10 things worth remembering about Solvency II – Part II

This is part 2 of my blog on some of the points discussed at recent conferences and  some of the issues  at the forefront of the minds of asset managers, insurers and third party administrators  over the past year.

•  The “Prudent Person Principle” – A benefit of the Solvency II regulation is that it will widen the scope of products that insurers can invest in. However, this also requires that the “prudent person principle” be applied, so that you only invest in assets that can be properly identified, measured and monitored. This in turn requires line-by-line reporting to understand these assets for consideration in the risk management process and not just for reporting to regulators.
• Look-through is required for all types of models – The look-through principle should be applied in all cases to standard models, internal models and partial internal models.
• The issue of aggregation – Aggregation has been raised in many circles as a way to address the issues of the quantity of data that an  organisation needs to manage for Solvency II. Whilst this can be seen as a method of reducing the amount of data reported to regulators, it should not be used as a method to avoid inspection of investments in the risk management process.
• The investment fund industry – The funds industry manages an estimated € 1.5-2 trillion of assets on behalf of European insurers. The industry provides a valuable service in terms of expertise and talent, as well as providing a method of diversification of investment. If the funds industry and asset managers fail to provide transparency to their investors, these investments will be considered ‘black boxes’, putting trillions of Euros at risk of being invested elsewhere. Not something asset managers would want, I’m sure…
• Dependency – Where insurers are invested in “fund of fund” products, there is a dependency among asset managers on each other to ensure that investors get access to the required data in a timely manner. This will lead to asset managers having to  review existing embargos they may  have in place in the event that they have to  divulge this data. But it also means that each of them risks losing assets under management if all do not comply. There is interdependency across the entire industry for those paid in terms of basis points.