SOLVENCY II

Impacts for asset managers

and services

Listening to investors

Introduction

David Zackenfels

Senior Legal Adviser, ALFI

European Insurance market

EU insurance market represents 33% of the volume of gross premiums worldwide

There are 4,325 (re)insurance undertakings in Europe as of June 30th, 2013

Assets under management for life insurance undertakings across Europe was 8.1 trillion euros in June

2014

29% of life Insurance undertaking’s portfolios are composed of investment funds

FR; 1001

GB; 516

DE; 389

LU; 312

SE; 299

ES; 269

IE; 243

NL; 223

Number of Insurance undertakingsRepartition by country Euro area (top 10)

FR

GB

DE

LU

SE

ES

IE

NL

IT

AT

The top 10 represents 80% of the total Euro area market

12% 12% 11% 10% 10%

7% 7% 7% 6% 6%

42% 42% 43% 43% 43%

13% 12% 12% 12% 12%

26% 26% 28% 28% 29%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010 2011 2012 2013 2014-02

Structure life insurer’s investment portfolioEuro area

Investment fundsshares

Shares and otherequity

Securities other thanshares

Loans

Deposits

Listening to investors

Solvency II setting the scene/roadmap/timeline

Thierry Flamand

Partner, Deloitte Luxembourg

Solvency II

Impact for Assets

Managers/Services

Thierry Flamand

October 2014

Solvency II – Basic concept

Pillar I – Quantitative aspects

Delta NAV approach (i.e. change in net asset

value) :

‒ Require sophisticated modelling techniques to capture

interaction between Assets & Liabilities

Look-through:

‒ In order to properly assess the market risk inherent in

collective investment undertakings and other

investments packaged as funds, it will be necessary to

examine their economic substance. Wherever

possible, this should be achieved by applying a look-

through approach.

‒ Where the look-through approach cannot be applied to

collective investment undertakings or investments

packaged as funds, the SCR may be calculated on the

basis of the target underlying asset allocation, provided

such a target allocation is available to the undertaking

at the level of granularity necessary for calculating the

Solvency Capital Requirement, and the underlying

assets are managed strictly according to this target

allocation.

‒ Where this approach is not possible and for all

collective investments to which the look-through

approach could not be applied, the equity type 2

charge shall be applied. In such cases, undertakings

shall demonstrate to supervisors why it has not been

possible.

Currency:

‒ Special reference to currencies pegged to the euro

Quantitative impacts Key challenges

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Type 1 Equity Type 2 Equity Property Curency

Equity/Property/Currency risk Shock

0%

10%

20%

30%

40%

50%

60%

5 10 15

Spread risk shock (by duration & rating)

AAA AA A BBB BB B CCC or lower Unrated

What is Solvency II ?

The new solvency system will include both quantitative and qualitative aspects of risks. Each pillar focusing on a

different regulatory component.

SOLVENCY II

Assets & liabilities

valuation

Technical

provisions

Own fundsSolvency capital

requirements

Minimum capital

requirementInvestment rules

Governance

system

Supervisory

review

Groups control

Supervisory

reportingPublic information

PILLAR I

Capital requirements

PILLAR II

Governance & supervision

PILLAR III

Disclosures

Two thresholds:

Solvency capital requirements (SCR)

Minimum capital requirements (MCR)

Harmonised standards for:

Valuation of assets and liabilities

Eligibility criteria of own funds

Effective risk management system

Own risks and solvency assessment

(ORSA)

Supervisory review & intervention

Insurers are required to publish details on

risks, capital adequacy and risk

management

Transparency and open information are

intended to assess market forces in

imposing greater discipline to the industry

Solvency II – Basic concept

Pillar I – Quantitative aspects

Market risk for the European industry:

Market risk is the largest component (56%) of the standard formula SCR for the European industry. The equity,

spread and interest rate components are the largest elements within this module, although the relative

importance of the sub-modules varies widely by type of undertaking.

