Balancing risk, return and capital requirements the effect of solvency II on asset allocation and investment strategy

With the survey sample representing at least half of the european market in terms of assets under management, the findings offer real insights into how insurers are managing solvency ii’

Beyond performance

despite several deferrals of the implementation deadline, solvency ii has already proved a major catalyst for change with insurers spending considerable time and resource on preparing for d-day at Blackrock®, we share this focus as we help insurers meet the outcomes they need in this rapidly shifting environment specifically, we are investing heavily in our infrastructure and people to help you navigate this crucial transition successfully

Yet this tremendous effort by the industry masks significant uncertainty: be it in terms of the final shape of the directive or how solvency ii will affect asset allocation, investment strategies and capital markets – all against a backdrop of a continued sovereign debt crisis Faced with this murky picture, insurers, not surprisingly, find it hard to have full confidence in their preparedness

to help bring some clarity around the remaining key challenges, Blackrock has commissioned the economist intelligence unit to conduct a comprehensive study among european insurers the findings offer a real insight into the challenges associated with each of the three pillars and the implications for insurers’ product offering and the wider capital markets interestingly, the research highlights a degree of discrepancy between market perception and what your peers really think, particularly in relation to the use of alternatives and their levels of preparedness for solvency ii governance and disclosure requirements

personally speaking, the most important finding was the need to move beyond performance and seek full alignment of investment expertise and enterprise risk management in 2012 and beyond, we will work very closely with our clients to help them achieve that essential goal i hope you find the report thought-provoking and, above all, beneficial, and look forward to hearing your views

sincerely,

david lomas, ACII

Head of Global Financial Institutions Group, BlackRock email: solvency2@blackrock.com

about this report 6

implementation date of solvency ii will be pushed back

a year, insurers are still working on the assumption that they have just one year to go, and therefore preparations for the new directive are well under way

the europe-wide legislation will impose stringent new capital requirements across the insurance industry, creating a more risk-focused approach to better protect policy holders from future financial crises data management will be overhauled, while many players will be forced to rethink their product range and investment strategies

coinciding with this final phase of preparations for solvency ii are some of the most testing market conditions in living memory the ongoing sovereign debt crisis has raised questions regarding the very foundations on which some pillars of solvency ii are built and as uncertainty over the final shape of the directive persists, insurers face notable challenges when building their strategies for the future

the economist intelligence unit, on behalf of Blackrock, surveyed 223 insurers with operations in europe With the survey sample representing at least half of the european market in terms of assets under management, the findings offer real insights into how insurers are managing solvency ii’s data management requirements; the impact of capital charges on their investment strategies, risk management and product ranges; and their views on the future for capital markets in a post-solvency ii world

Asset Allocation Shifts have been

Decided but Implementation is on Hold

almost half (46%) of survey respondents say they already

know how they are likely to change their asset allocation,

with just 4% saying they have not made plans However,

over half (53%) say they are waiting until closer to

implementation of the directive before making changes to

their asset allocation most changes are as expected –

away from equities and towards corporate bonds

Allocations to Alternatives are set to

Increase

some asset allocation changes are less expected

alternatives such as hedge funds and private equity will

benefit from solvency ii, with 32% of survey respondents

saying they will increase their allocations to these asset

classes Just 9% and 6% respectively say they will

decrease allocations these increases come despite the

higher capital charges for these assets, with insurers

betting that the higher charges will be worth the higher

potential returns almost three-quarters (70%) of survey

respondents expect their asset allocation changes to

result in higher returns

Allocations to Derivatives will Increase Under Solvency II

Over half (60%) of survey respondents agree that the directive will result in greater use of derivatives to better match assets and liabilities While some insurers say they are already confident in their derivative usage, as asset-liability management (alm) strategies become more complex and demanding in volatile markets, this will be an area on which many insurers will need to focus Over one-third (37%) of insurers agree that solvency ii will make them more likely to use derivatives in the future, although only 18% currently use derivatives and just 23% have definite plans to increase their overall holdings

