Solvency II Healthcheck Service
Solvency II became fully effective in January 2016, following a delay of two years, allowing the industry to meet the challenges the regulation presented. With this extra time, the first delivery should have been a smooth and complete process; however, the reality is that this remains a major data challenge for all parties. The demands on Insurance companies, whether on the standard or internal model, remain and require large volumes of data where the testing of these models is likely to result in more data requests not provided during the first run. The data challenges facing firms can be categorised into three levels:
- Aware of the regulations/data deliveries and have tested and completed dry runs;
- Aware of the regulations/data deliveries but not have a tested model;
- Those that are still not as prepared as they should have been for obtaining the data.
The Asset Management industry has been lobbying, through various bodies such as the ABI and the Investment Association (ex IMA) to set standards and templates for data delivery. Despite this, Insurance firms do not always adhere to the defined standards and instead look to add additional and/or different data attributes. This impacts on the models built by asset managers for delivering Solvency II data as the flexibility required to add the additional attributes was not built in to process. The legal aspects of passing on this data have important ramifications; the result is that it takes time and considerable effort to allow for the restructuring of the data delivery. Layered onto this is are further challenges of the different interpretations of the regulations across Europe also impacting the data requested.
Why Perform a Healthcheck?
Asset Managers have a duty to deliver data to Insurance firms either directly, through other asset managers as owners of fund of funds or third-party distributors. All the data needs to be delivered with suitable protection, so the data is only used for Solvency II aggregation and that suitable vendor licenses are in place. Although legal agreements have been established to allow the sending of data and templates throughout the industry; these models still rely on a large degree of manual activity. Reliance remains on excel functions in many cases to copying data to meet delivery targets. The sophistication of these data models should have been included as an implementation requirement as volumes will increase in addition to shortening timeframes for delivery to clients and regulators.
The interpretation of the regulations by each Insurance firm of their model creates further variation and there is unlikely to be any prescriptive requirements from the European Insurance and Occupational Pensions Authority (EIOPA). These variations will continue to grow, as each firm determines the level of the data required for the underlying assets as each model is tested. Defining a suitable operating data delivery model to deal with these scenarios is the outcome of this comprehensive review.
How can ISC Assist?
ISC have been involved with major institutions delivering all components of the Solvency II regulations, for the initial target and the final deadline. This involvement has continued beyond that deadline, enhancing the data model by resolving issues and ensuring future proofing with increased flexibility.
There have been several regulations impacting data delivery during this same period: AIFMD, PRIPs and MiFID II. ISC have been involved in the preparation and delivery of these regulations for our clients, assisting and enabling them to meet these additional data challenges. The lessons learnt from these projects provide invaluable understanding of the data delivery challenges for Solvency II.
Investment Solutions Consultants (ISC) offer a review process benchmarking data operating models in line with the Solvency II regulations. The data supplied to Insurance firms needs to be appropriate, complete and accurate, so the review would justify how each data delivery meets these criteria. The other areas of the review are covered under the sections described below:
An important part of the process is that the source of the data is recorded and stored to prove that the values can be recreated. For some firms, a proportion of the data is maintained in spreadsheets, these need to be recorded, protected and stored. The spreadsheets would be reviewed to ensure sufficient controls are in place and the formulas used are appropriate and accurate. The suitability of the data governance model would also be reviewed, with recommendations as to how it meets industry standards. This would cover all data, including those held in spreadsheets and databases to recognise business ownership and maintenance controls.
The data delivery to Insurance firms has created a risk for firms that they are passing licensed data to third parties, where they may not have suitable licenses in place. This has caused much concern within the industry and extra vigilance from the data vendors. The review would be able to assess the license agreements in place and determine whether they cover the usage being applied as well as any possibilities for cost savings. Some service providers have put in place metering models which are better at managing the usage costs. The review would look to see if metering could be applied thus leading to better control of the licensed data model.
Look Through Data Delivery Model
Asset Managers have had to build operating models to deliver look through data whilst protecting their intellectual property. These models send data mainly in spreadsheet formats that are prone to manipulation and lack controls. The review would look at the following areas:
- Storage and management of agreements, NDA's and licensing
- Creation of the data extracts with suitable controls
- The distribution delivery mechanisms of templates
Each area would look to make the model more robust and cost effective, as well as making sure the model can meet the shortening of delivery timeframes.
Solvency II is one of a recent flood of regulations needing data, this has led to a number of projects usually tackled by separate areas of the organisation. The Solvency II review would look at the data used for other regulatory deliveries ensuring that there is data consistency and no cost duplication, as well as looking for similar processes that could be shared.