28%

42%

12%

30%

10%6%

8% -36%

100%

0%

20%

40%

60%

80%

100%

120%

140%

160%

Interest rate Equity Property Spread Currency Concentration IlliquidityPremium

Diversification Market risk

Expected reporting frequency

Implementation of Solvency II

Solvency II deadlines have been settled as follow:

The preparatory measures will start as from January 2015 on FY 31 December 2014 figures.

The full scope reporting will start as from January 2016 on FY December 2015 figures.

Preparatory phase Solvency II

FY 2014 FY 2015 FY 2016

FY 2014 Solo

reporting (22 weeks) Q3 2015 Solo reporting

(8 weeks)

22 8 7 7 7# Weeks

Risk management

closing deadlines

3 6

Notes:

• Content of submission FY 2014 : Partial RSR, Basic Information, Balance sheet, List of assets, Open derivatives, Technical Provisions, Own Funds, SCR/MCR

• Content of submission Q3 2015 : Basic Information, Balance sheet, List of assets, Open derivatives, Technical Provisions, Own Funds, MCR

Annual report

Quarter report

Preparatory phasePosition of the member states according to EIOPA’s guidelines

The EIOPA address to the attention of the competent national authorities the procedure during the

preparatory phase on the implementation of the Directive. The Guideline n°16 "Individual quantitative

quarterly information" and the guideline n°13 “Individual quantitative annual information” set out the

contents of the quantitative requirements.

The below table shows the member states position in relation to these guidelines:

Comply Intend to Comply Not Comply

Greece Austria IcelandSerbia / Montenegro

(only annual)

Finland Belgium Italy Denmark

Ireland Bulgaria Liechtenstein Luxembourg

Malta Cyprus Lithuania

Romania Germany Latvia

Sweden Estonia Netherlands

Spain Norway

France Poland

Croatia Portugal

Hungary Slovakia

United Kingdom

Gibraltar

19%

75%

6%

GUIDELINE 13 –ANNUAL INFORMATION

Yes

Probably

No

19%

72%

9%

GUIDELINE 16 –QUARTERLY

INFORMATION

Yes

Probably

No

Annex 1 – Assets specific details

List of QRTs

Codification Frequency Description

Analysis - Detailed Assets

Assets - D1 Investments Data – Portfolio list

Assets - D1Q Investments Data – Portfolio list (Quarterly)

Assets - D1S Structured products Data - Portfolio list

Assets - D2O Derivatives data – open positions

Assets - D2T Derivatives data – historical derivatives trades

Assets - D3 Return on investment assets (by asset category)

Assets - D4 Investment funds (look-through approach)

Assets - D5 Securities lending and repos

Assets - D6 Assets held as collateral

A

QA

Q

Q

Q

A

A

A

A

A

A

A

AnnualQuarterly (semi-

annual for groups)

AQ

Preparatory phase

Listening to investors

Perspective of the Insurance world

Bernard Denis

Director, Lombard International Assurance

Lombard International Assurance

Life Assurance – Unit Linked only

Open Architecture

24 Billion AUM

200 custodian banks

600 investments managers

17,000 portfolios +

25,000 active assets (of which 11,200 funds)

Business Model - Relations

PCP

Private Client

Portfolio

Lombard Int.

Assurance

Issues policy that invest in

the fund

Executes the administration

and the calculation of the

fund NAV

Sends quarterly valuations

of the policy to the

policyholder

Monitors the fund underlying

assets in regards to the

Client strategy and CAA

investment rules

Daily transactions

Monthly statements of holdings

Custodian

• Discretionary manager of the

fund

• Agrees on details of the fund:

Client strategy

CAA requirements

• Act on the fund underlying

assets in line with the client

strategy and the CAA

regulations

Subscribes to the fund through

their life assurance policy

Decides on a risk profile and

an investment strategy

Policyholder

Regulated IM

Solvency II at Lombard International Assurance

5M € project

Started 5 years ago

Focus on Pillar 1 & 2 so far

Optimizing Solvency capital ratio calculation (SCR)