Meeting Solvency II Data Requirements

is a Major Concern, Whilst Pillar III Commands the Least Budget

Over 90% of survey respondents are very or somewhat concerned about meeting the requirements for the timeliness (96%) and completeness (94%) of data under solvency ii, as well as the quality of data from third parties (92%) in particular, pressure is on third parties to provide the ‘look-through’ on pooled funds required by insurers, with 92% of respondents concerned that they will have to limit their investment strategy as some assets demand more rigorous data requirements Overall, survey respondents say they are most concerned about pillar iii, yet it is the pillar to which they are devoting the least budget

key Findings

business two-thirds of life and composite insurer survey

respondents say they will restructure in order to better

manage their guaranteed funds in house, while almost half

(49%) of life and composite respondents say they will seek

advice on alm as a result, insurers will be forced to more

aggressively price their guaranteed products, which will

likely drive consumers into other cheaper but less

well-protected offerings annuities too will become potentially

more expensive, as insurers factor in the increased costs

of managing solvency ii market risk into pricing

Solvency II Could Increase Market

Volatility

Just 5% of survey respondents disagree with the idea that

there will be an increase in volatility in capital markets

because of solvency ii insurers are also anxious about the

threat of pro-cyclicality if capital requirements reduce when

markets are benign and increase during periods of volatility,

losses due to falls in market prices could lead to a wave of

forced selling, which could create further losses eiOpa

plans to tackle this issue but insurers say the uncertainty

makes planning, particularly at this late stage, a challenge

need to increase significantly to encourage investing in equities However the overall supply of equities could be lower, as only 9% do not believe that companies will favour issuing debt rather than equity for their funding needs

Regulators may Have to Rethink Approach to ‘Risk-Free’ Assets

as the security of government bonds is thrown into doubt, insurers believe the regulator may have to revisit the 0% capital charge for sovereign debt insurers using their own internal models already factor in the ‘real’ risk presented

by government debt, but organisations using the standard model may be exposed planned changes to asset

allocation, such as moves from government bonds into higher-rated corporate debt, support the view that insurers are assessing the risk and return trade off for themselves

behalf of BlackRock, surveyed 223 insurers with operations in Europe

to find out how they were handling the data management requirements

of Solvency II, the impact of capital charges on investment strategies and product ranges, and their views on the future for capital markets

in a post-Solvency II world

Respondents comprised of 75 life, 65 non-life, and 57 composite insurers, while 26 were reinsurance companies Responses were collated from insurers with headquarters in all major EU countries Businesses were grouped by assets under management (AUM) covering

106 very large insurers with more than €25bn; 23 large insurers with

€10bn-€25bn; 68 with €1bn-€10bn; and 26 with AUM of less than €1bn

In addition, in-depth interviews were conducted with eight experts from insurance companies, regulators and trade bodies Our thanks are due to the following for their time and insight (listed alphabetically):

Anders Brix, Risk management team, Danica Pension, Denmark.

Britta Burreau, Managing Director, Nordea Life, Sweden.

Frank Eijsink, Global Program Director for Solvency II, ING Life, Netherlands.

David Johnston, Senior Implementation Manager, Financial Services Authority, UK Olav Jones, Deputy Director-General, CEA, European insurance and reinsurance

federation

Isabella Mammerler, Head of European Regulatory Affairs, Swiss Re.

Carlos Montalvo, Executive Director, European Insurance and Occupational Pensions

Authority (EIOPA)

Ann Muldoon, Solvency II Director, Friends Life, UK.

The report was written by Gill Wadsworth and edited by Monica Woodley of the

Economist Intelligence Unit

sweeping changes to solvency regulations were given a

year’s grace in the autumn of 2011, with regulators setting

a new deadline of January 2014.

delays to the implementation of solvency ii are nothing new – and a further delay may be in

the works - but the insurance industry is unlikely to view the latest push back as much of a

reprieve in their efforts to comply with the directive, particularly as by 2013 they will need

to demonstrate how they will meet the final legislation

the solvency ii directive imposes stringent new capital requirements, creating a more

risk-focused approach designed to better protect policyholders from future financial crises

the legislation is far-reaching and complex, and has forced insurers to analyse everything

from data management and risk analysis to asset allocation and product ranges

as insurers continue with their preparations, the ongoing sovereign debt crisis has forced

regulators back into negotiations to agree on a directive that can withstand such

unexpected changes in fortune

against this backdrop of uncertainty, insurers face notable challenges as they strive to

formulate a successful strategy that will stand up to the rigours of a new regulatory regime

and an unpredictable economic future

now that insurers have the fundamental systems building

blocks in place following the first stages of preparation for

solvency ii, they are turning their attention to investment

strategies and asset allocation However, the survey reveals

that insurers are not able to prepare to the extent that they

would like as the directive itself is still being finalised

almost half (46%) of respondents to the survey say they

know how their asset allocations will change as a result of

solvency ii, but more than half (53%) say they will wait until

they are nearer to the final implementation date before

effecting any change non-life insurers are less confident

than their life counterparts as to how their future asset

allocations will look – 43% compared with 50% – and as

such are more likely to wait until solvency ii is clearer

before taking action

David Johnston, senior implementation manager at the

uk’s Financial services authority, explains: “Until the

Solvency II rules come into force in 2014 the current rules

still apply, so insurers are welcome to make any changes

they want in the interim, within the context of those rules

But they might not be able to move to their

‘business-as-usual post-Solvency II’ end state just yet.”

