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SOLVENCY II
DATA
MANAGEMENT
Handbook
2015Sponsored by
Welcome to the latest in A-Team Group’s series of
Handbooks, which we hope are helping to shed light on
some of the tricki...
Solvency II Data Management
 5
Introduction	 3
Foreword 7
Overview 8
Pillar-by-Pillar Overview 10
Data Management Impact 1...
Solvency II Data Management
 7
by Tim Lind, Global Head of Regulatory Solutions, Thomson Reuters
With its January 2016 dea...
8
Solvency II Data Management	
Thomson Reuters provides the industry with the leading range of
Solvency II and ORSA servic...
Pillar-by-Pillar Overview (cont.)Pillar-by-Pillar Overview
The three pillars at the core of Solvency II describe the
regul...
Data Management Impact (cont.)Data Management Impact
While Solvency II has been designed to ensure that the
insurance indu...
Data Management Impact (cont.)
Third-Party Fund Administrators
Asset servicing companies are another source of Solvency
II...
Data Issues (cont.)Data Issues
Overview
The data requirement for Solvency II is substantial,
including existing and new da...
Data Issues (cont.)Data Issues (cont.)
Data quality
In many respects, the data quality requirements of
Solvency II are sim...
Data Issues (cont.)Data Issues (cont.)
Data Governance
Insurance companies, asset managers and asset services
alike recogn...
Downstream Data Challenges
Solvency II poses significant data challenges downstream
as it puts pressure on systems infrast...
Downstream Data Challenges (cont.)
Authority (EIOPA) has specified towards 100 QRTs that are
split into three sets coverin...
The Outlook for Solvency II
Insurance companies interviewed for a recent A-Team
survey on the data management implications...
Only Thomson Reuters has the depth and breadth of data, the global footprint, local
knowledge and proven experience to del...
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Solvency II Data Management Handbook

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We were delighted to sponsor the A-teams latest Data Management Handbook for Solvency II. With so many practitioners facing the challenge of being ready for Solvency II, Thomson Reuters in conjunction with the A-Team wanted to provide some clear guidance and support to the market about the best practices that are taking place and how they can get ready. This publication is freely available to the public.

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Solvency II Data Management Handbook

  1. 1. SOLVENCY II DATA MANAGEMENT Handbook 2015Sponsored by
  2. 2. Welcome to the latest in A-Team Group’s series of Handbooks, which we hope are helping to shed light on some of the trickiest issues that financial institutions are having to grapple with today. Far from being ‘just a European insurance issue’, the Solvency II regulation has far-reaching implications into asset management and custodian firms globally, the reasons for which will become apparent as you read through this Handbook. Solvency II’s aim of creating a unified and stable industry driven by risk management and solvency requirements to help protect consumers and make the European insurance market more competitive, is a noble one. But it has created significant burden on data management practices across financial institutions who are now wrestling with wide-ranging requirements - many in last-minute mode - in order to comply with the fast approaching deadline of January 2016. In this Handbook we look at the regulation at-a-glance, what the implications are of each of the three pillars on data management, how Solvency II impacts data management at insurance firms, asset managers and securities administrators or custodians. We also delve into data issues, such as the volume of data required, new data types, quality of data, data governance and the significant requirement for data transparency and fund look-through. And we explore the downstream data challenges on infrastructure and reporting. Finally, we give our take on the outlook for Solvency II. Thanks to our sponsors Thomson Reuters and advertisers for making this Handbook possible. If you enjoy this handbook you may also want to register for our upcoming webinars on Solvency II where we seek up-to-date information on the state of the financial industry’s preparedness for the deadline. We have one on May 28th and will have more later in the year (register at bit.ly/rdr webinars). We’ll also be discussing the impact of Solvency II and other regulations at our next set of Data Management Summits in the second half of the year in London and New York so be sure to come along. See you there! Angela Wilbraham Chief Executive Officer A-Team Group Solvency II: Time is Running Out Managing Editor Andrew P. Delaney andrew@a-teamgroup.com Contributing Editor Sarah Underwood sarah.underwood@a-teamgroup.com A-Team Group Chief Executive Officer Angela Wilbraham angela@a-teamgroup.com President & Chief Content Officer Andrew P. Delaney andrew@a-teamgroup.com Sales Director Caroline Statman caroline@a-teamgroup.com Operational Marketing Director Jeri-Anne McKeon jeri-anne@a-teamgroup.com Client Services Manager Ron Wilbraham ron@a-teamgroup.com Production Manager Sharon Wilbraham sharon@a-teamgroup.com Design Graphic Designer Victoria Wren victoria@wr3n.com Postal Address Church Farmhouse, Old Salisbury Road, Stapleford, Salisbury, Wiltshire, SP3 4LN +44-(0)20 8090 2055 info@a-teamgroup.com www.a-teamgroup.com www.referencedatareview.com SOLVENCY II DATA MANAGEMENT Handbook 3 Only Thomson Reuters has the depth and breadth of data, the global footprint, local knowledge and proven experience to deliver the exact data you need to not just comply – but thrive – anywhere you do business. Step by step guidance for cost-effective compliance, across the board, across the globe, including specialist data sets for: REGULATORY DATA THAT KEEPS YOU ON THE RIGHT COURSE TOOLS TO HELP YOU NAVIGATE THROUGH A SEA OF REGULATION • FATCA • Basel III • Solvency II • EMIR • Dodd-Frank • IFRS • +More © 2014 Thomson Reuters 1006275/02-14 Thomson Reuters and the Kinesis logo are trademarks of Thomson Reuters. To find out more, simply email prd.community@thomsonreuters.com or visit prdcommunity.com
