UK insurers behind schedule on Solvency II data requirements

UK Financial Services Authority highlights problems with data control, ownership and validation

UK insurance firms are continuing to struggle with the data requirements imposed by Solvency II.

Firms undergoing the internal model approval process (Imap) need to integrate new data governance structures into day-to-day business processes in order to meet the requirements of the new regime.

However, the scale of the challenge means many companies are falling behind schedule in building the required infrastructure, experts warn.

Acquiring asset data of appropriate granularity has been a particular problem for insurers, says Matt Gosden, London-based partner at consultancy Oliver Wyman Financial Services.

"[Solvency II's requirements] are about knowing the characteristics of the assets, and that's not something insurers typically have in as much detail or necessarily have in one place. Also, the asset data quality needs to be very high, because if certain parts of the data are wrong, then in the tail of a one-in-200 year event the assets can have quite different values."

Insurers, Gosden says, are having difficulties documenting and validating asset data. Firms are required to gather data on an asset's class, credit rating, issuer, counterparty and concentration risk - a task that some are finding difficult to manage in the Solvency II time frame. This is particularly complicated if an insurer relies on a third party for its asset management.

"If you are outsourcing a part of your portfolio, then there are issues with making sure you have the right controls and that the data is correct," says Gosden.

Another burden is the requirement for insurers to conduct a ‘look-through' analysis of assets held in funds managed by a third party.

Nick Ford, London-based actuarial senior manager at KPMG, comments: "For some of the unit-linked companies that invest in hundreds if not thousands of funds, it is a tall order [to gather all the necessary data]."

The UK's Financial Services Authority (FSA) found that many insurers undergoing the Imap are struggling to comply with the data requirement.

The FSA identified 10 areas where insurers' current processes are inadequate. These included deficiencies with data control, confusion over data ownership and difficulties in building bespoke data directories. There were even instances where the risk owner had never seen the data policy or was not aware of the data deficiency management process.

An FSA spokesperson says: "Our general observation is that most firms are behind in their plans to embed a business-as-usual data governance operating model, that it is currently uncertain what a 'good' [model] looks like, and that we are looking for gradual evolution as Solvency II approaches."

However, some say the overall picture is more mixed than the FSA suggests. David Prowse, a senior director of insurance at Fitch Ratings in London, says there has been a varied response to the data challenge across the industry.

"In some cases, the extra requirements genuinely do play a part in improving the management of insurance companies' risk, and the measurement of those risks. In others, especially the major groups, they are already pretty well set-up in existing reporting. For them, they actually know the Solvency II result is somewhat academic, and, to some extent, it is just a box-tick they have to do for regulatory requirements," he says.

Yet the need to ensure that the right processes are in place in time for the implementation of Solvency II means all UK firms will have to accelerate their current programmes, say consultants.

Oliver Wyman's Gosden says: "There is certainly a sense of urgency that people need to get things in place for 2014. Now the FSA has come out with specific comments in specific areas where they would like people to improve, that will help focus resources and effort to getting the job done."