Where insurers have examined the future for their

investment strategies under the new regime, the overriding

response is to keep asset allocations the same this is

partly explained by the already conservative asset

allocations the survey respondents report

What is Your Current Asset Allocation?

Corporate bonds 36% Government bonds 28%

Cash 3% Property 4% Hedge funds 1% Derivatives 1% Other alternatives 5% Total equities 15% Other assets 7% Base: all respondents (n=223)

source: economist intelligence unit

Well before the advent of solvency ii, many insurers had started de-risking strategies – action which has since been accelerated by the difficult economic conditions Ann Muldoon, solvency ii director at Friends life in the

uk, says: “In the UK we already make an assessment of risk-based capital [Individual Capital Assessment] and provide this as a private submission to the regulator This is already informing our strategic asset allocation decisions.”

she adds that where solvency ii has the potential to change the individual capital assessment, the insurer will guide its strategic asset allocation studies accordingly

nearly two-thirds (64%) of the survey respondents’ total asset allocations are to fixed income, with government debt accounting for 28% and corporate bonds 36% equities account for 15% of total portfolios, while alternative assets including private equity, hedge funds and derivatives amount to 7%

in the fixed income category, just under half (49%) of respondents plan to keep allocations to corporate bonds the same, although one-third expect to increase

investment in this asset class more than one-third (37%)

of life companies say they will increase allocations to corporate bonds compared with 29% of non-life companies Just 18% of respondents overall say they will decrease corporate bond allocations

the Future for asset allocation

proposed 0% capital charges, government debt allocations look likely to remain static for

48% of insurers, while 27% expect to increase and the remaining quarter will decrease

this may be an indication that insurers expect regulators to rethink the 0% capital charge

in light of the eurozone debt crisis (which is explored further on page 30)

many insurers operating in countries enduring the worse of the sovereign debt crisis are

cautious about the future for their own region’s government bonds none of the

icelandic insurers and just 7% of italian respondents plan to increase allocations to

government bonds

in contrast, in the nordics where governments enjoy relatively healthy debt levels,

conditions are stable and they are outside of the eurozone, insurers say they will increase

investment in government bonds

more than half (56%) of swedish insurers say they will increase sovereign debt

allocations, with just over one-fifth (22%) expecting to decrease respondents in

denmark tell a similar story, with half saying they will increase domestic government

bonds and just one-quarter expecting to decrease investment in this asset class

Thinking About the Likely Effects Of Solvency II, in Light of the Regulation’s Capital

Requirements, how are Your Holdings in Government Bonds Likely to Change?

Holdings will increase Holdings will decrease

32%

Netherlands 21%

21%

Belgium

22%

UK 27%

28%

Germany 38%

16%

Switzerland 18%

35%

Iberia 46%

Base: all respondents (n=223)

source: economist intelligence unit

“Under Solvency II there is a possibility that

a large number

of insurers may

be forced to sell assets in times of financial stress”

Italian non-life insurer, AUM >€25bn

However scandinavian insurers face a supply constraint when increasing their government debt allocations as the region’s countries are small, relatively well off and do not need to issue large amounts of bonds

Britta Burreau, managing director at nordea life in sweden says: “[Sweden] has a small economy and we are already experiencing a shortage of government bonds The long 10-year interest rates have been forced down due to huge demand and this could worsen under Solvency II.”

Anders Brix, part of the risk management team at danica pension in denmark, shares nordea’s concerns and anticipates further problems with low interest rates as a result of solvency ii’s market-consistent economic valuation, which forces insurers to mark-to-

market assets and liabilities “Solvency II is generally good for risk management, but we are concerned about what can happen if or when all insurers will have to value their liabilities at market value, since the interest rate markets may not be able to supply enough interest rate sensitivity This may depress interest rates further and hence create more demand for interest rate sensitivity,” mr Brix says.

the concern about availability of local bonds is highlighted in the survey with 55% of nordic insurers saying they will shift from local to global bonds, compared with an average of 40% for all respondents

elsewhere in fixed income, the survey reveals an increased appetite for corporate bonds One-third of respondents say they will increase investment in this asset class, with life insurers more likely to increase (37%) than non-life (29%) Just 18% of respondents overall say they will decrease corporate bond allocations

Requirements, how are Your Holdings in Corporate Bonds Likely to Change?