  3. 3. Solvency II Data Management 5 Introduction 3 Foreword 7 Overview 8 Pillar-by-Pillar Overview 10 Data Management Impact 12 Data Issues 16 Downstream Data Challenges 22 The Outlook for Solvency II 26 CONTENTS Unlocking the potential. Data breadth and depth for Solvency II compliance SFI’s Solvency II service provides the cross-asset class reference pricing data required to help insurers, asset managers and custodians calcu- late capital adequacy and reporting disclosures. SIX Financial Information’s service provides the data consistency and provenance required to sup- port accuracy, completeness appropriateness. Our compliance data service includes granular asset data required for Solvency II including new elements such as CIC, LEI and NACE industrial classifications. The service is available in three scalable service options to provide flexibility of data and delivery formats. www.six-financial-information.com/compliance
  4. 4. Solvency II Data Management 7 by Tim Lind, Global Head of Regulatory Solutions, Thomson Reuters With its January 2016 deadline looming, Solvency II is becoming one of the more demanding regulatory challenges of 2015. To comply, insurance companies need access to valuations information and associated reference data required to understand the current value of their investments. Many are looking to their investment managers for that information, and there may be good reasons for that. First, it appears that some insurers are considering dropping asset managers who are unwilling to provide timely look-through and other information they need to comply with Solvency II. More widely, this situation is leading insurers to question the benefits of diversification and having multiple asset managers vs. the cost and complexity of aggregating information from all of those asset managers for Solvency II. For those asset managers that have adopted a robust approach to Solvency II’s data requirements, the regulation represents an opportunity: By preparing to meet the look- through needs of their insurance company customers, they can demonstrate added value and win business away from those that haven’t prepared, particularly as insurers seek to reduce the population of asset managers they use. Meanwhile, asset managers facing these Solvency II-related pressures are considering changing their asset allocation strategy because of the difficulty on meeting certain look through requirements, particularly as they relate to the underlying components of structured assets. As they consider their options, savvy asset managers are partnering with providers of comprehensive pricing and valuations data, and related reference data, like Thomson Reuters. High on their check-lists are the breadth of coverage needed to service their portfolios, expertise and availability of service staff, transparency of valuations process and the range of associated identifiers and other meta-data that maps to the investments in question. Ensuring this level of service is one sure-fire route to compliance. But whichever route you take, now is the time to act: time is running out. Foreword As a marketing or business manager, you know you need content marketing if you’re going to succeed in attracting and engaging with today’s more savvy buyer. But do you: •Struggle to find time to create content consistently? •Find it hard to think of fresh topics to write about? •Lack the capacity to generate blogs, run or moderate webinars, seminars or events or other valuable content? •Fail to generate enough leads or sales conversions from your marketing efforts? You’re not alone. While 93% of marketers use content marketing today, their top two challenges are a lack of time (69%) and producing enough content (55%)* Come to the content experts at A-Team Group. A-Team Group has, since 2001, been delivering distinguished content based on in-depth domain expertise on behalf of B2B financial technology suppliers. Run by experienced business journalists, we thrive on taking complex business and technology topics and turning them into compelling content assets to drive lead generation and prospect nurturing with a measurable ROI. Whether you just need support with content for your blog or to manage a webinar, or if you want the full service content marketing strategy and execution, A-Team Group have the experience, knowledge and content know-how to help you succeed. * Source: 2013 survey of 1,217 respondents across a range of industries, functional areas and company sizes, by Content Marketing Institute, MarketingProfs and Brightcove. Call 020 8090 2055 For a free consultation or to ask any questions, give us a call 020 8090 2055 or email angela@a-teamgroup.com
