Ernst & Young EMEIA Asset Management

How asset managers are preparing for Solvency II

Kgdn]f[q AA ^gj Ykk]l eYfY_]e]fl kmjn]q f\af_k *()*

Contents
Executive summary Introduction Solvency II and asset management The challenges and opportunities Adapting to Solvency II Progress to date Achievable before 2014 Survey approach Glossary of acronyms 1 3 7 13 17 27 31 32 34

Executive summary

C]q f\af_k
European asset managers think they will win more insurance business due to Solvency II The survey found asset managers to be bullish about their prospects of winning additional business as a result of Solvency II, with two-thirds of respondents expecting to acquire more insurance business. While this is a positive viewpoint, Ernst & Young believes that this expectation is mainly aspirational jYl`]j l`Yf j]dYl]\ lg Y kh][a[ j]n]fm] target: some 91% of respondents have no set target for additional fees to be generated by Solvency II. Lack of clarity in the Solvency II regulations is the biggest challenge for asset managers At present, the biggest challenge for asset managers stemming from Solvency II is the clarity of requirements, with more than half of respondents citing this as an issue. Once clarity is achieved, we would anticipate that meeting the objective of providing accurate, timely data would become the next hurdle.

Asset managers believe their client reporting, data and product development ^mf[lagfk oadd Z] ka_fa[Yfldq aehY[l]\ by Solvency II The top three areas of impact within the asset management operating model highlighted by respondents in our survey were client reporting, data management and product development respectively. We would have expected data management to be ranked higher than client reporting because data management concerns the entire investment process, whereas client reporting is only the end of the process. We imagine respondents selected this activity due to a lack of clarity in the reporting requirements under Solvency II.

*( g^ j]khgf\]flk kYa\ l`Yl ]f_Y_]e]fl oal` afkmj]jk ak l`]aj Za__]kl [`Ydd]f_]& L`ak ak Y ka_fa[Yfl fmeZ]j$ _an]f l`Yl l`]j] ak an imperative for afkmj]jk lg [gehdq oal` Kgdn]f[q AA&

Gl`]j f\af_k
Lack of client requests cited as reason for not having a Solvency II program 9degkl Y ^l` g^ j]khgf\]flk \g fgl `Yn] a program under way and do not intend to deploy one, the main reason being a lack of client requests and asset managers not viewing insurers as a strategically important channel. There is evidence lg km__]kl l`Yl eYfq afkmjYf[] jek are not yet fully engaging their asset management partners on Solvency II, and there is a disparity in the state of j]Y\af]kk& 9 ^]o jek Yj] hmk`af_ Y`]Y\ with a strategic focus on grasping the opportunity offered by Solvency II while

How asset managers are preparing for Solvency II | Kgdn]f[q AA ^gj Ykk]l eYfY_]e]fl kmjn]q f\af_k *()*

most remain purely reactive with a low state of readiness. For example, a quarter of respondents said fewer than 10% of their insurance clients had engaged with them on Solvency II. The response to Solvency II remains reactive with minimal indication of asset managers taking a strategic approach: if the insurer is not demanding a response to Solvency II, the asset manager is not initiating a program. Furthermore, a third of asset managers Yj] oal`gml Y [d]Yjdq \]f]\ kljYl]_q ^gj Solvency II. This lack of a clear strategy is j]][l]\ af l`] dY[c g^ j]n]fm] lYj_]lk& Lack of clarity around recouping costs and generating additional fees There is much work to be done with respect to Solvency II fee structures. Firms may consider charging for two j]Ykgfk2 jkl$ a^ l`]q Yj] Z]af_ Ykc]\ ^gj data, they need to recoup the cost of that data, and second, if providing additional services, there is an opportunity to generate additional revenue. It is perhaps surprising that more than a quarter of respondents are not considering the charging on of Solvency II expenses to their insurance client base. Furthermore, just 5% of respondents have a set target in mind for additional fees that could be generated as a result of Solvency II.

Solvency II programs predominantly on schedule As far as timetables for Solvency II programs are concerned, it is a relatively hgkalan] k[]fYjag2 ^gj l`gk] jek oal` a Solvency II program, a quarter of respondents aim to complete before January 2013 and three-quarters aim to complete by the end of 2013. To achieve this goal, the results concerning Solvency II spend suggest asset managers are drawing in staff from existing programs to support Solvency II. This is placing more pressure on those individuals and a strain on other resources: there is a hidden cost to these hjg_jYek l`Yl Ykk]l eYfY_]e]fl jek need to consider.

Conclusion
EYfq Ykk]l eYfY_]e]fl jek Yj] fgl Y[lmYddq lYcaf_ Y strategic perspective on Solvency II. Whilst over half have said they are being proactive and two thirds have a strategy in place, more detailed evidence from the survey suggests the approach remains reactive. The survey found that the focus is on operational and compliance matters, with relatively little attention being paid to strategic revenue generation opportunities that may be derived from the Solvency II program.

