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TRANSCRIPT
SOLVENCY II
Impacts for asset managers
and services
Listening to investors
Introduction
David Zackenfels
Senior Legal Adviser, ALFI
European Insurance market
EU insurance market represents 33% of the volume of gross premiums worldwide
There are 4,325 (re)insurance undertakings in Europe as of June 30th, 2013
Assets under management for life insurance undertakings across Europe was 8.1 trillion euros in June
2014
29% of life Insurance undertaking’s portfolios are composed of investment funds
FR; 1001
GB; 516
DE; 389
LU; 312
SE; 299
ES; 269
IE; 243
NL; 223
Number of Insurance undertakingsRepartition by country Euro area (top 10)
FR
GB
DE
LU
SE
ES
IE
NL
IT
AT
The top 10 represents 80% of the total Euro area market
12% 12% 11% 10% 10%
7% 7% 7% 6% 6%
42% 42% 43% 43% 43%
13% 12% 12% 12% 12%
26% 26% 28% 28% 29%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2010 2011 2012 2013 2014-02
Structure life insurer’s investment portfolioEuro area
Investment fundsshares
Shares and otherequity
Securities other thanshares
Loans
Deposits
Listening to investors
Solvency II setting the scene/roadmap/timeline
Thierry Flamand
Partner, Deloitte Luxembourg
Solvency II
Impact for Assets
Managers/Services
Thierry Flamand
October 2014
Solvency II – Basic concept
Pillar I – Quantitative aspects
Delta NAV approach (i.e. change in net asset
value) :
‒ Require sophisticated modelling techniques to capture
interaction between Assets & Liabilities
Look-through:
‒ In order to properly assess the market risk inherent in
collective investment undertakings and other
investments packaged as funds, it will be necessary to
examine their economic substance. Wherever
possible, this should be achieved by applying a look-
through approach.
‒ Where the look-through approach cannot be applied to
collective investment undertakings or investments
packaged as funds, the SCR may be calculated on the
basis of the target underlying asset allocation, provided
such a target allocation is available to the undertaking
at the level of granularity necessary for calculating the
Solvency Capital Requirement, and the underlying
assets are managed strictly according to this target
allocation.
‒ Where this approach is not possible and for all
collective investments to which the look-through
approach could not be applied, the equity type 2
charge shall be applied. In such cases, undertakings
shall demonstrate to supervisors why it has not been
possible.
Currency:
‒ Special reference to currencies pegged to the euro
Quantitative impacts Key challenges
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Type 1 Equity Type 2 Equity Property Curency
Equity/Property/Currency risk Shock
0%
10%
20%
30%
40%
50%
60%
5 10 15
Spread risk shock (by duration & rating)
AAA AA A BBB BB B CCC or lower Unrated
What is Solvency II ?
The new solvency system will include both quantitative and qualitative aspects of risks. Each pillar focusing on a
different regulatory component.
SOLVENCY II
Assets & liabilities
valuation
Technical
provisions
Own fundsSolvency capital
requirements
Minimum capital
requirementInvestment rules
Governance
system
Supervisory
review
Groups control
Supervisory
reportingPublic information
PILLAR I
Capital requirements
PILLAR II
Governance & supervision
PILLAR III
Disclosures
Two thresholds:
Solvency capital requirements (SCR)
Minimum capital requirements (MCR)
Harmonised standards for:
Valuation of assets and liabilities
Eligibility criteria of own funds
Effective risk management system
Own risks and solvency assessment
(ORSA)
Supervisory review & intervention
Insurers are required to publish details on
risks, capital adequacy and risk
management
Transparency and open information are
intended to assess market forces in
imposing greater discipline to the industry
Solvency II – Basic concept
Pillar I – Quantitative aspects
Market risk for the European industry:
Market risk is the largest component (56%) of the standard formula SCR for the European industry. The equity,
spread and interest rate components are the largest elements within this module, although the relative
importance of the sub-modules varies widely by type of undertaking.