No direct influence on investment strategy

Importance of the look-through

Pillar I + Approach

e.g.

challenge

of market

risk

calibration

e.g.

strategic

riskse.g.

operational

risks

ORSA process Free

capital

Pillar I – Minimum regulatory requirements Pillar II – Own capital requirement assessment

Market Underwriting Other risks(Operational +

Default)

SCR Adjusting SCRassumptions to

LIA'specificities

Risks not fullycovered under

Pillar I

Material risksnot subject to

SCR

Internal capitalrequirements

(ICR)

Availablecapital

SurplusOwn SII

surplus

Insurance

(Lapse +

Expense)

Own capital

requirement

Own capital

available

Free

capital

SCR Market : What is the idea?

Capital requirements will vary depending on the nature of assets

underlying technical provisions.

Risky assets weight more than less risky assets.

Non-quoted

Equity non OCDE

Equity OCDE

Structured products

CCY VS EURO

Bonds

Cash

What about investment funds?

By default… the highest capital requirements

But if you can “ look through”… It is possible to reduce capital

requirements

Ex a balanced fund (50% bonds, 50% equity) could see requirement

reduced due to its bond exposure portion

AUM - Split

At Q4 2013, the AUM was 23,225 bn€ of which:

64% are classified as

Investment Funds

Unquoted Structures

36% are Direct Investments (Cash, Bonds, Equities, etc.) and considered as already

looked-through

Reporting obligations

As per the specifications (Art.78 - EIOPA Report 260-2012), an accurate Look-through has

to be performed if the portion of the Investment Funds exceed the threshold of 30% of total

investments.

Lombard International Assurance has to fulfill the requirements.

Balanced Fund 0.02761%

Bond Fund 29.60033%

Money Market Fund 2.63860%

Equity Fund 33.82336%

Exchanged Traded

Fund 0.16686%

Closed-End Fund 0.29480%

Hedge Funds - UCITS 3.42168%

Private Equity Fund 0.95270%

Simple Hedge Fund 8.03944%

Fund of Hedge Funds 5.37677%

Real Estate Fund 0.67480%

Other Fund 14.98306%

Look through Approach

Data

Quality

CAA File

22,400 lines of data

€23,225bn

Solvency II

Q4 2013

Submission

Apply Market Stresses

Dashboard for SCR

Calculation

SII Asset database

• SCR Market is 46% of the Total SCR

• Each look-through generates significant calculation requirements

• Carrying out a look-through calculation on the six sections above

generates an additional 750,000 lines of data

• Currently using spreadsheets which struggle with this volume

LT database c. 1,000,000 lines

External Funds € 100 m 2 funds => 6 lines

Internal Funds € 200 m 11 funds => 1,200 underlyings

SII retreated Database

Internal Funds € 900 m 3 funds => 3 lines

Use of

Mandates while

waiting for

accurate data

External Funds € 700 m 50 funds => 8,550 lines

External Funds € 750 m 113 funds => 10,000 lines

Data Provider € 4.5 bn 850 funds => 735,000 lines

Unquoted € 300 m 15 funds => 60 lines

Other Investment Funds to be looked-through

Another 250 funds to achieve the 80% (2014 target)

From largest

1000 holdings

Use of Mandates => propsectus

Look through Approach

Total FUM 22.158 bn € 23.225 bn €

Investment Funds 7.00739%

5.70729%

Unquoted Eq 1.561 1.221

Data Provider - - 4.398 v

Internal Funds 0.640 v 0.908 v

Internal Funds 0.683 v 0.197 v

Data Provider 2.284 v 0.249 v

External Funds 0.769 v 0.701 v

External Funds 0.522 v 0.719 v

Unquoted 0.301 v 0.624 v

External Funds - - 0.112 v

Direct Investments 8.391 38% 8.386 36%

61%

End 2013

V = Good data quality V = Poorer quality of data

5.199

LT

End 2012

71%

7.908

LT

End 2014

Look through - Unquoted

Total Unquoted

10% of FUM

Non Listed Underlyings

48%

Listed Underlyings

52% Equity 1 39% Stress +- Eq

Dampener

Bonds/Cash/Etc.