How asset managers are preparing for Solvency II | Kgdn]f[q AA ^gj Ykk]l eYfY_]e]fl kmjn]q f\af_k *()*

Introduction

Solvency II is an EU Directive that sets out stronger risk management requirements for European insurers and \a[lYl]k `go em[` [YhalYd jek emkl hold in relation to their liabilities. Under guidance of the European Insurance and Occupational Pensions Authority (EIOPA), implementation of the Directive is expected to come into force on 1 January 2014. The requirements of Solvency II involve more complex calculations of factor-based ^gjemdYk$ klj]kk l]klaf_ Yf\ fYf[aYd eg\]dk& AfkmjYf[] jek emkl Ydkg eYc] ka_fa[Yfl [`Yf_]k lg fYf[aYd kqkl]ek$ change their balance sheet for reporting to a fair-value basis for Solvency II, and prepare for greater public disclosure of fYf[aYd klYl]e]flk$ jakc e]Ykmj]k Yf\ capital calculations. The review consists of three central pillars: Pillar 1 Capital adequacy Pillar 2 Systems of governance Pillar 3 Supervisory reporting and public disclosure In the future, insurers are likely to prefer investments that provide closer matching with their liabilities and minimise risky asset classes, as this would reduce their capital requirements. This presents an opportunity for Solvency II-optimized products, such as bespoke products to hedge long-duration liabilities or products that match the complex discount rates the new regime will use. Asset managers are also beginning to develop their capabilities in portfolio construction, with an opportunity to pay more attention to their insurance clients liabilities and offer genuine portfolio optimization solutions, which in turn may lead to stronger, longterm client relationships.

All the recent studies measuring the impact of Solvency II have been conducted from an insurers perspective. Kgdn]f[q AA ak Y ka_fa[Yfl ha][] g^ insurance regulation; therefore, it is understandable that the focus to date has been primarily around the impact gf afkmjYf[] jek& @go]n]j$ Kgdn]f[q AA has to be seen in the context of all the other regulations impacting the asset management industry. Unfortunately, dealing with a regulation that is not asset management focused is not a priority: FSA regulation such as the Retail Distribution Review and European and overseas legislation such as Dodd-Frank, UCITS and FATCA have inevitably taken precedence for asset managers. For the last two years, Ernst & Young has been working with a number of asset managers, looking at Solvency II in terms of its impact on the asset management value chain. In this survey, we analyze Solvency II from the viewpoint of asset managers with insurance mandates. Through numerous meetings with asset managers, we have gained extensive anecdotal evidence about their concerns and plans. As awareness has grown, we have demonstrated that the impact of Solvency II extends beyond the insurance industry and into the business models of asset managers.

Solvency II is a ^mf\Ye]flYd j]na]o g^ l`] [YhalYd Y\]imY[q Yf\ jakc eYfY_]e]fl j]imaj]e]flk ^gj l`] European insurance af\mkljq& Al ak gf] g^ l`] egkl [`Ydd]f_af_ Yf\ ^Yj%j]Y[`af_ j]_mdYlgjq j]^gjek l`Yl l`] =mjgh]Yf afkmjYf[] af\mkljq `Yk k]]f&

How asset managers are preparing for Solvency II | Kgdn]f[q AA ^gj Ykk]l eYfY_]e]fl kmjn]q f\af_k *()*

Based on our work and discussions with asset managers, we designed a European survey that analyzed seven themes that are most relevant to Solvency II preparation, requirements, opportunities and threats. The objective is a quantitative assessment of how the asset management industry is responding and its state of readiness. The report reveals how the engagement process has unfolded between insurers and asset managers, whether targets have been set and what provisions have been made for insurers. Therefore, this report considers Solvency II from the asset management perspective, not from the insurance perspective (of the three pillars). It is widely acknowledged that data acquisition, accuracy, consistency and manipulation will present considerable challenges. As insurers are seeking internal model approval from their regulators over the coming 18 months, it is becoming obvious that many have Y ka_fa[Yfl k`gjl^Ydd lg eYc] mh af terms of asset data. The calculation of Solvency Capital Requirement (SCR) requires a range of inputs, and insurers will be looking for detailed, accurate asset \YlY Yf\ imYflaYZd] [j]\al Yf\ daima\alq risk metrics.

Full implementation is shortly upon us, and with data and technology both critical to success, insurers will soon need assurance that asset managers can provide all that they will need as they enter their testing phases. With less than a year before regulatory supervisory approval of Solvency II models, the asset management industry should be reasonably prepared. This is an appropriate juncture to ascertain whether the industry has moved beyond l`] [gf[]hlmYd afm]f[]k g^ Kgdn]f[q AA and made detailed provisions for the operational impacts and strategic opportunities. This survey also reveals the opportunities for asset managers with respect to product development.