  5. 5. 8 Solvency II Data Management Thomson Reuters provides the industry with the leading range of Solvency II and ORSA services; offering a specialist set of Pricing and Reference Data Feeds, Tax and Accounting Consultancy Services and Risk Models. Our feeds alone provide the market with a complete set of ‘fund look-through’, ratings (credit quality steps), benchmarks curves in addition to vital valuations content. If you would like to learn more about our regulatory data feed services, simply visit www.prdcommunity.com today. www.prdcommunity.com Overview (cont.)Overview source data for compliance purposes from both internal and external sources, often consolidating data from many data vendors to generate required data sets and always seeking to input consistent data across the three pillars of the regulation. As the implementation of Solvency II approaches, EIOPA issues guidance on outstanding technical issues, and plans are put in place for a final dry run of the regulation later this year, insurers, asset managers and asset servicers need to ensure the efficacy and completeness of their Solvency II compliance programmes. Solvency II is a European Union (EU) directive that aims to harmonise European insurance regulation to create a unified and stable industry driven by risk management and solvency requirements, and designed to protect consumers, improve regulatory supervision and increase the competitiveness of European insurers in international markets. Insurers have until January 1, 2016 to achieve compliance with Solvency II, but overcoming the many challenges of the regulation could also bring opportunities in terms of reduced capital requirements, improved risk management, a clearer link between risk and capital to support business decisions and a sturdy compliance platform. The directive is principles based, complex and broad in scope, covering not only insurers and reinsurers, but also asset managers and third-party asset servicers. It is broken down into three pillars: • Pillar I – Capital requirements, including a solvency capital requirement based on an internal or standard model and a minimum capital requirement • Pillar II – Governance and supervision, including effective risk management and an internal Own Risk and Solvency Assessment • Pillar III – Public disclosure and regulatory reporting on a quarterly and annual basis While insurers bear the greatest burden of data management under Solvency II and must manage both existing data and new data, the burden carried by asset managers and asset servicers is also significant. Under the regulation’s ‘look-through’ component, asset managers and asset servicers must provide transparency on the investments they hold on behalf of insurance company clients in accordance with technical standards outlined by the European Insurance and Occupational Pensions Authority (EIOPA). The standards, which cover both asset data and risk management data, include quality requirements of complete, accurate and appropriate data. Asset managers and servicers must also provide more granular information on entities issuing securities and the component elements of derivative instruments. It is expected that some asset managers will divest asset classes that do not have the underlying performance data required by Solvency II and instruments that create a large capital charge and are perceived by insurers as disadvantageous in terms of solvency capital requirements. With data management requirements running through the principles and pillars of Solvency II, insurers are likely to Solvency II Data Management 9 Significant Milestones November 10, 2009: Adoption by European Council March 14, 2014: Omnibus II vote revises the Solvency II directive October 31, 2014: EIOPA submission to the European Commission of Set 1 of the Implementing Technical Standards for Solvency II January 31, 2015: Deadline for transposing Solvency II rules into national law February 2015: EIOPA publication of Set 1 of the Guidelines for Solvency II At a Glance Regulation: Solvency II Regulatory Regime/ Authority: European Union European Insurance and Occupational Pensions Authority (EIOPA) Target Market Segment: Insurance companies and their service providers Core Data Requirements: Transparency of risk exposure Dates for Diary June 30, 2015: EIOPA submission to the European Commission of Set 2 of the Implementing Technical Standards for Solvency II July 2015: EIOPA publication of Set 2 of the Guidelines for Solvency II January 1, 2016: Implementation of Solvency II Key Links Overview: http://ec.europa.eu/ finance/insurance/ solvency/solvency2/ index_en.htm Timeline: https://eiopa.europa.eu/ regulation-supervision/ insurance/solvency-ii Technical Specifications: https://eiopa.europa.eu/ regulation-supervision/ insurance/solvency-ii- technical-specifications Further Information To find out more about regulations in financial markets, take a look at the A-Team Group Regulatory Data Handbook: http://bit.ly/regulatoryhandbookedition2
  6. 6. Pillar-by-Pillar Overview (cont.)Pillar-by-Pillar Overview The three pillars at the core of Solvency II describe the regulatory requirement for insurance companies, in some cases in terms of regulatory reporting and in others of verifiable processes. Pillar I describes the valuation of assets for capital requirement calculations. It requires insurance companies to have access to highly granular pricing and valuations data, as well as terms and conditions, curves and spreads, for use in the regulation’s Solvency Capital Requirement (SCR) and Minimum Capital Requirement (MCR) calculations, as well as credit ratings, classifications, security identifiers, and other meta data underpinning those data sets. Pillar I’s Market Risk Module (MRM) requires insurers to assign all assets held to one of seven specific risk categories: • Equities • Interest Rates • Property • Spread • Counterpart Default • Currency • Concentration Pillar II describes the requirement for governance and supervision. It requires the creation of a governance structure that supports Solvency II’s so-called Own Risk Solvency Assessment (ORSA) obligation. Under Pillar II, insurers are required to stress-test their balance sheets using risk systems and many of the same data sets that are used for Pillar I all underpinned with robust governance processes and models. Pillar III describes the requirement for reporting and the need for a detailed repository of internal data. To meet this pillar’s requirements, insurers will need access to the CICs (Complementary Identification Codes) and NACE (Nomenclature Statistique des Activites Economiques dans la Communaute Europeene) non-standard instrument classification codes, as well as the Legal Entity Identifier (LEI) standard identifier, to complete the regulation’s Quantitative Reporting Template (QRT). Overall, the three pillars require large amounts of highly granular data. One large insurer suggested his company’s efforts to date had generated some 75,000 data points, covering the sample data sets shown, among others. 