24 March 2014

Risk.net: Insurers urged to review data licence requirements

Undertakings require a large amount of data on their assets in order to populate the Quantitative Reporting Templates (QRTs) for Solvency II, Pillar III. The variety of data types cannot be catered for under a single licence by most data vendors, meaning costs could spiral unless insurers broker new arrangements.

Data expenses could rise further if vendors charge a separate fee for all entities using the market data the vendors provide. This could be costly for insurers that use a chain of third-party administrators (TPAs) and asset managers to handle their investment portfolios.

Chris Johnson, head of product management at HSBC Securities Services in London, says: "Insurers that start negotiating with data vendors now could get a much better deal on their licence packages than those who wait until nearer Solvency II implementation. Vendors are already offering 'regulatory lite' data packages, which is positive, but what insurers must do now is pick up the phone and ask about what offers are available. Nearer to implementation, when everyone else is joining the queue, those offers might start to disappear".

Johnson warns firms not to repeat the mistakes made by some insurers when they first reported their derivatives positions under the European Market Infrastructure Regulation (EMIR) this February. "Those who left EMIR reporting to the last minute experienced heavy weather getting the data they needed and some vendors' local operating units suffered from capacity issues. Insurers should operate 18 months ahead of the Solvency II start target date in order to ensure they have all the contracts and licences they need well before January 1, 2016", he adds.

Insurers require data on asset type, geography, income, valuation, risk, collateral, and credit rating among other areas to complete their QRTs. Acquiring the requisite licences can be expensive and administratively intensive. For example, insurers need to report Credit Quality Steps (CQS) on their assets so regulators have clarity on the credit risk associated with investments. Each CQS is defined by collecting ratings from Moody's, Fitch and Standard and Poor's, then selecting the second-best value to use as the reporting standard. Insurers therefore need to acquire ratings from all three agencies to produce a single data output.

Data costs will be most burdensome for those firms with complex asset portfolios and multiple fund managers. Christian Nilsson, Stockholm-based senior director, product strategy at S&P Capital IQ, says: "For insurers where the whole investment processes are outsourced, there may be an impact on some data costs, as they will need to capture and use more [data] in-house – this is dependent on several factors such as asset focus and the insurer's size".

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