Regulation changes are at the forefront of most asset managers, custodians and buy and sell side entities minds in 2011. Coupled with existing challenges, the CEO at technology firm Cadis says that data is now being seen as an asset not a liability.
“Each segment of the sector is dealing with increased regulation that is changing the way they manage their company, says Daniel Simpson, CEO, Cadis. There is an alphabet soup of regulation affecting institutional investors, trading houses, asset managers, custodians; everyone.
Solvency II is the new insurance directive that becomes effective on 1 January 2013. Under Solvency II, capital requirements will be determined on the basis of the risk profile of insurance companies and the way companies manage such risks.
Solvency II is proving difficult for some, as with an immediate deadline looming and with some data management technology taking 3 to 5 years to come online, those who leave it to the last minute will not be able to cope, says Simpson. If you are a company and you come back to your regulator in 2015 with the right technology – that will not cut the mustard.
In March this year, the European Insurance and Occupational Pensions Authority (EIOPA) released results of the fifth Quantitative Impact Study (QIS5), in order to assess the practicability, implications and impact of specified approaches to (re)insurers valuation of assets and liabilities as well as capital setting under Solvency II.
Solvency II introduces two levels of capital requirements: the minimum and the Solvency Capital Requirement. If a company misses the Minimum Capital Requirement (MCR), ultimate supervisory action will be triggered. If the SCR threshold is missed the respective supervisory authority will determine supervisory responses linked to the concrete situation of the firm.
Overall, QIS5 showed that the financial position of the European insurance and reinsurance sector assessed against the Solvency Capital Requirements (SCR) of the Solvency II directive remains sound. Currently, insurance companies who participated in QIS5 hold 395 billion of excess capital to meet their solvency capital requirements (SCR) and excess capital of 676 billion to meet their minimum capital requirement
However, the sell-side will also facing its own hurdles, such as FASB 157. A Financial Accounting Standards Board (FASB) Statement requires all publicly-traded companies in the U.S. to classify their assets based on the certainty with which fair values can be calculated. Its implementation was designed to allow investors to truly know how accurate the company’s asset estimates are.
On the sell side, FASB 157 and the demonstration of fair value remains an issue, says Simpson. On the buy side outsourcing is increasing with asset managers and insurers being forced to revisit costs and core competencies. As some outsourcing projects take 12-18 months to come into fruition, back and middle office need to maintain control of that side of the business during the transition.”
In terms of how these issues can be tackled, Simpson says while it maybe too late for some companies to implement new infrastructure, there are ways of being prepared.
“I absolutely agree that if anyone leaves the implementation of new technology to cope with compliance needs 4-6 months before the deadline, they will be pressed to adhere to the regulation requirements, says Simpson. After the collapse of Lehman Brothers, everyone knew regulation was on the cards and we saw a new wave of data management initiatives. All regulation is underpinned by data. Institutions need to have the correct infrastructure in place to deal with the constant change in the business, the products they are trading and the evolving compliance and regulatory environment.”