10 Solvency II Data Management Solvency II Data Management 11 n Itemised list of assets n Structured products n Trade data n Underlying security n Acquisition price n Synthetic n Structured products n Solvency II value n Capital protection n Quality/number of contracts n Collateral held n Accrued interest n Fixed annual return n Accrued rent rating agency n Accrued dividend portfolio n ID code/type fund number n Issuer name/code/group n Held in unit listed fund n Counterparty name/ code/group n Look-through information n CIC, LEI codes n Variable annual return n Issuer sector n Off balance sheet items n Asset category n Securities lending and repos n Valuation method n Derivatives n Duration n Prepaid structured products Sample Data points for Solvency II Reporting Solvency II represents a revolution in risk management for insurers, asset managers and custodians. The new infrastructure requirements impact all areas of their business and create data quality and operational model challenges. SIX Financial Information’s Solvency II service helps firms to process the increased volumes of granular asset data needed to meet the stringent risk management parameters. This ensures data accuracy, completeness appropriateness for pillar one calculations and to meet pillar three’s reporting obligations. www.six-financial-information.com/ solvency-ii
  7. 7. Data Management Impact (cont.)Data Management Impact While Solvency II has been designed to ensure that the insurance industry has a comprehensive understanding of the risks associated with its investments, the regulation’s impact is far wider than on the insurance industry alone. It also has a significant impact on the financial services firms that service those insurance investments – specifically, asset managers and asset servicing companies – due to the fact that insurance companies are able to source only a fraction of the required data sets themselves. Insurance Firms As reporting entities under Solvency II, the onus is on insurance companies to provide the appropriate information to populate the so-called Quantitative Reporting Template (QRT) and other reporting templates. At the core of the data requirement is valuation and risk data, which means insurance companies need to source pricing, credit ratings and other indicators of value and risk of all the assets they hold. For illiquid securities, this may involve evaluated pricing services and highly specialist data sets, often sourced from the insurer’s asset managers or third-party data services. As well as sourcing the data itself, insurers will be required to validate the origination, collection, cleansing and normalisation of data sets. Furthermore, to meet specific analytical requirements of certain Solvency II attributes – such as the Market Risk Module (MRM) and the Solvency Capital Requirement (SCR) calculation – they need access to entity identifiers like the Legal Entity Identifier (LEI) and new non-standard classification data sets including CICs (Complementary Identification Codes) and NACE (Nomenclature Statistique des Activites Economiques dans la Communaute Europeene). Finally, they need to be able to identify permissible investments. Under Solvency II, insurers are precluded from investing in listed firms owned 95% or more by a single entity (a similar, but slightly different requirement from Dodd Frank’s). Calculating this ownership can be tricky, particularly where subsidiaries and affiliates are concerned. Asset Managers For asset managers, the onus is on providing their insurance clients with the risk and valuations data they require to comply with Solvency II. Under the regulation’s so-called look-through provisions, insurers need access to this information held by third parties (mostly asset managers). But the asset managers may have issues with simply delivering this information on demand. First, where they are using a third-party to value or derive the information, the asset manager may not own the data in question. This raises issues around redistribution rights and licensing, as well as the cost of providing this information. Second, many of the asset managers’ processes for valuing assets are considered proprietary, whether or not they draw upon third-party information sets. As such, many asset managers are wary of providing unfettered access to the risk and valuations data required by the insurers to comply with Solvency II. As a result, some asset managers have not been enthusiastic suppliers of Solvency II data, while others have insisted upon robust non-disclosure agreements with their clients (see section on Fund Look-Through). 12 Solvency II Data Management Solvency II Data Management 13 The quantitative disclosure requirements for Solvency II are prescriptive and far reaching, requiring extensive asset data including new elements e.g. CIC, NACE industry classifications, Legal Entity Identifiers and enhanced funds ‘look-through’ capabilities. To support the reporting process, SIX Financial Information provides cross-asset reference pricing data to ensure data consistency and facilitate accurate market, concentration and liquidity risk calculations by utilizing a vendor’s core data management expertise to connect and maintain the critical data points. www.six-financial-information.com/ solvency-ii
