In the post-Solvency II world, asset managers with insurance clients are grappling with additional layers of complexity. The regulation not only lays out how insurers need to be capitalized and manage risks but has also introduced new requirements around governance and accountability, which changes the way insurers treat their investments¹.

Now in addition to investment research, asset allocation and risk management for their insurance mandates, asset managers are also responsible for providing a suite of dedicated reports¹. Integrating this regulation across front and middle offices, from both a portfolio construction perspective and a regulatory perspective, requires a robust technology strategy, analytics, data and expertise.

Given this sweeping change, insurers today are not only seeking to diversify their portfolios and find new sources of yield, they also need Solvency II expertise from a multi-asset class point of view. In our latest article, “Seeking Balance: Managing Insurance Portfolios Under Solvency II,” we examine the details of this framework and how asset managers can remain compliant while boosting business development.

First, a few basics. Solvency II primarily concerns the amount of capital that insurance companies must hold to reduce the risk of insolvency, including a set of quantitative requirements¹. The quantitative framework defines a standard model and the market capital requirement (“SCR”) is derived from six sub-SCRs which must be applied consistently across all asset holdings and associated liabilities. The overall market SCR is then computed by applying a pre-defined correlation matrix to these individual sub-components. Each sub-SCR represents its own challenges in terms of data, classification and modelling².

Asset managers have a central role to play, as they are in charge of both producing SCR estimates and delivering detailed portfolio data for regulatory calculations. Insurers expect this variable to be accounted for in the portfolio construction and investment process, alongside traditional market risk measures to understand the risk profile of the portfolio versus the capital buffer required. Similarly, the performance needs to be adjusted to the cost of capital to represent the true portfolio return.

Complicating this is the fact that many insurers are seeking yields away from traditional asset classes and have shifted their investments toward private equity, infrastructure and real estate, as well as loans and other forms of private credit.

This asset allocation shift is an opportunity for asset managers but making the most of it requires the integration of the capital buffer and hurdle rate – which can be defined as the expected return adjusted to the cost of capital – into their marketing materials and fund factsheets. By providing relevant adjusted return measures, asset managers can help institutional clients assess the capital cost associated with the allocation shift from an asset class perspective.

These calculations require a combination of best-of-breed proprietary pricing libraries and stress testing engines via an analytical platform. In addition, the data transfer between asset managers and insurers is a challenging exercise, with most legacy systems not set up to provide the required level of detail to clients or to check the consistency and quality of the multiple fields.

As the cost of building in-house solutions increases, more and more asset managers have decided to partner with third-party providers to implement a more efficient framework. In the case of Solvency II, Confluence’s award-winning Delta platform calculates SCR for a wide array of instruments – including equities, bonds and all types of derivatives and alternative investments – with the capability to have multiple levels of look-through. By offering on-the-fly calculations of accurate SCR estimates, the solution enables portfolio managers to incorporate this variable into portfolio construction and monitoring.

In addition, by integrating Delta’s analytical capability and Solvency II expertise with the Unity NXT® Regulatory Reporting platform, Confluence offers a workflow that enables clients to produce complex TPT reports with speed, scale and efficiency, with a robust data interface that can handle multiple insurers.

By offering a comprehensive system covering functions ranging from reporting to portfolio management, this unique product suite covers front office needs while reducing reliance on error-prone manual processes. Delta also offers integrated risk and performance and analytics solutions that enable insurers to gain greater insight into the main drivers of risk and performance in their portfolios.

While many systems are little more than disparate collections of various point solutions, the real power of Confluence’s Solvency II solution is that it offers an integrated suite of tools that work across regions and workflows. It has the flexibility to handle a broad range of asset classes, and its automation and data management capabilities help streamline operations and eliminate duplicate processes. All this enables asset managers to navigate Solvency II requirements through an efficient, operational product model that can adapt and scale with their needs.

<sup>1. https://ec.europa.eu/info/business-economy-euro/banking-and-finance/insurance-and-pensions/risk-management-and-supervision-insurance-companies-solvency-2
2. https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:02009L0138-20190113#id-5ae5e5bb-964e-4047-9bc1-95033a1a9ea1</sup>

Disclaimer: The information contained in this communication is for informational purposes only. Confluence/StatPro is not providing, legal, financial, accounting, compliance or other similar services or advice through this communication. Recipients of this communication are responsible for understanding the regulatory and legal requirements applicable to their business.