Asset data – focus on the end game

In my previous blog, I focused on the progress , or lack thereof that insurers were making on the asset data side of Solvency II. I raised the question of the full balance sheet approach the regulators seek to apply and how the industry still lacks the relevant data to complete this.

This made me think back to impact market risk, counterparty risk and concentration risk has had in the past, and left me constantly reaching the same conclusion. Nearly all major crisis in the past have lead to some systemic issue, originated from issues on the asset side of the balance sheet.

From an insurance aspect, the liability side may impact individual firms due to exposure to any given incident, but this was never systemic. On the flip side market exposure to global incidents is where systemic issues lay.

In conversations with many insurers, I have raised this on occasions to evaluate the response, and consistently the same comments are to the fore. The can has been kicked down the road, because insurers are not sure how to address this and have in general taken a broader view of their market risk.

Whilst this may have served in the past, I think it is now worth focusing on what the end game is for insurers in their risk management process.

The driving forces behind this process can vary from regulation to fear of ratings agencies to best practice for a given business in their risk management process. In regulation, the options may allow some subjectivity when applying what a firm does, although in many cases this subjectivity is lessened when mandated to report to regulators. With ratings agencies, it will often depend on how secure one sees their current rating, and from a best practice perspective, this lies in the hands of individual firms to define their approach based on a cost/value approach.

When regulation comes into play, the end game is important. Each regulation differs in how they define reporting requirements, but most have the same starting point, and that is granular data.

Firms should look to address this for the outset, as this is what will feed each regulation being imposed. If done correctly from the beginning, firms will notice that they can apply the same granular data in many regulations and formulate a single asset data approach to feed many, rather than creating multiple events.  A view of where firms want to be in 5-10 years is required rather than focusing on each regulation individually. Keeping the end game in mind will serve firms well in this approach.