Solvency II and its impacts on Alternative Investment Fund Managers (AIFMs)

in Audit, 19.02.2016

On 1 January 2016, a new EU-wide insurance supervision system became effective.

Affecting insurance companies first and foremost, Solvency II introduces new solvency capital requirements (SCR) and reporting requirements (QRT) which are of particular importance for AIFMs.

Under the new directive, different asset classes require different capital charges which means that, notwithstanding the fact that insurers continue to look for yields that enable them to meet their guaranteed interests, asset allocation might be driven by the objective of reducing the required capital charge as well.

In reaction to Solvency II, we have seen that the life insurance industry especially is looking more and more for investments with a high duration such as long-term government bonds (other than those from Germany). Alternative investment classes like real estate and infrastructure have become more attractive as well. In this new context, debt funds still play an important role—and since considerably reducing the capital charge for infrastructure investments is currently being debated, it’s probable that this asset class could become even more attractive in the future.

To calculate their SCR, insurance companies have to take a “look-through approach” to collective investment vehicles in order to assess their target investments. If this approach isn’t possible (for example if the information isn’t available), the highest capital charge will apply. Under specific circumstances, alternatives to the look-through approach are available, e.g. using the investment strategy of a fund, but several restrictions would apply in this case. To perform the look-through, insurance companies need much more detailed information from the AIFMs, compared to what they generally get now—and they need it more frequently.

To assist asset managers and insurance companies, some European Investment Fund Associations have taken the initiative to develop a reporting template (the “Tripartite Template”). This template is designed to provide information at a line-by-line level and contains all the information needed for the QRT as well as for the calculation of the related SCR. Additionally, with the template AIFMs can already do an indicative SCR calculation. For more information on the template, please refer to this article.

Having a thorough knowledge of the Solvency II rules, and being able to provide investors with high quality data with the required level of detail and frequency, can separate AIFMs from their peers and help give them a competitive edge.

KPMG Luxembourg’s Solvency II team works with asset managers of all types to help ensure that they are prepared for the changes. Please contact us for more information.

Leave a Reply

This blog is pre-moderated which means that all comments are reviewed by a moderator before they appear. KPMG reserves the right not to publish any comments made.