Destination: Solvency II

It has been almost a year since the entry into force of Solvency II (SII), and the reporting efforts of (re)insurance undertakings and asset managers are finally converging towards business as usual.

...Right?

In fact, we're not quite ready to say so yet. Here are some reasons why we think that Solvency II reporting's wandering journey isn't quite over yet.

The blurred vision of the look-through approach

The application and reach of the look-through provision are extensive, with (re)-insurance undertakings (IUs) being required to gather exhaustive asset-level information on their positions in collective investment undertakings to determine solvency capital requirement (SCR) figures reliably.

Recent monitoring exercises done to verify the degree to which the look-through (L-T) principle is applied suggest that many IUs are not able to reach a significant coverage of their investments via the L-T. Moreover, even when the principle is applied, there is no homogeneous indication that the L-T is used as well on deeper layers of investments (e.g. funds of funds, derivatives), as is advised by the Regulation. But what's holding IUs back from achieving complete look-through? The answer is a lack of the quality of the data retrieved from asset managers: information gaps, inaccuracies (e.g. CIC, LEI information) and heterogeneity of the data—amongst other things.

Validation controls tightening up

Transparency and quality of investment information are key topics in SII. Information errors translate into higher capital charges and operational costs for (re)insurance undertakings. Consequently, investment funds that fail to provide look-through information on their holdings or don't do so with a sufficient level of granularity and quality will face a severe competitive gap within the SII environment.

Previous reporting rounds have been characterised by supervisory authorities taking a slackened approach towards the validation controls applied to input data sourced from IUs, so as to smoothen the transit of data for the early reports. Along with the ongoing normalisation of the reporting processes, it is expected that validation controls will be tightened up, meaning more responsibility for IUs and, in turn, on asset managers as the prime source of the investment information.

Full speed ahead towards annual reporting

The scope and breadth of annual reporting is palpably larger than quarterly reporting, demanding additional Quantitative Reporting...