O] ljmkl l`Yl l`ak j]hgjl oadd Z] Yhhj][aYl]\ Zq l`] afkmjYf[] [geemfalq$ Yk alk f\af_k k`gmd\ _YdnYfar] al lg ]f_Y_] egj] oal` Ykk]l eYfY_]e]fl hYjlf]jk& @go]n]j$ l`] hjaeYjq gZb][lan] g^ l`ak j]hgjl ak ^gj Ykk]l eYfY_]jk lg Y[l mhgf l`] f\af_k&

How asset managers are preparing for Solvency II | Kgdn]f[q AA ^gj Ykk]l eYfY_]e]fl kmjn]q f\af_k *()*

Kmjn]q f\af_k

How asset managers are preparing for Solvency II | Kgdn]f[q AA ^gj Ykk]l eYfY_]e]fl kmjn]q f\af_k *()*

Solvency II and asset management

Has the insurance industry led from the front on Solvency II and actively engaged its asset management partners?
One might assume that the impetus for a Solvency II program would stem from the insurer, and the encouraging news is that almost a third of respondents had been engaged by most of their insurance client base around Solvency II. It is clear, `go]n]j$ l`Yl Y ka_fa[Yfl hjghgjlagf of asset managers are not in regular

dialogue with their insurance clients about Solvency II, even at this relatively late stage. In fact, 25% of respondents said more than 90% of their insurance clients had yet to engage with them on Solvency II planning and requirements. In these instances, the position would appear to be a reactive one: if the insurer is not demanding a response to Solvency II, the asset manager is not initiating a program.

A^ gmj [da]flk Yj] fgl Zjaf_af_ mh l`] akkm] g^ Kgdn]f[q AA$ l`]f o] Yj] lYcaf_ l`] d]Y\ af terms of initiating a kljYl]_a[ hjg[]kk&

O`Yl h]j[]flY_] g^ qgmj afkmjYf[] [da]fl ZYk] `Yk ]f_Y_]\ oal` qgm Yjgmf\ Kgdn]f[q AA7
4%

25%

<10% 1025% 2550% 5075% >75% n/a

29%

20% 13% 9%

How asset managers are preparing for Solvency II | Kgdn]f[q AA ^gj Ykk]l eYfY_]e]fl kmjn]q f\af_k *()*

Solvency II and asset management

Al emkl Z] j]e]eZ]j]\ l`Yl l`]j] eYq Z] Y kda_`l hgkalan] ZaYk af l`ak kmjn]q& :q najlm] g^ l`] ^Y[l l`Yl l`]k] Ykk]l eYfY_]jk Yj] `Yhhq lg hYjla[ahYl] af l`] kmjn]q$ gf] ea_`l ]ph][l l`Yl l`]q Yj] ^mjl`]j Ydgf_ l`] ljY[c lgoYj\ Kgdn]f[q AA aehd]e]flYlagf& L`gk] jek l`Yl Yj] d]kk hj]hYj]\ ogmd\ Z] d]kk af[daf]\ lg lYc] hYjl&

If there is low awareness of Solvency II among asset eYfY_]e]fl jek$ o`Yl ak l`] potential impact?
At a board level, there may be missed opportunities to react strategically. For staff dealing with clients, we could see potential issues or challenges being gn]jdggc]\ gj fgl Z]af_ a\]fla]\ quickly enough. With full implementation nearing, one would expect awareness to be extremely high, and two-thirds of respondents claim to have a Solvency II strategy.

Ka_fa[Yfldq$ `go]n]j$ l`Yl kladd d]Yn]k a third of asset managers without a [d]Yjdq \]f]\ kljYl]_q& L`ak dY[c g^ a clear strategy will impact the asset manager in terms of its achievement of the opportunities stemming from Solvency II, such as the development of Solvency II-optimized products. Reacting strategically also allows the company to align Solvency II programs with other regulatory programs under way that may have a potential overlap. For example, Dodd-Frank and Solvency II can overlap at a data governance level, providing an opportunity for synergies.

<g qgm `Yn] Y [d]Yjdq \]f]\ Kgdn]f[q AA kljYl]_q7

33%

Yes No 67%

How asset managers are preparing for Solvency II | Kgdn]f[q AA ^gj Ykk]l eYfY_]e]fl kmjn]q f\af_k *()*

Are asset managers being proactive in their approach toward Solvency II?
The good news is that the approach to Solvency II was predominantly described Yk Z]af_ hjgY[lan]$ l`gm_` Y ka_fa[Yfl hjghgjlagf \]k[jaZ]\ l`]aj je Yk reactive or not engaged. It is encouraging to see a proactive response from the asset management community, as evidence from the survey has indicated that insurers are not yet

fully engaging. A reactive position may work in many instances, though it could leave asset managers at the behest of their insurance clients as the deadline approaches. A reactive position might also lead to asset managers having to develop custom builds for individual clients, rather than proactively being clear about what they can and cannot deliver. Asset managers who are not engaged risk losing existing clients and falling behind their competitors in the future.

