Solvency II: The Four Stages of Grief

As insurers prepare to engage with their investment partners on Solvency II asset data requirements, asset managers face a difficult journey that I would suggest is not dissimilar to the stages of grief. This blog aims to guide them through each stage to hopefully, help them come out at the other end with the feeling that life goes on and all is well.

Denial

Refusing to believe in the impact of Solvency II on transparency requirements is the first stage experienced by most asset managers. After all, it would not be the first time that Solvency II comes and goes and the terms of implementation are not yet fully defined. From a reporting readiness perspective, some are taking the ‘I will believe it when I see it’ approach until requests from insurers will be piling in their inbox. Guess what, the date is set and the first few requests have indeed come through… moving on to the next stage.

Concern

The actual second stage of grief is anger which, perhaps, seemed a little too extreme for this analogy? However, there are valid concerns that an asset manager will have to overcome on their journey to Solvency II nirvana.

Firstly, active managers will want to protect their IP. After all, if stock picking is your secret sauce, why would you want to share positions in a timely manner?

Secondly, while asset managers are not directly subject to Solvency II, they are operating under the Treating Customers Fairly principle. Is it fair to provide some clients with reporting timelines that are not available to others? What about the risk of someone trading on this information before it becomes public?

Finally, who is going to pay for the additional reporting requirement? Why should an asset management firm contribute to the regulatory costs of insurers? And what other regulatory costs will be coming their way in future?

Bargaining

Perhaps the remnants of the denial stage will prompt some to lobby and try to make it all go away or at least dilute the reporting requirements. This could lead to the depression stage of grief that I have purposely excluded from this analogy.

Others will aim at the minimum minimorum of cooperation by refusing to compromise on formats, embargos and delivery channels. Depression might have been avoided but the high will certainly be followed by frustration and some level of disillusion.

Enlightened managers will, however, seek to maximise client satisfaction while keeping their response as standard and cost-effective as possible. They have earned a pain free ticket to the next and final stage of our arduous journey.

Acceptance

OK so this is not going away, right? And the client is king so we ultimately have to do it. What about the concerns we raised earlier?

Amarjit Singh, Partner at EY, recently stated that asset managers can no longer hide behind the fig leaf of Treating Customers Fairly. Sharing data for regulatory reporting purpose is clearly an exception to the rule.

IP must be protected while achieving the right balance between the need of insurers to feed timely data in their risk assessment models, the requirement to provide sufficient time for the data to be reviewed before filing with the regulator and the desire by asset managers to apply embargoes. This is not an insurmountable challenge provided that appropriate non-disclosure agreements and secure data exchange channels are put in place.

Finally, what about the cost of reporting? I would argue that the cost of servicing the needs of insurer clients is an investment worth making. Low interest rates are driving insurers to invest a portion of their assets in new asset classes and more sophisticated investment strategies. A better understanding of their investment portfolio may, on the other hand, lead to consolidation of investments with fewer providers. Therefore, reporting as a competitive advantage in the area of client servicing makes sense now more than ever before; both with a view to retain and win new business. Nonetheless, asset managers should not necessarily engage in complex bespoke reporting for their clients. Solvency II nirvana can be achieved by implementing a simple cost-effective solution that facilitates both the delivery and receipt of data in a standard format.

I will conclude by reiterating that managers who choose to fast-track to the acceptance stage will not only be able to tick the box and move on earlier than their peers but will also be better positioned to compete.