17 March 2014

Risk.net: Solvency II asset data formatting will breed 'inconsistencies'

Pillar III of the European Directive mandates insurers to complete quarterly quantitative reporting templates (QRTs) detailing information on their asset holdings, including data on asset type, risk profile, geography and value.

Insurers say finding accurate and consistent data for illiquid or uncommon assets will prove difficult, as will translating this data into the Complementary Identification Codes (CICs) formatted by the European Insurance and Occupational Pensions Authority (EIOPA). The CIC taxonomy was developed by EIOPA to simplify asset reporting for Solvency II. Each CIC is a four-position code. The first two positions represent the asset's country of listing. The third position classifies asset type, and the fourth the risk sub-type (including interest rate risk, currency risk and credit risk).

The CIC taxonomy allows firms to choose which code to assign to each position. Firms are expected to use existing codes such as those provided by the International Organization of Standardisation (ISO) at least for the first two parts of the CIC. For the other two positions, insurers must assign a code themselves using the relatively limited selection generated by EIOPA.

While EIOPA has provided guidance on how to assign CICs, the authority has refused to appoint a single numbering agent to provide a fully standardised list of codes for the third and fourth positions. EIOPA says it is the responsibility of each insurer to assign CICs. This makes it likely that different insurers will assign different CICs to the same assets, resulting in inconsistent reporting of assets across Europe. Insurers can use CICs provided by external asset managers and third-party administrators, but will need to validate these internally.

This will lead to complications for insurers and asset managers generating CICs for the alternative or illiquid assets in their asset portfolios, experts say. Regulators will also have to contend with the challenge of understanding the differences between insurers' CIC interpretations.

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