@go ogmd\ qgm \]k[jaZ] qgmj jek YhhjgY[` lg Kgdn]f[q AA7

2%

25% Reactive Limited proposition Proactive 53% Not engaged

20%

How asset managers are preparing for Solvency II | Kgdn]f[q AA ^gj Ykk]l eYfY_]e]fl kmjn]q f\af_k *()*

Solvency II and asset management

Gmj l]Ye `Yk Y j]Yddq _gg\ mf\]jklYf\af_ g^ Kgdn]f[q AA$ Zml gmlka\] g^ l`Yl l]Ye l`]j] ak eafaeYd YoYj]f]kk&

Is there a good understanding of the impacts of Solvency II at a board level from which a strategic approach should evolve?
Our survey indicates a reasonable understanding at board level of the impact of Solvency II. It is also testimony to the asset management community that boards are engaged, given the raft of other regulations that they are obliged to contend with. More than a

third of respondents rate their boards understanding of Solvency II as good, with more than half saying it is fair. The picture emerging is one of wellinformed staff in asset management jek& L`] j]kmdlk ^gj klY^^ ZjgY\dq eajjgj that of the board, with more than a third rating their staffs understanding of Solvency II as good and almost half rating their staffs understanding as fair.

@go ogmd\ qgm jYl] qgmj [gehYfq ZgYj\k [mjj]fl mf\]jklYf\af_ g^ Kgdn]f[q AA Yf\ alk aehY[l gf Ykk]l eYfY_]e]fl7
2%

Good Fair 40% 58% Poor

)(

How asset managers are preparing for Solvency II | Kgdn]f[q AA ^gj Ykk]l eYfY_]e]fl kmjn]q f\af_k *()*

There is an important caveat here: these results are generally (but not exclusively) kh][a[ lg Kgdn]f[q AA l]Yek& L`]j]^gj]$ the 86% of respondents that rated staff understanding as good or fair is generally applicable to Solvency II teams. There is a question mark regarding awareness outside of these groups: Ernst & Young has anecdotal evidence to suggest that awareness does not seem to extend beyond the Solvency II teams.

If as we suspect knowledge of Solvency II is held mainly within the Solvency II team, this explains the lack of a strategic approach among many Ykk]l eYfY_]e]fl jek& Oal` kYd]k$ investment and business development teams not engaged in the Solvency II program, the focus remains on operational and compliance activities.

@go ogmd\ qgm jYl] qgmj klY^^k [mjj]fl mf\]jklYf\af_ g^ Kgdn]f[q AA7

14%

Good Fair 42% 44% Poor

How asset managers are preparing for Solvency II | Kgdn]f[q AA ^gj Ykk]l eYfY_]e]fl kmjn]q f\af_k *()*

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Solvency II and asset management

O] l`afc l`] d]n]d g^ mf\]jklYf\af_ Yl Y ZgYj\ d]n]d ak Y[[mjYl]3 `go]n]j$ o] ^]]d l`Yl klY^^ mf\]jklYf\af_ g^ Kgdn]f[q AA ak dgo]j l`Yf l`] j]kmdl `]j] ogmd\ af\a[Yl]&

A useful indicator of whether asset managers have been proactive with respect to Solvency II is their approach to training. It could therefore be seen as positive that 71% of respondents have run education sessions for staff on Solvency II. This result, however, is counterbalanced Zq l`] ^Y[l l`Yl Y ka_fa[Yfl fmeZ]j g^ asset managers have not run sessions to educate staff. The proportion that have not run (or even plan to run) educational sessions on Solvency II also correlates with asset managers lack of a clearly \]f]\ kljYl]_q&

One might reasonably assume that even educational seminars run on Solvency II will be delivered to a limited number of teams within any asset management je& L`] aehda[Ylagf ak l`Yl l`] hjg_jYek are under way and two-thirds of asset managers have a strategy, which is all n]jq hgkalan]& @go]n]j$ l`] cfgod]\_] is held within the Solvency II teams; therefore, these programs are more operational and compliance-focused in nature, rather than being truly strategic.

@Yn] qgm jmf'\g qgm hdYf lg jmf ]\m[Ylagf k]kkagfk ^gj qgmj klY^^ gf Kgdn]f[q AA7

29%

Yes No 71%

)*

How asset managers are preparing for Solvency II | Kgdn]f[q AA ^gj Ykk]l eYfY_]e]fl kmjn]q f\af_k *()*

The challenges and opportunities

With the Solvency II deadline looming, asset managers should be in a position where each of the components of their programs is nearing completion. But how ready are they, and where are they behind? Our study indicates that at present, the biggest challenge for asset managers stemming from Solvency II is the clarity of requirements, with more than half of respondents citing this as an issue. As clarity of requirements is a basic component of a Solvency II program, once clarity is achieved, we would anticipate that providing the right data would dominate. Data provision is currently ranked in second place, with more than a quarter of respondents citing this as a challenge. Subsequently, we expect to see other challenges gaining prominence,

such as loss of intellectual property due to the requirement for look-through to position-level data, close to monthend, to meet the insurers reporting requirements. The loss of intellectual property is an interesting challenge. The speed with which asset managers have to submit data to insurers under Solvency II effectively means that the insurer can potentially replicate the portfolio that the asset manager is managing. As a consequence, while only a few asset management jek k]] dgkk g^ afl]dd][lmYd hjgh]jlq Yk Y eYbgj [`Ydd]f_]$ egkl Yj] ka_fa[Yfldq concerned about providing look-through data within such a short timeframe and are exploring ways in which to circumvent this issue.

