Solvency II and Data Challenges
The new ‘Solvency II’ regulatory framework has been widely labelled as a ‘data nightmare’ for insurance and reinsurance undertakings (Insurance Firms), and rightly so. The complexity of the data quality and reporting requirements raises a large number of data challenges for Insurance Firms and their allied asset managers. From an internal perspective, Insurance Firms will have to review balance sheet data in order to evaluate whether or not to opt for an Internal Model or the Standard Formula for calculating solvency capital, and in order to develop capital optimisation strategies. Insurance Firms will also have to review their existing data frameworks in order to identify whether or not they can be used or adapted to cope with the increased level of granular data required to be reported. They will also have to review whether their data frameworks are able to comply with the more regular quarterly reporting time frames set by Solvency II, i.e. within five to ten days of the end of each quarter. Insurance Firms will now also have to disclose firm qualitative and quantitative data to the public and to National Competent Authorities (NCAs) in the Solvency and Financial Condition Report (SFCR). Insurance Firms must also disclose to NCAs firm qualitative and quantitative data contained in the Regulatory Supervisory Report (RSR) every year in summary and in full every three years. In addition to these new obligations relating to firm data, Solvency II raises a number of relevant operational challenges.
Data Sources
One of the most significant challenges for Insurance Firms will be the actual sourcing of the data required to be reported to regulatory authorities on a quarterly and annual basis. Although the legal obligation to report the required data lies with the Insurance Firms, the underlying asset data will invariably be held by investment management firms, market data vendors, reference data vendors, pricing vendors, collateral managers, securities lending agents, custodians, and third party custody and fund administration firms. Internally, Insurance Firms may also be facing a lack of common repositories that hold master data which may be problematic when attempting to match data fields.
Insurance Firms will be required to organise the sourcing of the asset data within the quarterly reporting timeframes from across a multitude of third party data holders. European Economic Area (EEA) insurance groups undertaking group reporting by will also face the additional task of processing non-uniform data in order to create Solvency II reports. Line level data will be required from a large number of representative sources such as performance engines, clients, accounting, back office functions, and credit ratings agencies. Insurance Firms will also be required to source, validate and map this data within short time frames in order to meet the reporting deadlines. There will also be different asset data requirements for quarterly and annual reporting periods.
Data Requirements
The informal ‘Three Pillars’ of Solvency II require different sets of data to be reported to the regulatory authorities. Pillar I covers quantitative requirements relating to capital rules and investment rules, and will also require data needed to calculate the Solvency Capital Requirement (SCR) and Minimum Capital Requirements (MCR). The SCR formula is made up of data that is required to be identified and sourced in relation to a number of different risk modules (non-life underwriting, life underwriting, health, market, counterparty default, intangible asset, operational) and sub-risk modules (correlation coefficients, interest rate, equity, property, spread, market risk concentrations, currency). Pillar II covers supervisory review and internal and management controls, and will require data needed to calculate the Own Risk and Solvency Assessment (ORSA). Pillar III covers disclosure requirements relating to risk and capital levels, and requires the adoption of a forward-looking methodology in order to populate the Quantitative Reporting Templates (QRTs) required to be reported under Solvency II. The look-through approach (i.e. including the underlying assets of collective investment undertakings and other investments packaged as funds) may prove to be particularly challenging in terms of identifying and sourcing correct and accurate data.
Data Quality Requirements
Under Solvency II, Member States are required to ensure that Insurance Firms have internal processes and procedures in place that can ensure the appropriateness, completeness, and accuracy (ACA) of the data that is used in the calculation of technical requirements. These three characteristics are the criteria that are used to calculate the quality of the data used. Data is considered to be appropriate “if it is suitable for the intended purpose (e.g. the valuation of technical provisions, setting of assumptions) and relevant to the portfolio of risks being analysed (i.e. directly relates to the underlying risk drivers)”.[1] Data is considered to be complete where it includes sufficient historical information to assess the characteristics of the underlying risks and to identify risk trends, and such data allows for the recognition of all relevant homogenous risk groups used in the calculation of Solvency II technical provisions.[2] Data is considered to be accurate where it is free from material errors, data from different time periods used for the same estimation are consistent, and it is recorded in a timely manner and consistently over time.[3] In addition to ensuring data quality, Insurance Firms must put in place a data quality management framework that allows for the definition of data, assessment of data quality, resolution of material problems identified, and the continuous monitoring of data quality. The data quality requirements may prove to be significantly challenging for Investment Firms that deal with a large number of third party data holders. With a large number of asset data fields to be populated, increased granularity of the data required, and new data required to be sourced, Insurance Firms may find it difficult to uphold Solvency II data quality requirements, e.g. in terms of transparency of data processing, audit trails, auditor data assessment, reliable data policies, and robust and reliable metrics for the ACA data requirements.
