Asset data requirements for Solvency II

Insurers are used to having to collect asset data to enable them to calculate statutory valuations.  However, the Solvency II Standard Formulae require approaches that might mean additional asset data needs to be collected. We recommend that the requirements are assessed now and discussed with your investment manager to avoid any nasty surprises late in the process.

Article 84 of the Implementing Measures¹ sets out the principle of the look-through approach, whereby the Solvency Capital Requirement (SCR) has to be calculated on the basis of each of the underlying assets of collective investment undertakings and other investments packaged as funds.

At the end of November, EIOPA released 18 of its final reports on public consultations on guidelines, including one on the look-through approach.  The guidelines on look-through are summarised briefly below:

Guideline 1 – Money market funds:

• The look-through approach should be applied to money market funds.

Guideline 2 – Number of iterations:

• An appropriate number of iterations are expected of the look-through approach, i.e., determining the ultimate counterparties of funds of funds.

Guideline 3 – Investment in real estate:

• Undertakings should cover the following in the property risk sub-module:
  • Land, building and immovable property,
  • Property investments held for use by the undertaking.
• Equity investments in real estate companies should be considered under the equity risk sub-module.
• The look-through approach should also be applied to investments in real estate through collective investment undertakings.

Guideline 4 – Data groupings in accordance with Article 84 (3):

• Where assets in the spread and interest rate risk sub-module are grouped by duration, these durations should be prudent.
• When grouping according to credit quality, the rating used should be prudent too.

Guideline 5 – Data groupings and concentration risk:

• Companies should assume that all assets for which they cannot determine the counterparty should be considered as being exposed to a single counterparty. 
• An exemption exists where the fund is managed with limits to single name exposures.

Guideline 6 – Indirect exposure to catastrophe risk:

• Undertakings should account for catastrophe risk inherent in cat bonds in the catastrophe sub-module when calculating the SCR, in addition to any credit risk.

Guideline 7 – Catastrophe bonds issued by the undertakings:

• Catastrophe bonds not meeting requirements of risk-mitigation techniques should not provide capital relief in the calculation of the standard formula.

Guideline 8 – Longevity bonds:

• Longevity bonds not meeting requirements of risk-mitigation techniques should have their capital charge in respect of mortality risk calculated using a notional portfolio of term assurance contracts and spread risk based on a conventional bond with the same features as the longevity instrument.
• Where undertakings sell longevity bonds, a notional portfolio of endowment contracts should be used to calculate the longevity capital requirement.  Longevity bonds not meeting risk-mitigation requirements should not be considered to increase in value when stressed in the life underwriting risk module.

Article 84 (3) allows look-through not to be applied on up to 20% of the total value of the assets of the undertaking.  However, the approach taken must be prudent and guidelines 4 and 5 suggest how this should be done.  This could lead to material spread and concentration SCR capital being needed depending on the assets being held.

One other additional asset data requirement that we have noted from using our SCR tool, SIIMPLIFY, with clients is that typically companies have calculated the impact of parallel interest rate movements on bond holdings by using the market value and the duration.  This information is still needed to enable the spread SCR calculation but Articles 166 and 167 require a non-parallel shift in interest rates and so to do this properly, companies need coupon and maturity cashflows for all of their bonds.  Producing these for certain types of bonds can be non-trivial.

Additional asset data requirements for Solvency II:

1. final look-through guidelines were published by EIOPA in November
2. the look-through approach requires considerable amounts of information to be collected in respect of collective investments, although there are some simplifications that can be used
3. full bond cashflows are needed for the interest rate SCR calculation