O] kladd Yj]fl kmj] o`Yl l`] afkmj]jk Yj] ]ph][laf_ ^jge mk

O`Yl \g qgm h]j[]an] ak l`] Za__]kl [`Ydd]f_] ^gj Ykk]l eYfY_]jk g^ Kgdn]f[q AA7
25 Number of respondents 20 15 10 5 0
Ti pr m ov el isi in on es so fd at a pr ov Le isi ve on lo fd at a di sc lo Cl su ar re ity of re qu ire En m ga en ga ts m en tw ith Re in ta su in in re g rs in su ra nc e bu Lo sin ss of es s ite lle ct ua lp ro pe rt y Ot he r

Da ta

How asset managers are preparing for Solvency II | Kgdn]f[q AA ^gj Ykk]l eYfY_]e]fl kmjn]q f\af_k *()*

)+

The challenges and opportunities

O] ogmd\ `Yn] ]ph][l]\ \YlY eYfY_]e]fl lg Z] jYfc]\ `a_`]j l`Yf client reporting because \YlY eYfY_]e]fl encompasses all hjg[]kk]k ^jge l`] ZY[c lg ^jgfl g^[]$ o`]j]Yk [da]fl j]hgjlaf_ `Yk Yf aehY[l gf bmkl l`] ^jgfl ]f\& O] kmkh][l l`ak ak goaf_ lg dY[c g^ [dYjalq af l`] j]hgjlaf_ j]imaj]e]flk g^ Kgdn]f[q AA&

Where will the greatest impact of Solvency II be felt by asset managers within their own operating model? The top three areas of impact highlighted by respondents in our survey were client reporting, data management and product development respectively. In terms of the impact on the operating eg\]d$ l`]k] f\af_k ^gj j]hgjlaf_ and data management are in line with later questions in the survey, where the provision of the additional, quality assured data and data for the SCR calculations

ranked highly. The data managers gather the data, process it, clean it, validate it and channel it to various recipients across l`] je$ af[dm\af_ l`] [da]fl j]hgjlaf_ l]Ye3 l`]j]^gj]$ alk afm]f[] ak ZjgY\ and deep. No respondents cited the investment hjg[]kk Yk Z]af_ ka_fa[Yfldq aehY[l]\& If this survey were to be repeated in a years time, when there will be more clarity on the issues, we would expect the investment process function to be ranked far higher.

O`Yl Yj] l`] lgh l`j]] Yj]Yk g^ qgmj gh]jYlaf_ eg\]d qgm l`afc oadd Z] aehY[l]\ l`] _j]Yl]kl Yk Y j]kmdl g^ Kgdn]f[q AA7 jYfc Yfko]jk ^jge ) lg +!
20 18 16 14 12 10 8 6 4 2 0
Cl ie nt re po Da rt in ta g m an ag Su em pp lie en rm t an ag Cl em ie en nt t m an Pr ag od em uc en td t ev el In op ve In m st ve en m st t en m tp en ro tr ce isk ss As m an se t-l ag ia em bi lit en y t m an ag em No en ne t of th e ab ov e Ot he r
Ranking 1 Ranking 2 Ranking 3

),

How asset managers are preparing for Solvency II | Kgdn]f[q AA ^gj Ykk]l eYfY_]e]fl kmjn]q f\af_k *()*

At the board level of most asset eYfY_]e]fl jek oal` afkmjYf[] mandates, a fundamental question regarding Solvency II will be whether this j]_mdYlagf oadd j]kmdl af l`] je oaffaf_ more insurance business. Two-thirds of respondents expect to win more business as a result of Solvency II. While this is a positive viewpoint, Ernst & Young believes this expectation is mainly aspirational rather l`Yf j]dYl]\ lg Y kh][a[ j]n]fm] lYj_]l& As we highlighted earlier in the survey, 91% of respondents have no set target for additional fees to be generated by Solvency II.

It is noteworthy that a minority of respondents indicated that Solvency II will reduce the amount of insurance business that they manage. Why would those two jek Yfla[ahYl] dgkaf_ Zmkaf]kk7 L`] j]Ykgf eYq kaehdq Z] l`Yl l`]k] jek \g not want to invest in the program. Indeed, Zgl` g^ l`]k] jek `Yn] d]kk l`Yf MK)(Z in insurance money under management. Al ak ka_fa[Yfl l`Yl kge] Ykk]l eYfY_]jk may already be considering insurance client attrition because they do not want to assist insurers in compliance with Solvency II. A similar policy is being adopted by some wealth managers supporting US clients with accounts in Europe, as a result of FATCA.

