Cracking Silos Between Insurers and Asset Managers: A Fintech Solution

Financial institutions are fenced within a regulatory terroir. Europe is a multi-lingual continent with less than half a dozen currencies and more than two dozen legal & economic jurisdictions. Wilkommen y benvenuto. Financial regulations in Europe can fill a library, if there was an audience for it. But I can’t foresee any aficionados, so it is only the stakeholders affected that care about the MIFIDs and all other regulations protecting customers and economies that depend on financial service providers.

Regtech is one of the areas that Fintechs have focused on; using technology to address efficiently and cost effectively the needs of financial institutions for regulatory compliance. This is actually a broad area and includes challenges like data security, reporting accuracy, on-time delivery, and capability to identify relevance and applicability (to name a few).

Insurance companies are not immune to the tsunami of regulations even though payments and fund management have been more on the spotlight.

New Solvency II is one of the main regulations to come into effect in 2016, that will require insurers to identify underlying holdings in any funds they own. More than 4000 European insurance companies are affected. Deloitte reports that European insurance sector represents more than 42% of the fund industry; the insurance sector is actually a larger client than pension funds (36%).

Asset managers have been happily serving insurance companies because they are typically large, relatively sticky pockets of money, with a long-term investment horizon. Solvency regulatory framework has been around since 2013 but it has been proven very difficult for insurers to comply simply because most asset managers don’t have the capability to provide the granular data needed. The main requirement of this regulation is the “Look-through” principle which demands that asset managers provide their insurance clients sufficient data of their holdings so that risk metrics can be calculated associated with the Solvency Capital Requirement (SCR).

Insurers have been paying a high cost because they end up being charged (increased capital requirements – type 2 equity) on each of the underlying assets that they dont comply (i.e. calculate SCR). In simple words, if “Look-through” isn’t achieved, then the insurer ends up with higher capital adequacy requirements and with more stringent risk requirements (counterparty exposure limits and increased liquidity levels). As a result, insurance companies are out on the look for the Asset managers and asset service providers that can live up to the new standards of the solvency regulation. In effect, insurance companies are forced to choose asset allocations and risk exposures, based on the SCR calculation’s. As long as those calculations are distorted because of the lack of data, insurance investment decisions are suboptimal.

Luxembourg and Dublin, the two large fund centers of Europe, have decided to create an alliance and do something about this issue that affects insurance companies, asset managers and asset servicers. The Luxembourg Stock exchange created a consortium in 2010 that has evolved into Fundsquare that started operating about 2yrs ago as a user owned subsidiary of the exchange with expertise in fund technology. At the same time, in Dublin the Moneymate Group, a fund data technology group, launched a Fintech and SilverFinch was born. Silverfinch, is a Regtech utility for “Secure Data Sharing” to allow asset managers handle the look-through requests from their Insurance Company investors.

In late 2014, Silverfinch and Fundsquare partnered to accelerate the ability of European asset managers to service the needs of the insurance sector with regards to Solvency II demands. Once again Luxembourg is rolling out a “tapis rouge” on a bridge linking asset managers serving insurance companies.

The adaptation is a work in progress since it involves a multi-jurisdictional web of multiple financial assets. Silverfinch manages over $2.5 trillion of client assets (reported as of Oct 2015). Their value proposition is focused on data ownership and security, while providing the necessary reporting requirements for Solvency II.

The need to open a secure channel of communication between insurers and the asset managers that invest the premia collected by insurance company providers, is clearly a one-way street. Data flows from asset managers to insurers, solely for reporting purposes but of course, risk measures and capital requirements are determined from the data.

Imagine a flip flow of data: Insurers providing their asset managers with their customer related data. Anonymous but valuable data that can be turned into investable insights from Fintechs in the Big Data business. Which Fintechs can be a bridge between asset managers and insurers, to transform the structured data available to insurers, into investable insights that the asset managers serving them can have privileged access to? Looking for a flipped SilverFinch.

Which asset managers are exploring the possibility of exploiting data from their insurance clients? Looking for asset managers testing insurance provided data sets, to extract hidden value.