Luxembourg: Solvency II Update For Asset Managers

Last Updated: 27 July 2018
Article by Martin Reinhard

Most Read Contributor in Luxembourg, August 2019

After a few quiet months Solvency II is back in the spotlight, following regulatory and industry developments. Additionally, stagnating yields are pushing institutional investors to explore new asset classes and to seek capital-efficient allocations, creating challenges (and opportunities) for asset managers.

This article will look at some recent Solvency II developments set to affect regulation practices, investment products, and reporting solutions. The developments involve:

  • the new version (4.0) of the Tripartite Template for Solvency II asset data reporting
  • EIOPA's advice on the Solvency II delegated regulation
  • the simple, transparent, and standardised (STS) securitisation regulation and its integration into Solvency II

The Tripartite Template, revised

The Tripartite Template is the financial reporting standard that several major asset manager associations across Europe have endorsed as the reference means for exchanging investment information that helps (re)insurers meet Solvency II reporting obligations.

This template has been revised now for a fourth time, with the purpose of enhancing the informative power of the report and updating it with recent regulatory updates. The changes are minor but important: computational aspects are affected, as are (potentially) the data-sourcing efforts required by filers. Industry associations expect this new version to be operative from September 2018.

More scrutiny of data quality and completeness

One of the most conspicuous updates to the template is that it now requires a "by asset type" logic (based on CIC or more complex conditions), which means more stringent and specific completion rules for each field. While this may make it harder for asset managers to complete the template, the change will ultimately improve quality and comparability of the circulated reports.

Asset managers reporting on (re)insurance companies in Germany and Switzerland: you will also have to account for specific reporting requirements related to BaFin's Nachweisung 675 and FINMA's solvency test, respectively.

Prospects for alternative asset managers

Also new in the template: asset managers can pre-indicate, in their portfolios, the qualification statuses of infrastructure investments. This update is in line with Solvency II's goal of promoting such investments with a favourable capital requirement for "qualified" infrastructure equity and debt assets.

EIOPA's new set of advice to the European Commission

After months of consultations, the European Insurance and Occupational Pensions Authority (EIOPA), has recently issued its second set of advice on Solvency II. With these recommendations EIOPA aims to simplify several of the regulation's provisions, including some that will affect asset managers in particular.

One of EIOPA's ideas is to ease the capital requirements for unlisted equities (and so also funds of private equity), which would be done by recategorising them as equity Type 1. Currently, these investments are under the most capital-absorbing class, putting them at a disadvantage compared to listed equities with similar risk profiles. To qualify, unlisted equities would have to meet extensive criteria demonstrating the eligibility of their assets and risk management practices.

It is worth noting that ESMA has not yet defined what qualifies as a "leveraged" alternative investment fund, so, when it does, it could mean that this asset class is classified as Type 1 across the board anyway.

On the debt side, in order not to hamper bonds and loans that lack credit ratings from a nominated External Credit Assessment Institution, EIOPA suggests calculating and assigning a comparable credit quality step (CQS) to all unrated debts. The calibration of the CQS would be based on objective criteria sourced from financial ratios, spread measures, and risk management requirements.

The recommendations also include specific requirements regarding exposure to regional governments and local authorities. Other suggestions relate to new requirements for reviewing interest rate risk and concentration risk methodologies, and to simplifying the look-through approach and risk mitigation technique requirements.

We don't know exactly when and how the EC will transpose these recommendations into regulation, but the next concrete item on the EC's agenda (in this area) is to carry out a review by December 2018. If the EC adopts the advice as is, thus intensifying the data and due diligence requirements for investment companies and asset managers computing solvency capital requirements, it could affect the entire asset management industry.

Alignment with STS regulation

Simple, transparent, and standardised (STS) securitisation regulation will affect Solvency II too. It's expected to introduce a harmonised framework for securitisation instruments that features a more risk-sensitive calibration of capital requirements. The Delegated Regulation that introduces it is still in draft form but is projected to go live in 2019.

Classifying an asset as an STS securitisation (or not) will probably again fall on asset managers and (re)insurance undertakings in the form of additional due diligence and reporting—similar to the current process for classifying qualified infrastructure investments or risk-mitigation techniques.

Looking ahead

All of these changes will mean costs, planning, and organisational constrains for the insurance sector. On top of that will come more disruptive forces like IFRS 17 and Brexit.

In this context, the capital efficiency of investments will hit the spotlight, as will reporting synergies. Being able to provide high-quality "look-through" investment information will be pivotal for asset managers to win new mandates, especially for those in the alternative investment space.

KPMG can help generate Solvency II reports, calculate solvency capital requirements, and provide portfolio allocation and regulatory assistance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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