<g qgm Yfla[ahYl] Kgdn]f[q AA oadd e]Yf l`Yl qgm7

40 35 Number of respondents 30 25 20 15 10 5 0 Acquire more insurance business Continue to retain insurance business Reduce the amount of insurance business you manage

A large number of j]khgf\]flk ]ph][l lg oaf more business as a result g^ Kgdn]f[q AA$ Zml o`]j] oadd l`ak Zmkaf]kk [ge] ^jge7 K`gmd\ o] ]ph][l lg k]] kge] [`mjf af l`] af\mkljq Yk afkmj]jk dggc lg j]Yddg[Yl] Ykk]lk \m] lg [YhalYd j]imaj]e]flk7 Oadd afkmj]jk Z] ]fla[]\ lg gl`]j Ykk]l eYfY_]jk$ or will client retention Z] \jan]f Zq ^Y[lgjk km[` Yk 9kk]l DaYZadalq EYfY_]e]fl 9DE!7

Results based on respondents who answered yes

How asset managers are preparing for Solvency II | Kgdn]f[q AA ^gj Ykk]l eYfY_]e]fl kmjn]q f\af_k *()*

)-

The challenges and opportunities

L`] h]j[]flY_] g^ j]khgf\]flk 0/! anticipating a closer ogjcaf_ j]dYlagfk`ah oal` l`]aj afkmjYf[] [da]flk ak imal] `a_` o`]f [gfka\]jaf_ Y l`aj\ `Yn] no Solvency II program mf\]j oYq Yf\ Y imYjl]j \]k[jaZ] l`]aj YhhjgY[` lg l`] j]_mdYlagf Yk Z]af_ j]Y[lan]& O] aeY_af] l`Yl l`] 0/ Yj] egj] YkhajYlagfYd af fYlmj]$ `go]n]j l`]j] ak dalld] ]na\]f[] ^jge l`ak kmjn]q lg kmZklYflaYl] l`ak na]o&

Will asset managers form a closer working relationship with insurers as a result of Solvency II?
The answer appears to be yes. With a potential impact on the front, ea\\d] Yf\ ZY[c g^[]k$ l`ak ak h]j`Yhk unsurprising. But why have more asset eYfY_]e]fl jek fgl ]f_Y_]\ oal` l`]aj insurance clients?

<g qgm Z]da]n] Kgdn]f[q AA oadd hjgegl] Y [dgk]j ogjcaf_ j]dYlagfk`ah oal` qgmj afkmjYf[] [da]flk7

13%

Yes No

87%

).

How asset managers are preparing for Solvency II | Kgdn]f[q AA ^gj Ykk]l eYfY_]e]fl kmjn]q f\af_k *()*

Adapting to Solvency II

How are asset managers gearing up for the increased data requirements stemming from Solvency II?
The message here is one of self-reliance, as opposed to external systems support. Our survey found that more than half of respondents plan to enhance their existing data infrastructure, while a quarter said they are intent on delivering an in-house build. Indeed, only a quarter of respondents have the intention of expanding data coverage through a third-party arrangement, such as an existing administrator. This may come as a surprise to the system providers and administrators, who have been preparing for asset managers (and insurers) to approach them for Solvency II data solution support. There are higher data requirements under Solvency II, but

it appears asset managers intend to look at gaps in their own infrastructure. When we compare the results here with those concerning the state of readiness pertaining to various Solvency II tasks, there is a disparity. The current state of the key data activities needed for Solvency II compliance was rated low to moderate, yet more than half of respondents are expecting to enhance existing data infrastructure. If these jek Yj] lg Z] j]Y\q Zq BYfmYjq *(),$ activity will need to pick up considerably. The reasons why a third-party could potentially be used include competency in data provision and the avoidance of large-scale internal change programs. L`]j]^gj]$ o] ea_`l ]ph][l l`ak _mj] to rise as the deadline looms closer and the pressure to comply increases for the insurer.

L`] f]]\ ^gj Y k[YdYZd] \YlY kgdmlagf `Yk Z]]f l`] []fl]j g^ em[` \]ZYl] oal`af l`] Ykk]l eYfY_]e]fl af\mkljq gn]j l`] dYkl log q]Yjk& Kgdn]f[q AA oadd Y\\ lg l`] `a_` d]n]d g^ \YlY j]imaj]e]flk l`Yl Ykk]l eYfY_]jk Ydj]Y\q ^Y[] ^jge Y eqjaY\ g^ j]_mdYlagfk Yf\ d]_akdYlagf&

Af j]dYlagf lg \YlY kgdmlagfk lg kmhhgjl Kgdn]f[q AA j]imaj]e]flk$ \g qgm hdYf lg7

25

Number of respondents

20

15

10

0 Buy and implement a vendor data solution Deliver an in-house build Enhance existing data infrastructure Extend coverage through third party arrangement such as existing administrator Other

How asset managers are preparing for Solvency II | Kgdn]f[q AA ^gj Ykk]l eYfY_]e]fl kmjn]q f\af_k *()*