  8. 8. Data Management Impact (cont.) Third-Party Fund Administrators Asset servicing companies are another source of Solvency II data for insurers as they handle administration of insurance investments on behalf of asset managers. As part of this process, asset services may find themselves with access to asset managers’ valuations and risk information, but may be restricted in their ability to disclose it. Similarly, they may be called upon to provide the analytics and valuations data asset managers require for their insurance clients. As such, custodians and other asset servicers are striving to understand the requirement from the perspective of both the asset management and insurance communities. 14 Solvency II Data Management Pricing Reference Data A comprehensive approach to managing the data and reporting requirements for asset managers and insurers under Solvency II Financial firms are seeking unprecedented transparency and quality of data to manage risk and maintain operational efficiency in the face of increasing regulation and globalization of the capital markets. Interactive Data provides high-quality reference data on over 10 million financial instruments, and collects, edits maintains and delivers pricing from more than 450 markets and exchanges around the globe. The combination of high quality reference and pricing data, coupled to proven analytics can help firms successfully manage the transition to Solvency II and maintain ongoing compliance. To find out more: E: info@interactivedata.com W:www.interactivedata.com
  9. 9. Data Issues (cont.)Data Issues Overview The data requirement for Solvency II is substantial, including existing and new data that is typically sourced from both internal systems and external providers such as data vendors, asset managers and asset servicers. Most insurers will use data from a number of these sources, implying a significant data aggregation challenge that requires the collation of market, liquidity, credit and operational data to measure and report on risk. The volume of data from multiple sources also raises concerns about the consistency of data, particularly in relation to Pillar I capital requirement calculations and Pillar III disclosure and reporting, while the need for very granular data is particularly acute in the look-through process that requires asset managers and asset servicers to provide transparency on the investments they hold on behalf of insurance company clients. Solvency II also focuses on data quality, imposing data standards that must be met, as well as ongoing assessment processes designed to ensure that data quality is sustained. In many cases, these requirements will result in improved data quality that can benefit both the insurer’s business and other regulatory reporting regimes. Hand in hand with data quality and consistency is data governance, the requirements of which are outlined, but not prescribed, in Pillar II of the regulation. While many large insurers will implement data management programmes for Solvency II in house, some, along with smaller insurers, will use vendor solutions to achieve compliance with all, or particular elements, of the regulation. These solutions include data vendor services offering data sets required by insurance companies to comply with the capital adequacy and disclosure obligations of Solvency II. They also include fund data utilities that are offered by solution vendors and designed to provide a common platform that can be used by insurers and asset managers to manage requests for asset data that is needed for the look-through process that forms part of Pillar I Solvency Capital Requirement (SCR) calculations and Pillar III regulatory reporting. New data types Solvency II introduces new data requirements related to coding conventions, classifications, credit ratings, benchmark curves and default probability analytics, as well as new data taxonomies for securities instruments. While most of these data types are familiar to the financial industry, the data classifications include two new schemes that have not previously been used in the industry. These include CICs (Complementary Identification Codes), that are used for asset class and country classification, and NACE (Nomenclature Statistique des Activités Economiques dans la Communauoté Européenne) code that are used for industry sector classification by the European Commission. Bringing together and reconciling this data can present a challenge for insurers as the data is not always available and it is not standardised. For example, while data vendors offer CIC codes, their coverage does not extend to instruments that are traded over the counter or bilaterally. This means insurers must define codes to fill the gaps in vendor data without the benefit of market standards, potentially leading to the same instruments being coded and classified differently by different insurers, a discrepancy that has yet to be resolved by regulators. Similarly, questions about the materiality of CIC codes remain unanswered. While not entirely new, the emerging Legal Entity Identifier (LEI) is also a requirement of Solvency II and should be used where it is available in Pillar III regulatory reporting. This will facilitate the exchange of information between insurers and national supervisory authorities, as well as risk analysis of submitted data by the authorities. Companies have until 1 January 2016 to implement the Solvency II regulatory requirements. This involves fulfilment of the interim measures under the supervision of their national regulators (NCAs) by Q2 2015, finalizing risk models, implementing Own Risk Self Assessments (ORSA), and fulfilling Pillar 3 disclosure requirements. SIX Financial Information provides the cross-asset reference data necessary to ensure a smooth transition and comply with the European Union’s Solvency II directive. www.six-financial-information.com/ solvency-ii 16 Solvency II Data Management Solvency II Data Management 17