Holdings will increase Holdings will decrease

Pan-Europe

18%

Iberia 27%

0%

33%

Nordics 13%

48%

Italy 21%

43%

France 21%

37%

Netherlands 14%

36%

Belgium 22%

33%

UK 18%

33%

Germany 22%

31%

Switzerland 18%

29%

Base: all respondents (n=223)

source: economist intelligence unit

norwegian insurers exhibit the most interest in growing corporate bonds allocations

three-quarters say they will take this action italian insurers also favour company debt

under solvency ii, with more than two-fifths looking to increase investment

the survey also highlights a shift from longer-term to shorter-term debt, as the former

will be more expensive to hold under solvency ii Forty-four percent of respondents say

they will favour short-term debt under the directive, with more than half of uk insurers

expecting to make this move

twice as many respondents believe that solvency ii will ‘severely hamper their ability to take investment risk’ than those who do not this is even more extreme among the largest insurers, with more than three times the number saying they will be restricted versus those who will not.

Solvency II will Severely Hamper our Ability to Take Investment Risk –

Do you Agree or Disagree? (Responses by Assets Under Management)

Agree 41%

Neutral 46%

Disagree 13%

Agree 33% Neutral 38% Disagree 29%

Insurers with >€10bn AUM Insurers with <€10bn AUM

Base: all insurers with >€10bn (n=129) all insurers with <€10bn aum (n=94) source: economist intelligence unit

Carlos Montalvo, executive director of eiOpa, says solvency ii is not designed to hamper insurers’ ability to take investment risk, but rather to ensure a direct link between the assets in which they invest their underlying risks and the assigned capital charge

He adds: “[Solvency II] may, therefore, have an impact on the investment policies and products offered by some insurers, but this change is to be encouraged where it promotes effectively managed insurance companies and improves policyholder protection.”

However, the extent to which insurers are concerned about restricted investment risk is reflected in their expected changes in investment strategy is limited One-third of respondents say their investment risk budgets will increase under solvency ii, with only 15% actively disagreeing

looking at assets that will carry a higher capital charge, as they are considered riskier, more than half of respondents to the survey say they will keep equity allocations the same across all regions, although us equities are the most likely (62%) to remain static French and italian insurers are the most likely to increase allocations to european equities (37% and 39% respectively), while just over one-third (34%) of german insurers are set to decrease allocations to stock markets in this region

allocations to alternatives, which also carry a high capital charge under solvency ii, actually look likely to increase once the directive is in place Just under one-third (32%) return-seeking assets

say they will increase allocations to private equity and hedge funds, with allocations

expected to decrease at just 6% and 9% of insurers respectively non-life companies had

a slightly bigger appetite for hedge funds than life, with 46% saying they will increase

investment compared with 33% of their life counterparts

in terms of assets under management, the very largest insurers (with aum greater than

€25bn) are the most likely to increase allocations to hedge funds (36%), with 26-27% of

other insurers expecting to allocate more funds to this asset class under solvency ii

French, nordic and iberian insurers are among the most likely to increase hedge fund

allocations italian respondents are the most likely (23%) to decrease investment in this

asset class, while dutch insurers are the most likely (71%) to keep hedge fund allocations

the same and are also among the highest number to keep private equity static

BlackRock View: Matt Botein, Managing Director, BlackRock

Alternative Investors (BAI)

The survey results show insurance companies are expecting to increase

their usage of alternative investments strategies as they look to prudently

improve diversification in their portfolios and meet their investment needs

Their implementation process involves balancing (and optimizing) the

impact of potentially higher capital charges for certain asset classes with

the economic benefits of superior risk adjusted returns This is even more

urgent today as the challenging market environment makes stable and

uncorrelated returns increasingly appealing

Transparency and a greater focus on risk management are key

considerations insurers will take into account as they allocate capital to

alternative asset classes under this new regulatory regime

Therefore, an attractive solution can be based on

diversified hedge fund strategies that meet the

disclosure and reporting requirements of Solvency II,

while being a good complement to their existing

portfolios Also, strategies that generate transparent,

long term stable cash flows with bond like characteristics

and uncorrelated returns will be well received by

those insurance companies planning to add or

increase their allocation to alternatives

return-seeking assets continued

Thinking About the Likely Effects of Solvency II, in Light of the Regulation’s Capital Requirements, how are Your Holdings in Each of the Asset Classes Below Likely to Change?