28%
42%
12%
30%
10%6%
8% -36%
100%
0%
20%
40%
60%
80%
100%
120%
140%
160%
Interest rate Equity Property Spread Currency Concentration IlliquidityPremium
Diversification Market risk
Expected reporting frequency
Implementation of Solvency II
Solvency II deadlines have been settled as follow:
The preparatory measures will start as from January 2015 on FY 31 December 2014 figures.
The full scope reporting will start as from January 2016 on FY December 2015 figures.
Preparatory phase Solvency II
FY 2014 FY 2015 FY 2016
FY 2014 Solo
reporting (22 weeks) Q3 2015 Solo reporting
(8 weeks)
22 8 7 7 7# Weeks
Risk management
closing deadlines
3 6
Notes:
• Content of submission FY 2014 : Partial RSR, Basic Information, Balance sheet, List of assets, Open derivatives, Technical Provisions, Own Funds, SCR/MCR
• Content of submission Q3 2015 : Basic Information, Balance sheet, List of assets, Open derivatives, Technical Provisions, Own Funds, MCR
Annual report
Quarter report
Preparatory phasePosition of the member states according to EIOPA’s guidelines
The EIOPA address to the attention of the competent national authorities the procedure during the
preparatory phase on the implementation of the Directive. The Guideline n°16 "Individual quantitative
quarterly information" and the guideline n°13 “Individual quantitative annual information” set out the
contents of the quantitative requirements.
The below table shows the member states position in relation to these guidelines:
Comply Intend to Comply Not Comply
Greece Austria IcelandSerbia / Montenegro
(only annual)
Finland Belgium Italy Denmark
Ireland Bulgaria Liechtenstein Luxembourg
Malta Cyprus Lithuania
Romania Germany Latvia
Sweden Estonia Netherlands
Spain Norway
France Poland
Croatia Portugal
Hungary Slovakia
United Kingdom
Gibraltar
19%
75%
6%
GUIDELINE 13 –ANNUAL INFORMATION
Yes
Probably
No
19%
72%
9%
GUIDELINE 16 –QUARTERLY
INFORMATION
Yes
Probably
No
Annex 1 – Assets specific details
List of QRTs
Codification Frequency Description
Analysis - Detailed Assets
Assets - D1 Investments Data – Portfolio list
Assets - D1Q Investments Data – Portfolio list (Quarterly)
Assets - D1S Structured products Data - Portfolio list
Assets - D2O Derivatives data – open positions
Assets - D2T Derivatives data – historical derivatives trades
Assets - D3 Return on investment assets (by asset category)
Assets - D4 Investment funds (look-through approach)
Assets - D5 Securities lending and repos
Assets - D6 Assets held as collateral
A
QA
Q
Q
Q
A
A
A
A
A
A
A
AnnualQuarterly (semi-
annual for groups)
AQ
Preparatory phase
Listening to investors
Perspective of the Insurance world
Bernard Denis
Director, Lombard International Assurance
Lombard International Assurance
Life Assurance – Unit Linked only
Open Architecture
24 Billion AUM
200 custodian banks
600 investments managers
17,000 portfolios +
25,000 active assets (of which 11,200 funds)
Business Model - Relations
PCP
Private Client
Portfolio
Lombard Int.
Assurance
Issues policy that invest in
the fund
Executes the administration
and the calculation of the
fund NAV
Sends quarterly valuations
of the policy to the
policyholder
Monitors the fund underlying
assets in regards to the
Client strategy and CAA
investment rules
Daily transactions
Monthly statements of holdings
Custodian
• Discretionary manager of the
fund
• Agrees on details of the fund:
Client strategy
CAA requirements
• Act on the fund underlying
assets in line with the client
strategy and the CAA
regulations
Subscribes to the fund through
their life assurance policy
Decides on a risk profile and
an investment strategy
Policyholder
Regulated IM
Solvency II at Lombard International Assurance
5M € project
Started 5 years ago
Focus on Pillar 1 & 2 so far
Optimizing Solvency capital ratio calculation (SCR)
No direct influence on investment strategy
Importance of the look-through
Pillar I + Approach
e.g.