  10. 10. Data Issues (cont.)Data Issues (cont.) Data quality In many respects, the data quality requirements of Solvency II are similar to those of other regulations and the requirements of middle and back office functions. Where they differ is in scale, with the depth and breadth of the regulation requiring huge volumes of high-quality data that can make data sourcing difficult and data management burdensome. The directive includes three criteria of data quality: completeness, accuracy and appropriateness. It also call for a means of assessing the three criteria with regard to insurers’ data suppliers and internal systems. The data content challenges of the Pillar 1 capital requirement include the sourcing of high-quality, accurate data ranging from basic terms and conditions and pricing content to more complex datasets including curves and spread data for use in Solvency Capital Requirement (SCR) and Minimum Capital Requirement (MCR) calculations. This can be a complex process as the information is required at the underlying holdings level across potentially multiple asset managers. Sourcing the data is even more difficult where firms invest in complex funds and structures. The nature of this data means it is likely be acquired from multiple sources, including asset managers, vendors and internal databases. This means it will require a strong data management programme to ensure the level of quality that is required to avoid over allocating capital. There are a number of similarities between the data challenges presented by Pillar I and the risk management requirements of Pillar II, namely the acquisition of high- quality, accurate, consistent data and the ability to aggregate and report on this data in a timely manner. Pillar I and Pillar III also have some common data requirements, including granular cross-asset class reference and pricing data. This data requires consistency and provenance to ensure accuracy, completeness and appropriateness for Pillar I SCR and MCR calculations, and for the Pillar III Quantitative Reporting Template (QRT). While all three pillars of Solvency II highlight the importance of the application of quality data, the quality assessment requirement within the governance principles of Pillar II sets out to ensure continuous improvement in data quality over time. 18 Solvency II Data Management Solvency II Data Management 19 EIOPA data quality requirements n Embed a system of data quality management across the entity n Compile a directory of data attributes used in the internal model, stating each attribute’s true source, characteristics and usage n Define and monitor processes for identification, collection, transmission, processing and retention of data n Ensure data processing from source to model is transparent and demonstrable n Define objective metrics for completeness, accuracy and appropriateness of data n Establish a data policy which sets out the entity’s approach to managing data quality n Perform periodic data quality assessments, and implement a process for identifying and resolving data deficiencies n Document instances where data quality may be compromised, including implications and mitigating actions n Provide an audit trail and rationale for data updates when applying expert judgment in lieu of reliable internal or external data n Agree with the role of internal and external auditors in assessing data quality n Establish a process to manage changes or data updates which materially impact model outputs Interactive Data’s Solvency II data solution delivers unparalleled breadth and depth of cross-asset data to help asset managers and their insurance clients to successfully maintain ongoing compliance in their reporting, and capital and risk management functions. The solution includes high-quality asset data required to support the Minimum Capital Requirement (MCR) and Solvency Capital Requirement (SCR) calculation process under pillar 1 requirements and additional asset data requirements specific to Quantitative Reporting Templates (QRTs) under pillar 3. www.interactivedata.com
  11. 11. Data Issues (cont.)Data Issues (cont.) Data Governance Insurance companies, asset managers and asset services alike recognise that Solvency II will require fundamental governance changes to the way they source and manage data. Whether supplying or receiving Solvency II data, each of these practitioner organisations will be required to be able to vouch for the accuracy, timeliness and overall validity of the data they are using under Solvency II. To that end, many firms have implemented or embarked on projects to implement a wide-ranging governance framework. According to one Solvency II specialist at a major German insurance company, the regulation’s stress on data quality prescribes a robust approach to governance, complete with committees to uphold internal standards and close relationships with asset managers. This executive described his company’s Solvency II data management and governance process in terms of four phases: To handle the governance function, many insurance companies have implemented a central standardisation and management platform supported by the group IT function and servicing stakeholders within the lines of business. This approach, they expect, will ensure a more standardised, centralised and comprehensive data set for use by the business with support and controls put in place and managed