 By Jimmy Mohn, Senior Vice President, Data at Morningstar
Much has been written about Solvency II and the new requirements for insurers coming into force in January 2014. As the introduction of the legislation draws near, we are finding increased focus on the topic of market data—in particular data governance—and the look-through principle embedded in Pillar 3 of the Solvency II legislation.
Market data, which can cover bonds, swaps, dividends, and in fact any instrument that is both tradable and non-tradable globally—must now be on the minds of both the insurers, as well as asset managers, as both consider the consequences of a legislation that leans firmly towards greater transparency.
Whilst the look-through principle of Solvency II will not oblige insurers to gather and make available the market data that discloses their investment holdings, one implicit takeout from their doing so is expected to be a greatly reduced Solvency Capital Requirement and a greater ability to calculate their institution’s Minimum Capital Requirement. Both mean significant cost savings.
Global Actuarial, a specialist actuarial and technology consultancy, ran a study earlier this year comparing the capital requirement results for a number of funds between “Other Equity”, “Mandate” and “Look-Through” approaches. According to the consultancy, insurers who put in place the data management systems required to fulfill the look-through principle of the regulation can be expected to enjoy a far cheaper cost of capital. So, whilst embracing the look-through principle is in no way an obligation on the insurance industry, there is research to suggest a net saving in doing so.
Insurers will of course be running their own calculations, and those finding economic advantage under greater transparency will have to decide how they will acquire the necessary holdings data, and in such a manner as to be certain of its veracity and timeliness. The level of granularity encouraged by the look-through principle means that holdings data must be clear, regular, and wholly reliable; in all, part of a strong data governance procedure that includes quality assurance analysts whose purpose is to ensure the cleanliness of the data and its timely delivery every time.
Insurers with excellent data analysts in house, and with strong relationships with each of their selected asset managers, may conclude that this work is best undertaken by a team of their own creation. It will be on-going, and they will elect to build the expertise internally.
For others, the sheer scale of the exercise will be too great. Acquiring timely, clean, and accurate data from up to perhaps as many as 400 asset managers for the purposes of Solvency II reporting will be an unrealistic undertaking; for insurers in this camp, third parties with a proven reputation for strong data quality assurance programmes will be an option. Actuaries, custodians, third party administrators, consulting organisations and investment research and data providers are already working together to bring forth solutions to meet the challenge.
Either way, with the right systems and teams in place, adherence to the standards of the look-through principle, will be a big tick in the box for data governance for those insurers who choose to embrace it.
Asset managers often have concerns regarding the release of full portfolio holdings but as the market leader in collecting and disseminating full holdings data for funds for more than 25 years, Morningstar is uniquely well positioned to address this. Indeed, we are trusted worldwide by investors and asset managers alike to deliver portfolio transparency whilst protecting the interests of both parties.
The same technology we use to handle holdings collection and dissemination in our data and research products is now available to asset managers for the express purpose of releasing holdings data to their insurance clients for Solvency II reporting. This should offer the vital link—and necessary level of comfort—in the chain that brings together the insurer and the asset manager for the benefit of meeting the needs of the Solvency II look-through principle.
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