Mapping of Data
The mapping of the data that is required for Solvency II reporting may prove to be a huge challenge for many Insurance Firms. It must be remembered that Insurance Firms may be required to source data from a number of different third party data holders, and each of these may classify data using different sets of definitions, rules, or classification systems. Insurance Firms will have to identify and classify financial instruments and assets and map these to the new European Insurance and Occupational Pensions Authority (EIOPA) Data Point Model (DPM) and XBRL Taxonomy. Solvency II utilises Complementary Identification Codes (CICs) to classify financial instruments in terms of asset country listings, instrument types, and risk types, and the industry sector classification tool ‘NACE’ (Nomenclature statistique des Activités économiques dans la Communauté Européenne). One of the difficulties with the CIC classification system is that asset managers often classify the same assets in different CIC classification categories, which may lead to potential reporting errors. In practice there may be conflicting taxonomies that Insurance Firms must address, whilst classifying existing portfolios, typically across millions of financial instruments, to the Solvency II XBRL Taxonomy in order map to the complex QRT fields. Insurance Firms may therefore choose to opt for third-party data vendors that may offer Solvency II datafeeds in order to map financial instruments to the EIOPA Taxonomy.
Technology
Given the sheer breadth of the new Solvency II reporting requirements, in terms of increased granularity of data, volume of data, and regular reporting deadlines, it would seem to be the case that many Insurance Firms are choosing to pass reporting obligations on to their asset management firms, to outsource their reporting obligations to third party Solvency II reporting firms, or to use Solvency II to catalyse the implementation of more effective data management systems and technologies. The choice an Insurance Firm makes in practice may be dictated by a large range of pertinent factors. A Solvency II data and systems report published by Ernst & Young found that the maturity of Solvency II data workstreams varied widely from insurer to insurer. [4] It was found that some insurance firms had already implemented data workstreams by moving from gap analysis to solution design. [5] Other Insurance Firms had commenced re-planning data workstreams from the bottom-up, whereas most other Insurance Firms were somewhere in between, struggling in certain areas and making headway in others.[6] The report found that common themes included that many Insurance Firms believed wholesale remediation of front-end policy systems was not feasible owing to the exorbitant cost and time required, that many Insurance Firms were making significant investments of time in order to investigate the advantages and disadvantages of enterprise data warehousing solutions, and that there was a lack of focus on Solvency II technology remediation programmes.[7] Celent proposes that internal systems developed by Insurance Firms cannot benefit from vendor driven innovation, that IT vendors can provide helpdesk support, and that IT vendors can keep Solvency II solutions up to date with the latest regulations.[8]
If you would like to discuss any of the implications of Solvency II on your business, or for more information on our Solvency II reporting solutions and prices, please email DataTracks at: enquiry@datatracks.eu.
[1] CEIOPS (2009). CEIOPS’ Advice for Level 2 Implementing Measures on Solvency II: Technical Provisions – Article 86 f Standards for Data Quality (October) (CEIOPS-DOC-37/09), p.8.
[2] CEIOPS (2009)., p.8.
[3] CEIOPS (2009)., p.9.
[4] Ernst & Young (2011). Getting up to speed Solvency II data and systems. EYGM Limited.
[5] Ernst & Young (2011), p.2.
[6] Ernst & Young (2011), p.4.
[7] CEIOPS (2009). CEIOPS’ Advice for Level 2 Implementing Measures on Solvency II: Technical Provisions – Article 86 f Standards for Data Quality (October) (CEIOPS-DOC-37/09), p.8.
[8] CELENT (2012). Solvency II IT Vendor Spectrum. (June) Celent, a division of Oliver Wyman, Inc., pp.10-11.