by IT. For asset servicers and asset managers, Solvency II requires them to have the governance structure in place to prove they understand the appropriateness and quality of the data they provide to the insurance companies’ reporting systems. Part of this requires transparency on the part of third-party data providers, such as credit rating agencies, valuations providers and other suppliers. DataTransparency and Fund Look-Through As discussed, most insurers are looking to their asset managers for help in meeting Solvency II’s data requirements. Under the regulation’s look-through provision, they are expecting to access valuations and risk data on their holdings from the various asset management firms they use to look after their investments. But getting access to this data isn’t as simple as it appears. Insurers are finding it more difficult than they’d expected to receive highly granular and timely fund holdings, risk exposure and valuations data from their managers. This is for two main reasons. First, the asset managers themselves often use third- party services – from other fund managers, to asset servicers or data vendors – to run analytics on their insurance company clients’ holdings. Since they don’t own this data, they are unable to pass through access to it without having appropriate licensing deals in place. Many participants report that they are working on securing such arrangements, but that they take time and money. The second issue relates to the asset managers’ own intellectual property. For many, risk and valuation analysis represent proprietary services provided as part of their broader asset management remit. As such, many asset managers seem to be reluctant to simply pass through this ‘special sauce’, instead restricting access to certain data sets or requiring extensive non-disclosure agreements to be in place before access is granted. Such is the level of intransigence that insurers are now said to be exploring the possibility of reducing the number of asset managers they use based on the managers’ ability and willingness to supply them with Solvency II data sets (see Outlook section). 20 Solvency II Data Management Solvency II Data Management 21 Phase Data/Action 1 Data Capture/Management Direct holdings Investment funds Target funds Market data vendors 2 Data Governance Apply CIC codes – standard or client-specific Use proxies where look-through not available Decomposition of structural derivatives 3 Analysis Solvency Capital Requirement Other reports/calculations 4 Reporting Reporting via Quantitative Reporting Template
  12. 12. Downstream Data Challenges Solvency II poses significant data challenges downstream as it puts pressure on systems infrastructure, calls for new reporting workflows and includes complex compliance requirements. The challenges result from the scope of the regulation, the volume and variety of data that must be managed, aggregated and distributed, and tight deadlines for reporting and compliance. Reporting Solvency II reporting is covered by Pillar III of the directive and includes both public disclosure and regulatory reporting on a quantitative and qualitative basis. The aim is to expose risks faced by insurers and detail concomitant capital adequacy and risk management programmes, as well as to increase transparency of the industry for the benefit of regulators and consumers. Some European countries have already started Solvency II reporting, particularly among large insurers, while others are working towards the January 2016 compliance deadline. Two types of report are required under Pillar III, the quantitative Quarterly Reporting Template (QRT) and more narrative reports entitled the Solvency and Financial Condition Report (SFCR), which insurers are required to disclose publicly and submit to their the local national competent authority (NCA) on an annual basis, and the Regulatory Supervisory Report (RSR), which is a private report to the local NCA and must be submitted in full at least every three years and in summary every year. Reporting using QRTs is the most taxing element of Pillar III. Demand for data is large and includes look-through data, the data must be extremely granular and of high quality, and the reporting schedule requires both quarterly and annual submissions to local supervisors that, in the case of annual submissions, must be made within five weeks of year end. Insurers will need an extensive data repository to meet the reporting requirements of the regulation and will also need to source new data, particularly CICs (Complementary Identification Codes) that are used for asset class and country classification, and NACE (Nomenclature Statistique des Activités Economiques dans la Communauoté Européenne) codes, that are used for industry sector classification. The Legal Entity Identifier (LEI) is also a requirement of reporting and all asset and risk data must be mapped to the eXtensible Business Reporting Language (XBRL) for submission to supervisors. The European Insurance and Occupational Pensions 22 Solvency II Data Management Conference Exhibition Datesforthediary Navigating the Regulatory Maze for Data Management 2015 www.referencedatareview.com NEWYORK NOVEMBER 3 LONDON OCTOBER 1
