Look-through of funds? It’s still murky

Published by Scott Eason on

Despite various requests from companies and industry bodies, further clarity in terms of applying proportionality to the principle of look-through of assets in collective vehicles when calculating the Solvency Capital Requirement (SCR) is not expected from European Insurance and Occupational Pensions Authority (EIOPA).

So companies are going to need to make their own decisions and then document and justify these to their regulator.  To try and aid this, this blog summarises a recent discussion at a seminar held by the Investment Association where various European practitioners discussed what is happening in each of their countries.

"It appears that the PRA are not demanding full, multiple level look-through as long as any approach used is proportionate and that companies can demonstrate that the approach used materially captures the risks being taken."

A European view

Various participants suggested that the French regulator, Association Française d’Epargne et de Retraite (AFER), appears to have given the greatest clarity.  They have indicated that companies only have to look-through funds that are greater than 3% of the total funds and only have to look-through a maximum of two levels.  After that, they are happy for companies to use the benchmark index to determine the SCR.  Other regulators, such as Luxembourg, have given similar guidance.

We have not had such guidance in the UK from the Prudential Regulation Authority (PRA).  However, it appears that the PRA are not demanding full, multiple level look-through as long as any approach used is proportionate and that companies can demonstrate that the approach used materially captures the risks being taken.

A practical approach

A similar practical approach seems to also be acceptable in respect of market values and stressed asset values for SCR calculations.  Over-the-counter derivatives, in particular, can be difficult to value independently but are often held in many pooled funds, especially those of an absolute return nature. 

The tri-partite-template that most UK asset managers are using for providing insurers with asset data for Solvency II reporting purposes has an optional section for stressed values for SCR calculations.  Again, it was suggested that the French appear to be the furthest down the line with all French asset managers completing the optional section and it appears that AFER are happy for insurers to use these figures in their SCR calculations.

Asset managers to provide optional data?

At the moment, it is not standard for UK asset managers to provide this optional information.  We would recommend that UK firms talk to their asset managers about them providing this data and then creating a framework of due diligence to enable them to have confidence in the figures being provided.

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