Belgium 0%

56%

Germany 6%

38%

Netherlands 7%

36%

Nordics 0%

36%

France 5%

32%

Switzerland 18%

29%

UK 8%

32%

Italy 23%

31%

Belgium 11%

33%

Germany 13%

22%

Netherlands 14%

14%

Nordics 10%

39%

France 5%

42%

Switzerland 6%

29%

UK 5%

“There are two aspects to consider: the capital that you need to set aside for investing in

risky assets and the volatility of that asset price Although hedge funds and private equity

funds have low volatility in the asset price, you do have to set aside a significant amount of

capital for those investments.”

the increase in risk budget, alongside greater allocations to alternatives, leaves

respondents confident of higher investment returns post-solvency ii seventy percent say

returns will either significantly (23%) or slightly (47%) increase under the new regime,

while no insurers say returns will significantly decrease

How do you Expect the Changes to Your Asset Allocation to Affect the Overall

Returns of your Portfolio?

Returns are likely to

stay the same

Returns are likely to

slightly increase

Returns are likely to

significantly increase

Base: all respondents (n=223)

source: economist intelligence unit

Figures do not add to 100% due to rounding

derivatives, too, are set to gain ground in the post-solvency ii world, with more than

one-fifth (23%) of survey respondents saying they will increase derivative usage

However, given just 18% report current derivative investment (although we do not know

what shape that derivative investment takes, and therefore its impact on portfolios), any

rise is from a relative low starting point

return-seeking assets continued

Thinking About the Likely Effects of Solvency II, in Light of the Regulation’s Capital Requirements, how are Your Holdings of Derivatives Likely to Change?

Holdings will increase Holdings will decrease

Pan-Europe 7%

37%

Switzerland 18%

29%

Netherlands 14%

29%

Iberia 9%

27%

Nordics 3%

19%

Germany 13%

19%

UK 5%

13%

Belgium 0%

danish insurers are the most likely to increase derivative use, with 75% saying they will invest in these instruments in the future italian insurers also exhibit high levels of interest, with 62% expecting to increase derivative investment

Where insurers are planning on increasing the use of derivatives, they will need to demonstrate they have the appropriate systems to be able to capture the impact on the business through their own risk and self assessment (Orsa) process under solvency ii

Ms Muldoon of Friends life is of the view that this poses no problem for uk firms that have been using derivatives for many years and already have systems in place to measure and monitor risks, such as counterparty exposure

However, eiOpa is clear in its expectations when it comes to derivatives and all other

‘risky’ asset classes Mr Montalvo of eOipa says: “Insurers will be required to have effective risk management systems enabling them to manage, inter alia, the counterparty risk presented by an exposure to derivatives EIOPA will work closely with national competent authorities to ensure that the Directive is appropriately implemented and supervised.”

BlackRock View: Nigel Foster, Managing Director,

Derivative Solutions Group

The findings point to a greater need for derivatives under Solvency II to

better match liabilities, provide capital guarantees and manage volatility

This increased use of derivatives is set against a background of higher

standards of transparency and additional capital being deployed under

Solvency II Demanding as these requirements are on their own, the

introduction of these standards comes at a point when derivative markets

as a whole are in a state of flux, thus further increasing complexity

A new derivative market infrastructure is coming into being driven in part by

shortcomings identified in the financial crisis associated with the collapse

of Lehman Brothers and the taxpayers’ rescue of AIG Under legislation such

as the US Dodd Frank Act derivatives are to be more closely controlled, in

particular private OTC transactions In addition, to counter the risk of

default we have seen the introduction of mandatory standards in the form of

counterparty and collateral arrangements All of this is new, and in addition

to the Solvency II requirements Furthermore, the notion of default risk now

plays a part in pricing that hitherto it did not

What this means is that Solvency II is not alone in

‘raising the bar’ for derivatives Taken together, the

level of expertise and control required, call for a

radical rethinking of derivative capabilities and

practices As a result, even the largest insurers will

need to choose between ‘upping their game’, dropping

out of the business lines that demand most derivative

expertise or partnering with those providers

that have the scale and resources to do the

job properly

a demanding data management regime

the comprehensive data management and governance regime imposed by solvency ii’s third pillar has proved one of the most controversial elements of the directive, and the survey reveals many insurers are struggling to come to terms with the requirements

respondents claim high levels of readiness for all three pillars When asked what they thought about the structure and requirements of each of the three pillars of the directive, 97% say they are very well or quite well prepared for pillar i, 95% feel the same about pillar ii and 89% for pillar iii

Thinking About the Structure and Requirements of the Solvency II Directive, how Well Prepared do you Feel for Each of the Three Pillars?

