The introduction of the Solvency II regulation on January 1st 2016 will significantly alter the way the insurance industry is regulated in the EU. In our final blog setting out key issues and implications for insurers, we highlight the way in which data needs for Solvency II will overlap and interact with requirements driven by other regulations.
Solvency II is just one of numerous regulations affecting the financial services industry. These regulations inevitably overlap and interact on a national, regional and global scale in a range of different ways.
Use of Legal Entity Identifiers (LEIs)
Legal Entity Identifiers (LEIs) are codes designed to uniquely identify legally distinct entities engaging in financial activities. Solvency II requires the use of LEIs for the identification of security and fund issuers, but they are also required for reporting across a range of other regulations, including:
- The European Market Infrastructure Regulation (EMIR) – EU-based insurers trading any kinds of derivatives must report transactions using LEIs to uniquely identify entities associated with each trade;
- Dodd Frank Title VII – Similarly, insurers in the US must use LEIs when reporting transactions in OTC derivatives;
- The Alternative Investment Fund Managers Directive (AIFMD) – Insurers managing alternative investment strategies within their group may need to use LEIs to identify various types of entities to comply with AIFMD reporting requirements;
- The Markets in Financial Instruments Directive II (MiFID II) – This regulation currently in development is expected to require the reporting of LEIs for a vast number of EU-based financial services firms.
Insurers needing to comply with some or all of these regulations can therefore make use of a single, consolidated database of LEIs to both increase efficiency and reduce costs.
Solvency II shares data requirements driven by risk analyses with several regulations including Undertakings for Collective Investments in Transferable Securities (UCITS) and the AIFMD. However, this data can be defined or used differently across regulations, so insurers will need to adopt a rigorous approach to defining and classifying risk data, whilst considering potential synergies carefully.
One example of a data requirement shared with regulations such as the Capital Requirements Directive IV (CRD IV), the AIFMD and Dodd-Frank is the need for tracking information on the percentage of net economic interest retained by issuers, originators or sponsors of securitised instruments.
The need for independent valuations data is shared across AIFMD, UCITS, EMIR and Solvency II as well as being required by International Financial Reporting Standards (IFRS), but here again there are issues with implementing a consistent approach across all requirements. It is also rarely possible to use a single source for valuations of multiple asset classes, which compounds challenges with data ingestion, aggregation and validation.
A particular concern for multinational insurers will be the potential for local variations as national regulators in different EU countries can implement Solvency II with slightly different requirements.
The evolving nature of several families of regulations focused on the financial services industry means that insurers will need to keep a close eye on potential new data challenges and synergies throughout the months and years ahead.
Despite the challenges insurers face in meeting Solvency II’s stringent requirements by the 1st January 2016 deadline, achieving full compliance brings with it a number of benefits. To learn more, read our latest whitepaper “Solvency II: Understanding the Data Implications”, which analyses challenges and opportunities presented by Solvency II in more detail.
You can read about this topic in more detail in our whitepaper “Solvency II: Understanding the Data Implications”.