)/

Adapting to Solvency II

L`]j] Yj] nYjagmk e]l`g\k g^ hjgna\af_ imYdalq YkkmjYf[] gn]j Kgdn]f[q AA \YlY$ af[dm\af_ af\]h]f\]fl j]na]ok$ afl]jfYd \Yk`ZgYj\k Yf\ K]jna[] Gj_YfarYlagf ;gfljgdk J]hgjl * KG; *!&

The insurer is responsible for having some sort of data control mechanism, as they cannot delegate the responsibility for the quality of the data. The SOC 2 does hjgna\] kge] [ge^gjl af l`Yl al [gfjek Y level of quality within the data. Our survey found that 24% of respondents are planning to provide a SOC 2 assurance, while 31% are considering an independent review. Both of these responses involve a form of independent review via an external party, a situation that will be welcomed by insurers.

Intriguingly, however, a third said they are not considering the provision of any assurance. Consequently, this third saying none may indicate that they have not yet planned to provide assurance or that Yfgl`]j je ak hjgna\af_ l`Yl k]jna[]&

9j] qgm [gfka\]jaf_ Yfq g^ l`] ^gddgoaf_ lg hjgna\] YkkmjYf[] gn]j qgmj Kgdn]f[q AA \YlY7

31% 33% Independent review Creation of internal dashboard Service organization controls report 2 (SOC under SSAE16 or ISAE3402) Other 8% 24% None

4%

)0

How asset managers are preparing for Solvency II | Kgdn]f[q AA ^gj Ykk]l eYfY_]e]fl kmjn]q f\af_k *()*

@Yn] Ykk]l eYfY_]e]fl jek across Europe adapted their processes to Solvency II, allocating budget, recruiting staff and setting targets for fees?
L`] f\af_k eYq af\a[Yl] Y dY[c g^ [gf\]f[] af l`] Yegmfl g^ egf]q currently being spent on Solvency II or kaehdq l`Yl Y kh][a[ Kgdn]f[q AA Zm\_]l has not been allocated to some asset managers. Fifty-one percent of the respondents were unwilling or unable to say what their budget was for Solvency IIrelated activities.

Eleven percent said there is no separate budget allocated. This may be due to a number of factors, such as the lack of clarity around the regulations, an unclear timeline or perception that Solvency II is not an asset management issue. 9 ^l` g^ j]khgf\]flk `Yn] Y k]hYjYl] spend, though the majority of these have Y Zm\_]l Z]dgo MK)e&

O] Yj] ogjja]\ YZgml kh]f\af_ lgg em[` gf Kgdn]f[q AA a^ l`]j] ak kg em[` [`Yf_] Yf\ mf[]jlYaflq ^jge l`] j]_mdYlgjk&

O`Yl ak qgmj Zm\_]l ^gj Kgdn]f[q AA%j]dYl]\ Y[lanala]k7

10%

13% 0500,000

7%

4% 4%

501,0001m >1m Not available/dont know No separate budget Not yet decided Other

11%

51%

How asset managers are preparing for Solvency II | Kgdn]f[q AA ^gj Ykk]l eYfY_]e]fl kmjn]q f\af_k *()*

)1

Adapting to Solvency II

L`] j]khgfk]k lg l`] im]klagf j]_Yj\af_ Kgdn]f[q AA kh]f\ o]j] ]fda_`l]faf_ Yk Y j]kmdl g^ l`]aj YeZa_malq&

How much have asset management jek kh]fl gf Kgdn]f[q AA kg ^Yj7

There appeared to be very little awareness of the budget utilized to the end of last year, and the responses indicated that the time utilized by internal resources was considered an overhead and was, therefore, not measured. This would suggest that the values presented by some respondents would Z] af Y\\alagf lg Yfq klY^f_ [gklk& L`]j]^gj]$ l`] Y[lmYd [gkl ak ka_fa[Yfldq higher than indicated. The implication is that asset managers are drawing in staff from existing programs to support Solvency II. This means the asset eYfY_]e]fl jek Yj] hdY[af_ egj] pressure on those individuals and thus

more strain on other resources. Asset managers need to understand the hidden cost to these programs. The recruitment of staff to assist in the implementation of a Solvency II program might be seen as a tangible indicator of commitment toward compliance within the asset management community, and 27% of respondents have recruited in this way. One might assume this refers only to Solvency II team members, but kge] jek `Yn] j][jmal]\ klY^^ aflg Yj]Yk km[` Yk hjg\m[l gj eYjc]laf_& L`ak _mj] (12) is far lower than the number of jek `Ynaf_ Y Kgdn]f[q AA hjg_jYe mf\]j way (28) or a strategy in place (29). L`] f\af_ af\a[Yl]k l`Yl Y\\alagfYd staff recruitment is not seen as part of a strategic commitment toward Solvency II.

