A report produced by financial services provider State Street said, while the directive is principles-based – whereby regulators determine high-level outcomes and leave firms flexibility in achieving them – it is detailed and wide ranging and likely to be costly for insurers.
The directive aims to harmonise insurance company regulation across Europe, placing greater responsibility on risk management and requiring insurance firms to understand better and demonstrate an understanding of the risks associated with and underlying their business.
Profound data challenge
It is anticipated that the directive will prove costly. State Street’s report said as an indication, the European Commission recently estimated the European insurance sector would spend “in the range of €2bn-€3bn over a period of five years” on Solvency II. The report added that some larger insurance firms are earmarking sums “in excess of €100m” for their Solvency II projects.
While it is not possible to predict all of the associated costs, as companies are likely to keep exact plans close, State Street suggests the principal reason for the scale of these costs is that insurance firms will need to upgrade or replace legacy systems to support the production and ongoing maintenance of the types and level of data required under the directive.
The report also said companies may need to invest in employees and expertise to help them to reorganise their businesses while overall, the report said firms face a “profound data challenge”.
Specifically, this “data challenge” will manifest itself in the need to produce much more detailed reports on their underlying liability. State
Street said, while liability calculations are a “core competency” for insurance firms, Solvency II will require them to focus on asset data and they “may lack the processes and systems needed to produce and maintain the degree of information required”. State Street added that this task will be made even more difficult because these assets will be held by asset managers in potentially complex funds and structures.
Knock-on impact
The requirement for insurers to gather more detailed information on their underlying assets will, of course, have a knock-on effect on the asset managers, with the report describing this impact as “significant”.
Under current proposals, the directive allows for insurers to accept a higher capital charge if they are unable to provide “look-through” data on the underlying assets in their investment portfolios.
However, the report adds, while some insurers may be content to accept the higher capital charge, as it may be more straightforward and less costly than gathering data, in most cases they will demand a “more granular level of reporting from their asset managers”.
The report concludes: “Solvency II creates a need for quantities of data to a degree of granularity that neither the insurers nor their asset managers and fund providers have had to source previously.
“The data challenge they face, along with the high cost impact and the risk and capital management rigour, will be of a complexity never before demanded by regulators.”
To read a copy of the report please click here