?

1 largest Unquoted 18%

10 largest Unquoted 62%

50 largest Unquoted 97%

Equity 249% Stress +- Eq Dampener

Why is Look-through important?

We’ve got no choice !

Lombard International Assurance: 10 % impact on SCR!

Different product will have different capital requirement, so impacting

product profitability

SII is a big cost to insurance companies, they will seek to mitigate by

optimizing capital requirements

Funds with high transparency will be preferred as they will “cost” less

Opportunity for custodians and data providers to offer a new service

What do we need?

Fund Asset breakdown, with high degree of granularity

Assets details will need to be enriched (rating, domicile…)

Data quality is key

Data quality Issue

Bonds Equities FundsOthers

(Rights, Warrants, etc.)

Total asset lines8,590 3,010 11,200 2,323

DATA MISSING

ISIN 437 454 1,017 N/A

Classification 349 128 650 1,515

Maturity Dates 690 N/A N/A N/A

Coupon Rates 882 N/A N/A N/A

Credit Ratings 4,266 N/A N/A 1,428

Domicile & Listing 500 25 N/A N/A

DATA INCOHERENCIES

Misclassification 13 22 125 N/A

Wrong Coupon 14 N/A N/A N/A

Wrong Dates 243 N/A N/A N/A

Wrong Listing 39 5 N/A N/A

Solvency II

c 25,000 lines

When and How?

When ?

At least once a year for regulatory reporting

Ideally quarterly for monitoring purposes

How?

Full automation as the data volumes are huge

Via custodians and/or data providers

Industry outlook

Fund managers beginning to work with insurers to provide data, as the

deadline for Solvency II draws closer

Currently receiving very good quality data from some external Fund

Manager. We are receiving data from the other sources on quarterly

basis but poor quality.

Several independent solution providers are now active in the market

Fund Managers have also raised licensing issues, where data

providers (e.g. S&P, Moodys) are not happy for their data to be passed

on to unlicensed users

Impact on our industry

A requirement for increased transparency and public disclosure should

encourage greater responsibility within the insurance industry

This will introduce greater 'market discipline', which will help ensure the

soundness and stability of insurers

Insurers applying 'best practice' are more likely to be rewarded e.g. by

lower financing costs

Modifications in product design due to more accurate pricing of risk

under SII may result in changes in the pricing of insurance products.

Impact on Lombard

SII is the new ‘business as usual’ for regulatory purposes

The SII programme has a limited life-span and we are building the new

processes and templates for future regulatory reporting and risk

management.

Combined financial and operational risk management

A key factor in achieving SII compliance is ensuring that financial risks

are considered alongside operational risk.

An enterprise wide view of risks

This requirement covers how risks are controlled, how they interact with

each other in times of stress, as well as day-to-day volatility, and what

framework is in place to manage those risks.

Impact on Lombard

New reporting requirements

Solvency II requires new reporting standards, demanding more reports

in a shorter timespan

Enhanced capital management

An increased focus on our capital and how we use it will ensure that it

works harder for our clients whilst providing them with the security that

we will be able to fund their needs regardless of the economic situation

THANK YOU

Bernard Denis

Director

Investment Administration

bernard.denis@lombard.lu

Lombard International Assurance S.A.