@Yn] qgm j][jmal]\$ gj Yj] qgm hdYffaf_ lg j][jmal$ Y\\alagfYd klY^^ lg kmhhgjl Kgdn]f[q AA7

27%

Yes No

73%

*(

How asset managers are preparing for Solvency II | Kgdn]f[q AA ^gj Ykk]l eYfY_]e]fl kmjn]q f\af_k *()*

How is the asset management community responding to the changes in operating costs as a consequence of Solvency II?
Solvency II poses a question for asset managers in terms of how to pass on the additional costs resulting from compliance facilitation. There are opportunities for fee generation that will affect the operating model of asset managers, but the basic question regarding the recouping of additional Solvency II expenditure is the jkl akkm] lg Z] Y\\j]kk]\& Only a third of respondents are still undecided about items they are considering charging to insurers, which is in line with the fact that a third do

fgl `Yn] Y [d]Yjdq \]f]\ Kgdn]f[q AA strategy in place. L`] af[j]Yk] af \YlY oadd Z] ka_fa[Yfl& Insurers may not be anticipating these heavy data expenses to be charged on, yet a third of respondents intend to levy a fee for the provision of additional data. A quarter will pass on the cost for portfolio modeling and optimization, and we expect that percentage to grow in the coming months. It is perhaps surprising that more than a quarter of respondents are not considering charging on Solvency II expenses to their insurance client ZYk]k$ \]khal] l`] hgl]flaYddq ka_fa[Yfl costs involved.

9j] qgm [gfka\]jaf_ [`Yj_af_ afkmj]jk ^gj Yfq g^ l`] ^gddgoaf_ al]ek7
18 16 Number of respondents 14 12 10 8 6 4 2 0
kh ][ a [h jg \m [l Po k rt fo lio m od el Po in g rt fo lio op tim iza tio n Re po rt in g se rv ice s re po rt in g No tc on sid er in g Ot he r

Ad di tio na l/d at a

K*

How asset managers are preparing for Solvency II | Kgdn]f[q AA ^gj Ykk]l eYfY_]e]fl kmjn]q f\af_k *()*

*)

Adapting to Solvency II

Al Yhh]Yjk l`Yl l`] j]khgf\]flk Yj] fgl Y[lmYddq lYcaf_ Y kljYl]_a[ h]jkh][lan] gf Kgdn]f[q AA& 9dl`gm_` egj] l`Yf `Yd^ kYa\ l`]q Yj] Z]af_ hjgY[lan] Yf\ log%l`aj\k `Yn] Y kljYl]_q af hdY[]$ o`]f ^Y[]\ oal` l`] \a^[mdl j]n]fm] im]klagfk$ l`] YhhjgY[` g^ l`] Ykk]l eYfY_]e]fl jek ak egj] j]Y[lan] l`Yf hjgY[lan]& L`] YhhjgY[` ak fgl kljYl]_a[ ^g[mk]\ gf j]n]fm]k! Zml jYl`]j gh]jYlagfYd ^g[mk]\ gf [gehdaYf[]!&

Is the attitude to Solvency II really board level and proactive, or is it more operational and reactive?
Only 5% of respondents have a set target in mind for additional fees that could be generated as a result of Solvency II. Gf[] Y_Yaf$ Ykkmeaf_ l`Yl l`] je `Yk Y [d]Yjdq \]f]\ Kgdn]f[q AA kljYl]_q af place, one would expect that strategy to specify the level of additional revenue to Z] _]f]jYl]\& Q]l gfdq log g^ l`] jek with a strategy have a set target for additional fees.

As clarity improves, we expect more jek lg dggc Yl l`] ghhgjlmfala]k l`Yl Solvency II brings. Although only 5% of respondents are actively setting additional ^]] lYj_]lk$ kge] jek Yj] j][g_faraf_ the revenue opportunities.

<g qgm `Yn] Y k]l lYj_]l ^gj Y\\alagfYd ^]]k _]f]jYl]\7

5% 4%

Yes No Other or N/A

91%

**

How asset managers are preparing for Solvency II | Kgdn]f[q AA ^gj Ykk]l eYfY_]e]fl kmjn]q f\af_k *()*

What form will the charging on of Solvency II expenses take?

The method adopted by asset managers for charging on additional products and services is a key decision given the potential costs that Solvency II may incur for asset managers. Sixteen percent will levy a one-off charge for these additional services and a similar proportion have agreed to increase fund or management charges. We would have expected there to be far more clarity in the plans for fund charges. It leaves the bulk of responses in the other category, some examples of which are reproduced here. These illustrate the varied approaches to charging adopted by asset managers.

<g qgm `Yn] Yf Y_j]]\%mhgf YhhjgY[` Yk lg `go qgm oadd [`Yj_] afkmjYf[] [da]flk ^gj l`]k] Y\\alagfYd hjg\m[lk'k]jna[]k7

16%

Increase in fund/ management charges 16% One off charge Other

68%

The design of SCR modeling solutions to support Solvency II requirements is a major undertaking, so what are asset managers plans? Our survey found that a third of respondents are planning to create an in-house SCR model. This is effectively replicating components of the model that the insurers use, so the asset managers are moving up the value chain in terms of what they can deliver to their insurer clients. