Solvency II News: regulators consider easing Solvency II look-through

Rule makers may introduce partial aggregation of the look-through requirement for Pillar I SCR calculation in the standard formula, Solvency II Wire can reveal. According to a source close to the discussions in Frankfurt, rule makers are considering a proposal to allow undertakings that hold less than 20% of their total assets in collective investment funds to treat these funds on an aggregated basis for the SCR calculations. Any collectives in excess of the 20% would be treated on a full look-through basis (line-by-line). The proposal relates to Pillar I SCR calculations only, and does not affect Pillar III disclosures.

20% opt-out

The most onerous of the standard formula modules in terms of the granularity of data required are the Market Concentration Risk module and the Counterparty Default module which use the ‘single name’ of the exposure in calculating the capital charge. Since the majority of assets are subject to one or both of these modules, the data requirements underlying the standard formula can be near to asset-by-asset in some cases. According to the source, some grouping of collective investments will be allowed as follows: Up to 20% of the total of assets on the balance sheet held in collective investment funds could be treated on an aggregated basis. Any amount of collectives above this 20% will be treated on a full look-through basis (line-by-line). The allowed portion of collectives can be aggregated on an entity or ‘single name’ basis. That is, if shares in company XYZ are held in three different funds the exposure to XYZ can be aggregated as a single line. Applying the grouping assumes one exposure, which could be subject to a concentration charge and reconciled with the ‘known’ (line-by-line) exposures. “While this proposed solution will still require full look-through to the underlying funds in order to produce the aggregations, it will get around most of the confidentiality and embargo conflicts with UCITS funds,” the source explained. Such conflicts with other regulatory requirements are a major concern for asset managers and TPAs.

Material impact

If the proposal is integrated into the final Solvency II rules it could amount to a substantial relief in firms’ workload. Although this would depend on the number of firms that fall under the 20% threshold. According to Tristan Garnons-Williams, Solvency II Policy Adviser, ABI, the proposal is a good example of how Solvency II’s principle of proportionality could be applied in practice. “With the implementation costs of Solvency II already presenting a significant consideration for firms, the proposal appears to be a pragmatic approach that could reduce the regulatory burden faced by firms after the introduction of the new rules. However, detailed information would still need to be collected under this proposal so the feasibility of this approach is yet to be fully assessed,” he said. But applying partial aggregation may actually increase the amount of work required initially. Alan Spencer, an independent consultant working on Solvency II for a large UK insurer, believes the revised approach would ease the burden on the calculation of risk capital, but not on gathering the data. “Individual asset and look-through data would still be needed at the most granular level to produce the groupings. Creating such groupings often requires historical information and product details, which would require even more data to be provided by the asset managers. Initially this could mean significant work as actuarial teams, supported by investment specialists, try to develop the groupings.” Mr Spencer also pointed to a possible unintended consequence of the proposal. “The 20% get-out will save some analysis of the most difficult assets, but these are probably the ones that should have the most focus as risks are least understood.”

Clarity needed

Look-through has been subject to much debate, as well as some confusion, in terms of the exact requirements for firms, especially in relation to the Pillar III reporting requirements. In its final report on the public consultations on disclosure requirements published in July 2012, EIOPA confirmed that full look-through (on a line-by-line basis) will not be required for Pillar III. Template ‘Assets-D4’ in the reporting package, which lists details of individual holdings in collective investment funds, only requires a look-through approach on the basis of the asset category, geographical exposure and currency exposure for each investment fund. “Uncertainty on the interpretation of the look-through approach for reporting purposes had existed for some time prior to clarification and had proved problematic for insurers trying to assess the impact on their businesses of the reporting requirements,” Mr Garnons-Williams said. “Clarity on the Pillar III rules is therefore welcome, although the look-through requirements still remain to be fully explained in the case of Pillar I capital requirements.” While the new proposal may provide welcome relief in the long run, for now it will add to the already significant uncertainty surrounding the delivery of investment data. According to John Dowdall, Global Business Development, MoneyMate, “From a data management perspective, it will add to the confusion of what is required from asset managers, with insurers requesting differing sets of data for Pillars I and III already. The question is, who will apply the aggregation and who is best positioned to do so, asset managers, service providers or insurers themselves? Whoever does, will require granular look-through data.”]]>