22 July 2012

FT: A look on the bright side of Solvency II

"It's the nature of the introduction of new regulation that people throw up their hands and say 'it is all too difficult'", says Robin Cresswell, managing principal at fixed income specialist Payden & Rygel.

Many asset managers with insurance company clients have yet to work out what exactly will be required in terms of data management to enable this reporting transparency, and many of those that have started to get ready for the challenge see it largely as a huge and tedious task.

Not so Mr Cresswell. “We see a net positive coming from this.” Payden & Rygel is among the minority of asset managers that are treating this change in regulation as a business opportunity. It has spent time and resources making its products compliant with SII’s requirements, and is also putting a great deal of thought into the most efficient way for an insurance company to put its assets to work, given the capital charges for different kinds of investment.

“Making life easy for insurers is a key step”, says Kieran Murphy, Ernst & Young’s resident expert on SII. This will entail making sure products are easy to understand, will fit neatly into asset allocation boxes and are capital efficient. “It’s about building an understanding of insurers’ needs into your investment strategy.”

Aymeric Poizot of Fitch Ratings is less optimistic about the opportunities for asset managers to bring in insurance business by offering the complete solution. But he does agree this will be a huge shift for a large pool of assets (some $7 trillion). Equities will become unpopular with insurers, particularly if they are sceptical the returns will justify the risk, says Mr Poizot. “For an asset manager that is an equity player, dealing with insurers will be tough. There are two broad asset classes that will make sense: fixed income and real assets.”

Every commentator mentions one asset type, currently little used, that is likely to see significant demand from insurers under SII. That is real estate debt. This is attractive because if the loan to value ratio is less than 65 per cent, insurers will be able to treat it as risk free, i.e. there is no capital charge. It is also an interesting sector for asset managers, because the traditional lenders in this space, the banks, are rapidly withdrawing, leaving significant demand for them to fill.

Private credit specialist Tenax Capital sees a niche there it can exploit. “Insurers can mitigate the risk of bank deleveraging [by stepping into the gap]. The problem for insurers is that they don’t have the expertise”, says Massimo Figna, the chief executive of Tenax Capital. Although insurers are hiring former credit specialists from banks, in the meantime Tenax’s products are gathering business, he says.

Although investment products designed with insurance clients in mind may not be directly transferable to other investor groups, Mr Murphy says the skills and mindset necessary to support insurers under SII should be useful across an asset manager’s business. “Having a much clearer understanding of your clients’ needs is a good way to approach clients”, he says. “And higher risk-adjusted returns are of interest across all sectors.”

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