Head office: 4, rue Lou Hemmer L-1748 Luxembourg Grand-

Duché de Luxembourg

Listening to investors

Perspective of the Investment

Management world

Estelle Beretta-Somody

Head of Business Implementation

ING Investment Management

About ING IM International

Investment Management Profile

EUR 180 bln* (USD 227 bln*) in Assets under Management

Active in 18 countries across Europe, U.S., Asia and the Middle East

More than 1100 employees

Manages assets for:

Institutions including Sovereign Wealth Funds and Pension Funds (27% of AuM)

Retail Investors (29% of AuM)

ING Insurance (Proprietary) (44% of AuM)

Applies its proprietary research and analysis, global resources and risk management

to offer a wide variety of strategies, investment vehicles and advisory services in all

major asset classes and investment styles

The asset manager of NN Group, a publicly traded corporation. Our investment

history dates back to 1845 through our strong roots in insurance and banking

Investments structured as a series of specialist skills-based investment boutiques

united by shared global resources

ING IM International – Assets under Management

€ 48 € 49 € 49

€ 48 € 52 € 52

€ 72 € 76 € 79

€ 168 € 177 € 180

Q1 2014 Q2 2014 Q3 2014

Eu

ro B

illio

ns

Assets under Management

Institutional Retail Insurance

27%

29%

44%

Type of clients

Institutional

Retail

Insurance

20%

80%

Asset class

Equity

FixedIncome

Figures as of 30 September 2014 Asset class data using look through and excluding excess cash

Solvency II : main concerns of asset managers (1)

Weight of insurers into our Luxembourg domiciled funds?

Given that most of our (re)insurance clients have their assets managed through discretionary portfolios,

our first estimate was that less than 30% of assets in our funds are from insurance clients.

However, looking at the EFAMA statistics, we assessed that there are more third party insurance clients

investing though intermediaries and platforms than we think.

Cerulli made a survey to estimate the cost origin of Solvency II

Source: Cerulli Associates Source: EFAMA Asset Management Report 2014

Solvency II : main concerns of asset managers (2)

Risk profiles definitions of our (re)insurance clients

Understanding the insurers risks and regulation – a competitive advantage?

Outperforming in a risk controlled environment

Asset allocation decisions drivers

Capital requirements

Risk appetite

Diversification

Data requirements and management

Looking through

Data format requirements and delivery

Data quality and ownership

Costs of development and additional data sources

Solvency II : our response

Reception of clients’ requests to provide information, especially in The

Netherlands, Germany and France

Set up of Solvency II project at NN insurance level with go live for the

1st phase in 2013

Set up of Solvency II project at ING IM level with intermediary actions

for a few clients and official go live 1st of Jan 2016

Impact on management: rebalancing of portfolios for our (re)insurance

clients

Impact on products: new design taking into account the constraints for

our (re)insurance clients

Impact on data governance and architecture

Impact on staffing and split of activities within teams

Listening to investors

Panel Discussion:

Vantage Points to Solvency II

Moderator: Thierry Flamand, co-chair ALFI Solvency II WG &

Partner, Deloitte Luxembourg

David Zackenfels, Senior Legal Adviser, ALFI

Panelists : Valérie Nicaise, Head of Risk and Performance

Solutions, BNP Paribas Securities Services

Mathilde Sauvé, Insurance Solutions Strategist, AXA

Investment Managers

David Claus, Luxembourg Country Executive, BNY

Mellon

Bernard Denis, Director, Lombard International

Assurance

Jeff Rupp, Director of Public affairs, INREV

Asset Class Applied Shocks under Solvency II

• Real Estate • Standard 25% shock is applied on the market value of all the properties held

(land, buildings, immovable-property rights and property investment for the own

use of the undertaking). Otherwise, investments are treated as equity (see below)

• Global Equity (Quoted on EE or OCDE

exchanges)

• 39% base shock is applied and a +/-10% equity dampener is considered. The

current dampener is +7.5%

• Other Equity • 49% base shock is applied and a +/-10% equity dampener is considered. The

current dampener is +7.5%

• Financial and Institutional Participations • Shock exempt (deducted from own funds)

• Strategic Participations • 22% shock is applied to the market value of the participations

• Corporate / Government bonds • Modified interest curve is used to evaluate the impact of market rate falls and

rises. The rating and the modified duration of the corporate bonds are also

considered in the application of the spread risk module

• Intangibles • 80% shock is applied to the economic value of the assets

• Investments in Foreign Currencies • 25% shock is applied on the market value of the assets (some currencies get a

special treatment)

Market risk Shocks