challenge
of market
risk
calibration
e.g.
strategic
riskse.g.
operational
risks
ORSA process Free
capital
Pillar I – Minimum regulatory requirements Pillar II – Own capital requirement assessment
Market Underwriting Other risks(Operational +
Default)
SCR Adjusting SCRassumptions to
LIA'specificities
Risks not fullycovered under
Pillar I
Material risksnot subject to
SCR
Internal capitalrequirements
(ICR)
Availablecapital
SurplusOwn SII
surplus
Insurance
(Lapse +
Expense)
Own capital
requirement
Own capital
available
Free
capital
SCR Market : What is the idea?
Capital requirements will vary depending on the nature of assets
underlying technical provisions.
Risky assets weight more than less risky assets.
Non-quoted
Equity non OCDE
Equity OCDE
Structured products
CCY VS EURO
Bonds
Cash
What about investment funds?
By default… the highest capital requirements
But if you can “ look through”… It is possible to reduce capital
requirements
Ex a balanced fund (50% bonds, 50% equity) could see requirement
reduced due to its bond exposure portion
AUM - Split
At Q4 2013, the AUM was 23,225 bn€ of which:
64% are classified as
Investment Funds
Unquoted Structures
36% are Direct Investments (Cash, Bonds, Equities, etc.) and considered as already
looked-through
Reporting obligations
As per the specifications (Art.78 - EIOPA Report 260-2012), an accurate Look-through has
to be performed if the portion of the Investment Funds exceed the threshold of 30% of total
investments.
Lombard International Assurance has to fulfill the requirements.
Balanced Fund 0.02761%
Bond Fund 29.60033%
Money Market Fund 2.63860%
Equity Fund 33.82336%
Exchanged Traded
Fund 0.16686%
Closed-End Fund 0.29480%
Hedge Funds - UCITS 3.42168%
Private Equity Fund 0.95270%
Simple Hedge Fund 8.03944%
Fund of Hedge Funds 5.37677%
Real Estate Fund 0.67480%
Other Fund 14.98306%
Look through Approach
Data
Quality
CAA File
22,400 lines of data
€23,225bn
Solvency II
Q4 2013
Submission
Apply Market Stresses
Dashboard for SCR
Calculation
SII Asset database
• SCR Market is 46% of the Total SCR
• Each look-through generates significant calculation requirements
• Carrying out a look-through calculation on the six sections above
generates an additional 750,000 lines of data
• Currently using spreadsheets which struggle with this volume
LT database c. 1,000,000 lines
External Funds € 100 m 2 funds => 6 lines
Internal Funds € 200 m 11 funds => 1,200 underlyings
SII retreated Database
Internal Funds € 900 m 3 funds => 3 lines
Use of
Mandates while
waiting for
accurate data
External Funds € 700 m 50 funds => 8,550 lines
External Funds € 750 m 113 funds => 10,000 lines
Data Provider € 4.5 bn 850 funds => 735,000 lines
Unquoted € 300 m 15 funds => 60 lines
Other Investment Funds to be looked-through
Another 250 funds to achieve the 80% (2014 target)
From largest
1000 holdings
Use of Mandates => propsectus
Look through Approach
Total FUM 22.158 bn € 23.225 bn €
Investment Funds 7.00739%
5.70729%
Unquoted Eq 1.561 1.221
Data Provider - - 4.398 v
Internal Funds 0.640 v 0.908 v
Internal Funds 0.683 v 0.197 v
Data Provider 2.284 v 0.249 v
External Funds 0.769 v 0.701 v
External Funds 0.522 v 0.719 v
Unquoted 0.301 v 0.624 v
External Funds - - 0.112 v
Direct Investments 8.391 38% 8.386 36%
61%
End 2013
V = Good data quality V = Poorer quality of data
5.199
LT
End 2012
71%
7.908
LT
End 2014
Look through - Unquoted
Total Unquoted
10% of FUM
Non Listed Underlyings
48%
Listed Underlyings
52% Equity 1 39% Stress +- Eq
Dampener
Bonds/Cash/Etc.
