Look-through Symposium: an insurer's view

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Oliver Bäte, Chief Financial Officer, Allianz SE The look-through requirements as set down by EIOPA in the Solvency II reporting and disclosure guidelines are not clear. There appear to be different interpretations on how to implement the guidelines which would lead to – at best – non-comparable results. In particular, the guidelines do not differentiate between consolidated investment funds which are under a company’s control and non-consolidated funds which are managed externally. Nor is there a distinction of unit-linked investment funds which are owned by policyholders. Our ongoing talks with the German insurance association and the German regulator BaFin confirm these concerns. If our understanding is correct, look-through reporting for all investment funds would fall under the guidance for the asset template D4. The insurer would have to report the “main underlying asset categories” of an investment fund, whilst it is not defined what these are: bonds, equities and real estate? Or is a further break down necessary in accordance with the Complementary Identification Code (CIC), i.e. government bonds, corporate bonds, equity, investment funds, structured notes, collateralised securities etc? Furthermore, there is an issue of whether unit-linked funds should be excluded from look-through reporting in D4. That would make sense, even though there is no explicit reference to this. In addition to the nature of the assets, we are also unsure about “timing”. Do we have to publish look-through reporting as of the day the fund has been issued (i.e. prospectus information), or the current asset categories and their fair value amounts as of each quarterly closing date? Whilst these questions have clear ramifications for our ability to report properly, in what follows, we would like to describe the Allianz perspective on look-through reporting for consolidated, non-consolidated and for unit-linked funds.

Fully owned consolidated investment funds

For our consolidated investment funds (special funds), we are in a position to provide the proposed look-through reporting requirements and to disclose the main asset categories included in the investment funds, because we own the reporting systems and have the necessary data warehouse in place.

Non-consolidated investment funds (mutual funds)

On the other hand, we are neither in a position to provide look-through reporting, nor do we believe it to be useful, for non-consolidated investment funds (mutual funds). These mutual funds are majority owned by third party investors and managed by external fund managers. The asset reporting systems for those funds are external from our reporting systems. Expensive data system connections would have to be established to permit a data delivery eight days after the closing date of each quarter in order to be able to comply with EIOPA’s reporting deadlines of five weeks. Generally, fund managers have signalled they would not be able to provide the required information on time. Some would be sourcing information in turn from third parties, including from non EEA countries. This would have a knock-on effect on both, timeliness and data quality. In addition, as we do not own the funds we do not decide on asset classes and individual risk positions. That is in the hands of the fund manager. Recognising the challenges and costs to providing a look-through, the capital the insurer needs to hold for these funds is typically calculated based on top-down, conservative estimates based on a variety of factors including the fund’s historical investment performance, its strategy, etc. Since our asset allocation in mutual funds is generally small and below the control threshold, it is not even clear what the benefit of look-through reporting is in this case. Of its €502 billion in financial assets as of the first quarter 2012, Allianz has invested only €12 billion in mutual funds. That represents 2.4 % of its total investments. Given this small share, we therefore recommend to establish a materiality threshold that does not require look-through reporting for non-material investments in mutual funds.

Excluding unit-linked business

Insurers bear no financial risk for unit-linked investment funds. Thus, a look-through analysis is not a faithful presentation of risk reporting for solvency purposes. All investment risk, returns and losses remain with the policyholder. Are we nonetheless required to provide look-through reporting on unit-linked funds, and if so, why? In the first quarter of 2012, Allianz has reported around €67 billion of unit-linked investment funds for policyholders. Providing look-through of fair values of their underlying main asset categories would result in a huge amount of individual data which is very costly to generate and with questionable relevance for risk reporting. In our view, assets backing unit-linked contracts should be removed from look-through reporting templates in cases where assets are closely matched to liabilities and where insurers bear no investment risk.

Objection to Pillar III reporting as a statistical tool

The look-through disclosures are particularly costly and burdensome to complete for both insurers and asset managers. These costs will ultimately be passed on to customers and policyholders. The result would be vast amounts of individual data delivered to the supervisors who will also need systems in place to analyse the data in time. Investment funds are dynamic by their nature, as funds constantly change their composition and fluctuate in value. We question whether this is relevant risk disclosures for external reporting purposes, especially in the above described cases of mutual funds and unit-linked funds. Thus, more focus, pragmatism and cost consciousness in defining the reporting standards is urgently needed. Link to Symposium index page.]]>