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  • 3 Min Read
  • October 15, 2015

Fund Look-Through and Tripartite Update

Earlier this week, in conjunction with their Solvency II Industry Update Meeting, the Investment Association (UK), BVI (Germany), and Club AMPERE (France) published the third version of the tripartite, a common data exchange template designed to facilitate the Pillar 1 and Pillar 3 data requirements for fund look-through reporting.

The updated version contains multiple changes that align it more closely with EIOPA’s Solvency II reporting guidelines. In addition, a supplemental Q&A document was released that provides clarity on specific issues.

New Tripartite Data Point: Underlying Asset Category

The newest version of the tripartite includes an additional data point: Underlying Asset Category. Whilst this data point is new to the tripartite, it is not new to insurers, as it is included in the QRT S.06.03 – Look Through template. Underlying Asset Category requires identification of the assets’ categories, receivables, and derivatives within a collective investment undertaking, and that they be categorized according to a predetermined list of options.

Materiality For Fund Of Fund Look-Through

EIOPA and national regulators have been silent on materiality, instead placing the responsibility of determining materiality for fund of fund look-throughs on individual insurers. However, the recent Q&A publication includes a suggested 3% rule proposed by the European Solvency II Working Group (ESIIWG):

‘Unless an underlying fund holding represents more than 3% of the top level fund holding, there is no need to continue to look through.

Example 1: Fund A has a position in Fund B which represents 2% of the AUM of Fund A—no need to look through to Fund B.

Example 2: Fund C has a position in Fund D which represents 10% of the AUM of Fund C—look-through needs to be undertaken. In addition, Fund D holds a position in Fund E which represents 10% of the AUM of Fund D—no need to look through as the position in Fund E only represents 1% of the AUM of Fund C.’

(Source: TPT Q&A_20151013http://www.theinvestmentassociation.org//assets/files/industry-guidance/20151013-tptqanda.pdf)

Whilst ESIIWG’s approach seems straightforward, it may not meet the materiality requirement for each insurer. The 3% rule fails to take into account the proportion of the fund holding as it relates to the insurer’s entire portfolio. For instance, in Example 1: Fund B represents 2% of the AUM of Fund A; however, if Fund A is a substantial portion of the insurer’s portfolio, Fund B could still be considered a material amount of the portfolio.

Increased Validation Checks For Submissions

During the Solvency II Industry Update Meeting, the Prudential Regulation Authority (PRA) shared that insurers are likely to encounter more scrutiny during the Solvency II validation and submission process in 2016. EIOPA ‘turned off’ many checks prior to the 2015 preparatory phase submission deadlines in order to accommodate the overwhelming amount of data they received. As EIOPA becomes better able to handle submissions, those validation checks will be reinstated. This will highlight more inconsistencies and inaccuracies if data is not properly reconciled, resulting in delayed filings.

Navigating Solvency II

Clearwater is dedicated to keeping insurers up-to-date on regulatory changes that could impact their investment accounting and reporting. As Solvency II continues to evolve, we will continue to provide market updates and best practice guidelines.