  13. 13. Downstream Data Challenges (cont.) Authority (EIOPA) has specified towards 100 QRTs that are split into three sets covering supervisory reporting, public disclosure and financial stability reporting. Completion of different templates is specified for annual, quarterly, group, solo, financial stability and ring-fenced fund reporting. To support this EIOPA has published sets of Log files containing specifications and instructions for completing the templates, including definitions of data items and standardised coding formats. It has also specified a number of completion thresholds for some QRTs that limit the level of detail required. Infrastructure requirements The breadth and depth of Solvency II requirements call for a robust systems infrastructure that is ideally based around a centralised data repository. As well as the ability to source internal data, the infrastructure must include interfaces to numerous data vendor feeds and the ability to aggregate data across systems. It must also link to asset managers and asset servicers that support the look-through element of the regulation, and support workflows for solvency capital requirement calculations, risk management and reporting. Most large insurers are likely to leverage and extend existing data management capabilities to deliver Solvency II compliance, although some are mixing in-house development with outsourced services and vendor solutions that fulfil the look-through function and bridge the gap between asset managers’ concerns about public disclosure of investments to insurers and insurers’ regulatory reporting obligations. Smaller insurers that must be Solvency II compliant, but have not typically managed their own data in the past, are developing and implementing new data management strategies to meet the regulations’ requirements, but are expected to continue to rely on outsourced or vendor solutions for operational purposes. Solvency II Data Management 25 Solvency II reporting timeline for UK insurers By May 25, 2015: Year end 2014 annual solo reporting to the Prudential Regulation Authority (PRA) By July 6, 2015: Year end 2014 annual group reporting to PRA By November 16, 2015: Third quarter 2015 solo reporting to PRA By January 1, 2016: Third quarter 2015 quarterly group reporting to PRA January 1, 2016: Implementation of Solvency II For news on further Hot Topic webinars as they are added go to bit.ly/rdrwebinars Reference Data Review Your Reference Data Resource from A-Team Group Forthcoming Webinars If you would like to learn about webinar sponsorship and speaking opportunities, please contact Caroline Statman at caroline@a-teamgroup.com April 28th Enterprise Data Management - The Next Generation May 7th Pricing and Valuations Data May 14th Screening for Sanctions, Watch Lists and PEPs May 19th Data Governance May 28th Solvency II June 2nd Utility Model for Data Management June 9th A Collaborative Approach to Client and Entity Data for Client Onboarding June 16th BCBS 239 July 9th Entity Data Management July 14th Risk Data Analytics bit.ly/rdrwebinars Fulfilling Solvency II requirements inescapably entails collecting, aggregating and reporting on vast amounts of data and analytics. OTCFin’s core competencies lie in enterprise-wide risk data management. Our multi-talented team will perform data and analytics sourcing, enrichment and monitoring to produce fully transparent reports in standard and customized formats, including XBRL, Tripartite and Club AMPERE FundsXML. Leverage on our expertise to accelerate time to market of your data framework while reducing the overall cost of ownership. www.otcfin.com
  14. 14. The Outlook for Solvency II Insurance companies interviewed for a recent A-Team survey on the data management implications of Solvency II were largely confident of their ability to meet the 2016 deadline. They reported good results from dry runs they experienced during 2014, with some having embarked on their Solvency II initiatives as early as 2011. They believed that the combination of impending (possibly final) guidance from European Insurance and Occupational Pensions Authority (EIOPA), publication of comments from an earlier consultation, and a further dry run during the third quarter of 2015 would clear up any remaining inconsistencies. Firms are also beginning to acknowledge the potential business benefits from implementing the data governance and data management practices required by Solvency II. For some, the work they have done for Solvency II merely continues in a similar vein to that which they started under Dodd Frank. For others, Solvency II compliance is a major step toward meeting the data requirements for other regulatory initiatives. Others see their Solvency II efforts as validation of their general governance activities. Insurance companies appear confident that the issues around look-through can also be overcome. They report good collaboration from data vendors on working with the various stakeholders to ensure data sets are properly licensed. As mentioned above, some believe there is an opportunity to weed out intransigent or inflexible asset managers that are reluctant to make valuations and other data available to their clients. For asset managers, adopting a flexible approach to data licensing and making proprietary information available to clients (albeit under non-disclosure agreements) may allow them to differentiate their service offerings, with insurers less willing to use asset managers that don’t play ball with respect to Solvency II. 26 Solvency II Data Management
  15. 15. Only Thomson Reuters has the depth and breadth of data, the global footprint, local knowledge and proven experience to deliver the exact data you need to not just comply – but thrive – anywhere you do business. Step by step guidance for cost-effective compliance, across the board, across the globe, including specialist data sets for: REGULATORY DATA THAT KEEPS YOU ON THE RIGHT COURSE TOOLS TO HELP YOU NAVIGATE THROUGH A SEA OF REGULATION • FATCA • Basel III • Solvency II • EMIR • Dodd-Frank • IFRS • +More © 2014 Thomson Reuters 1006275/02-14 Thomson Reuters and the Kinesis logo are trademarks of Thomson Reuters. To find out more, simply email prd.community@thomsonreuters.com or visit prdcommunity.com

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