?
1 largest Unquoted 18%
10 largest Unquoted 62%
50 largest Unquoted 97%
Equity 249% Stress +- Eq Dampener
Why is Look-through important?
We’ve got no choice !
Lombard International Assurance: 10 % impact on SCR!
Different product will have different capital requirement, so impacting
product profitability
SII is a big cost to insurance companies, they will seek to mitigate by
optimizing capital requirements
Funds with high transparency will be preferred as they will “cost” less
Opportunity for custodians and data providers to offer a new service
What do we need?
Fund Asset breakdown, with high degree of granularity
Assets details will need to be enriched (rating, domicile…)
Data quality is key
Data quality Issue
Bonds Equities FundsOthers
(Rights, Warrants, etc.)
Total asset lines8,590 3,010 11,200 2,323
DATA MISSING
ISIN 437 454 1,017 N/A
Classification 349 128 650 1,515
Maturity Dates 690 N/A N/A N/A
Coupon Rates 882 N/A N/A N/A
Credit Ratings 4,266 N/A N/A 1,428
Domicile & Listing 500 25 N/A N/A
DATA INCOHERENCIES
Misclassification 13 22 125 N/A
Wrong Coupon 14 N/A N/A N/A
Wrong Dates 243 N/A N/A N/A
Wrong Listing 39 5 N/A N/A
Solvency II
c 25,000 lines
When and How?
When ?
At least once a year for regulatory reporting
Ideally quarterly for monitoring purposes
How?
Full automation as the data volumes are huge
Via custodians and/or data providers
Industry outlook
Fund managers beginning to work with insurers to provide data, as the
deadline for Solvency II draws closer
Currently receiving very good quality data from some external Fund
Manager. We are receiving data from the other sources on quarterly
basis but poor quality.
Several independent solution providers are now active in the market
Fund Managers have also raised licensing issues, where data
providers (e.g. S&P, Moodys) are not happy for their data to be passed
on to unlicensed users
Impact on our industry
A requirement for increased transparency and public disclosure should
encourage greater responsibility within the insurance industry
This will introduce greater 'market discipline', which will help ensure the
soundness and stability of insurers
Insurers applying 'best practice' are more likely to be rewarded e.g. by
lower financing costs
Modifications in product design due to more accurate pricing of risk
under SII may result in changes in the pricing of insurance products.
Impact on Lombard
SII is the new ‘business as usual’ for regulatory purposes
The SII programme has a limited life-span and we are building the new
processes and templates for future regulatory reporting and risk
management.
Combined financial and operational risk management
A key factor in achieving SII compliance is ensuring that financial risks
are considered alongside operational risk.
An enterprise wide view of risks
This requirement covers how risks are controlled, how they interact with
each other in times of stress, as well as day-to-day volatility, and what
framework is in place to manage those risks.
Impact on Lombard
New reporting requirements
Solvency II requires new reporting standards, demanding more reports
in a shorter timespan
Enhanced capital management
An increased focus on our capital and how we use it will ensure that it
works harder for our clients whilst providing them with the security that
we will be able to fund their needs regardless of the economic situation
THANK YOU
Bernard Denis
Director
Investment Administration
Lombard International Assurance S.A.
