scope of their investment portfolio. The Prudent Person principle introduced in Solvency II, removes the restrictions on types of assets an insurer can hold and gives undertakings much more freedom in their investment choices and portfolio construction. This higher freedom needs to be balanced with the guarantee of policyholders protection. To achieve this two main requirements must be met: an adequate system of governance ensuring a high level of responsibility and accountability, and an adequate level of reporting to supervisors. Consequently undertakings must have in place a system that ensures a proper identification, measurement, monitoring, management, control and reporting of their investments. This, EIOPA believes, will contribute to the guarantee that the investment portfolio meets the criteria outlined above. Therefore information on assets available at the insurance undertaking should encompass such requirements on a line by line basis.
The new freedom to invest, coupled with lessons learned from the recent financial crisis, have also highlighted the need for more systemic oversight. There is now, more than ever, a clear need for pre-emptive supervision: an early identification of potential over exposure or market concentration and the need to take action to mitigate its impact. Such a demanding task can only be achieved with good quality data and sufficient level of granularity and frequency. One needs to have information in order to anticipate potential vulnerabilities at the level of the companies, of the sector and of the economy as a whole. Without information supervisors cannot perform their tasks. The proposed template related to the integrated detailed list of assets provides information that is essential for both micro and macro-supervisory purposes in the form of a detailed list of investments. This detailed list will show the full scope of the risks in the investment portfolio.
Reduced ad hoc reporting
Detailed regular reporting will also reduce the need for ad hoc requests to assess specific exposures of certain undertakings. It will also enable performing any necessary aggregation and analysis at undertaking level and for market-wide analysis.
Line by line works well
According to an EIOPA survey (2009) 16 countries out of 28 had a detailed list of assets in existing national reporting requirements (Austria, Belgium, Czech, Estonia, France, Greece, Island, Italy, Lithuania, Lichtenstein, Malta, Poland, Portugal, Slovakia, Slovenia, Spain). In jurisdictions where the detailed list of assets is currently used, it has often proved very effective as early warning indicators on potential excessive risk-taking or deficiencies in risk management of assets. In practice, this concerns all types of undertakings, regardless of the size or type of activity.
The regulator accepts that there may be an initial cost for undertakings when complying with the new regulations, although this will not be incurred on an ongoing basis. However the cost argument misses the point. The need to properly manage the risk of assets under Solvency II implies that undertakings will have to bear the cost anyway. It is part of the process of realigning the regulatory system to meet the needs of the current economic realities. At the same time, we recognise that where the portfolio or undertaking size is unlikely to have a significant systemic impact, proportionality aspects for quarterly reporting must be taken into account.
Using the data
EIOPA has both a supervisory and regulatory role. Both aim to prevent and mitigate the effects of a crisis and to enhance the level of policyholders protection. In so doing, it works with National Supervisory Authorities and the EU institutions to meet these objectives and ensure the best possible supervisory and regulatory framework. With the data it obtains, EIOPA will undertake a number of analysis off site, in order to assess and monitor market developments, aiming mainly to achieve financial stability objectives. But we cannot let aside the fact that the quality information will be used by supervisors to perform their off-site monitoring of companies thus, reducing the frequency for a number of on-site visits for a number of undertakings, in particular SMEs. In other words, the initial cost and burden will be compensated with a reduced future burden.
Supervision demands data, and that data must come from companies This request for data is neither new nor exclusive to Solvency II; we find it in today’s insurance and banking regulatory frameworks. Firms must recognise that demands for line by line reporting is part of the payoff of being able to expand their investment options and that the costs incurred are not purely regulatory as they become an integrated part of a risk based regulation. Link to Symposium index page.