Pillar 3: Reporting Pillar 2: Governance & Risk Pillar 1: Capital requirements

Not very prepared Not at all prepared

Quite well prepared Very well prepared

However, the confidence in preparations for pillar iii was not borne out by responses to more detailed questions on solvency ii’s data requirements

in spite of more than half (55%) of respondents claiming to have the necessary data to meet the requirements of solvency ii, 97% say they are either ‘very’ or ‘somewhat concerned’ about meeting the requirements for quality of data; 96% say they have concerns about timeliness; and 94% say the completeness of data requirements are a cause of anxiety

how Concerned are you About Each of the Following Areas?

Limiting my investment strategy

as some assets will not adequately

meet data requirements

Data from third-parties

will not be sufficient

Meeting the requirements

for timeliness of data

Meeting the requirements

for completeness of data

Meeting the requirements

for quality of data

Not concerned Somewhat concerned

Base: all respondents (n=223)

source: economist intelligence unit

Figures do not add to 100% due to rounding

among the concerns expressed by respondents to the survey, one large swiss insurer

says: “The description and mitigation of risk exposure by risk category required under Pillar

III…this is a time-consuming process.”

at the same time, survey respondents are dedicating the smallest amounts of their

overall budgets to pillar iii, which accounts for less than one-third (30%) of resource

dedicated to solvency ii

challenge is the development of IT architecture, processes and data, [which] may be required to gather the necessary information”

spanish non-life insurer, aum >€25bn

“The biggest challenge is to plan how data will flow from internal reporting systems

to the regulatory reporting system”

uk non-life insurer,

€1–10bn aum

BlackRock View: Coenraad Vrolijk, Managing Director,

Financial Market Advisory Business & Co-Chair, BlackRock

Solvency II initiative

With slowly moving portfolios, insurers have never had to provide this level of

transparency, at such timely notice, on their assets in the past The focus

over the past years has been very much on the science of modelling

risks However, with deadlines drawing closer, attention

has shifted to the operational challenges of making

multiple managers across multiple jurisdictions and

multiple legal entities all report accurately, consistently

and quickly Individual insurers who are unable to provide

the required transparency and are still operating in excel

spreadsheets may find their credibility severely

challenged across the remainder of the pillars

data management regime continued

What is your Overall Budget for Solvency II? How is your Budget for Solvency II Apportioned Between each of the Three Pillars?

Pillar I 36% Pillar II 34% Pillar III 30%

One of the clearest examples of a mismatch between perceived readiness for pillar iii and actual understanding of the new requirements drawn out by the survey, relates to ‘look-through’ solvency ii introduces ‘look-through’ across all assets classes, which forces insurers to understand the risk of every investment they hold, even if it is a pooled

vehicle One French survey respondent says: “I think under Solvency II the main challenge will be on quality reporting to the individual line item in pooled investment funds.”

But only one-third of respondents are confident they understand how the relationship between pooled fund look-through and return will be altered under solvency ii non-life insurers show below-average understanding of how look-through applies to pooled funds; just 22% agree they know how the relationships will work meanwhile, just 42% of life companies agree they understand the relationship between look-through and pooled funds under solvency ii

Ms Muldoon of Friends life says: “The main areas of look-through relate to unit-linked business and repackaged loans [asset-backed securities] For unit-linked business, insurers should take steps to ensure that they understand the asset mix of their external fund links.”

the problem with the imposition of look-through lies where insurers employ fund management providers and third parties that may be unable to deliver adequate data for particular funds ninety-two percent of respondents are very or somewhat concerned that data from third parties will be insufficient under solvency ii the highest instances of concern are among the very largest insurers (with more than €25bn in aum), with 55% saying they are very concerned, as these are most likely to employ the largest number of third parties and use more complex investment strategies

“Sometimes, it

is difficult for an

organisation to

obtain data that is

at the same time