Head office: 4, rue Lou Hemmer L-1748 Luxembourg Grand-
Duché de Luxembourg
Listening to investors
Perspective of the Investment
Management world
Estelle Beretta-Somody
Head of Business Implementation
ING Investment Management
About ING IM International
Investment Management Profile
EUR 180 bln* (USD 227 bln*) in Assets under Management
Active in 18 countries across Europe, U.S., Asia and the Middle East
More than 1100 employees
Manages assets for:
Institutions including Sovereign Wealth Funds and Pension Funds (27% of AuM)
Retail Investors (29% of AuM)
ING Insurance (Proprietary) (44% of AuM)
Applies its proprietary research and analysis, global resources and risk management
to offer a wide variety of strategies, investment vehicles and advisory services in all
major asset classes and investment styles
The asset manager of NN Group, a publicly traded corporation. Our investment
history dates back to 1845 through our strong roots in insurance and banking
Investments structured as a series of specialist skills-based investment boutiques
united by shared global resources
ING IM International – Assets under Management
€ 48 € 49 € 49
€ 48 € 52 € 52
€ 72 € 76 € 79
€ 168 € 177 € 180
Q1 2014 Q2 2014 Q3 2014
Eu
ro B
illio
ns
Assets under Management
Institutional Retail Insurance
27%
29%
44%
Type of clients
Institutional
Retail
Insurance
20%
80%
Asset class
Equity
FixedIncome
Figures as of 30 September 2014 Asset class data using look through and excluding excess cash
Solvency II : main concerns of asset managers (1)
Weight of insurers into our Luxembourg domiciled funds?
Given that most of our (re)insurance clients have their assets managed through discretionary portfolios,
our first estimate was that less than 30% of assets in our funds are from insurance clients.
However, looking at the EFAMA statistics, we assessed that there are more third party insurance clients
investing though intermediaries and platforms than we think.
Cerulli made a survey to estimate the cost origin of Solvency II
Source: Cerulli Associates Source: EFAMA Asset Management Report 2014
Solvency II : main concerns of asset managers (2)
Risk profiles definitions of our (re)insurance clients
Understanding the insurers risks and regulation – a competitive advantage?
Outperforming in a risk controlled environment
Asset allocation decisions drivers
Capital requirements
Risk appetite
Diversification
Data requirements and management
Looking through
Data format requirements and delivery
Data quality and ownership
Costs of development and additional data sources
Solvency II : our response
Reception of clients’ requests to provide information, especially in The
Netherlands, Germany and France
Set up of Solvency II project at NN insurance level with go live for the
1st phase in 2013
Set up of Solvency II project at ING IM level with intermediary actions
for a few clients and official go live 1st of Jan 2016
Impact on management: rebalancing of portfolios for our (re)insurance
clients
Impact on products: new design taking into account the constraints for
our (re)insurance clients
Impact on data governance and architecture
Impact on staffing and split of activities within teams
Listening to investors
Panel Discussion:
Vantage Points to Solvency II
Moderator: Thierry Flamand, co-chair ALFI Solvency II WG &
Partner, Deloitte Luxembourg
David Zackenfels, Senior Legal Adviser, ALFI
Panelists : Valérie Nicaise, Head of Risk and Performance
Solutions, BNP Paribas Securities Services
Mathilde Sauvé, Insurance Solutions Strategist, AXA
Investment Managers
David Claus, Luxembourg Country Executive, BNY
Mellon
Bernard Denis, Director, Lombard International
Assurance
Jeff Rupp, Director of Public affairs, INREV
Asset Class Applied Shocks under Solvency II
• Real Estate • Standard 25% shock is applied on the market value of all the properties held
(land, buildings, immovable-property rights and property investment for the own
use of the undertaking). Otherwise, investments are treated as equity (see below)
• Global Equity (Quoted on EE or OCDE
exchanges)
• 39% base shock is applied and a +/-10% equity dampener is considered. The
current dampener is +7.5%
• Other Equity • 49% base shock is applied and a +/-10% equity dampener is considered. The
current dampener is +7.5%
• Financial and Institutional Participations • Shock exempt (deducted from own funds)
• Strategic Participations • 22% shock is applied to the market value of the participations
• Corporate / Government bonds • Modified interest curve is used to evaluate the impact of market rate falls and
rises. The rating and the modified duration of the corporate bonds are also
considered in the application of the spread risk module
• Intangibles • 80% shock is applied to the economic value of the assets
• Investments in Foreign Currencies • 25% shock is applied on the market value of the assets (some currencies get a
special treatment)
Market risk Shocks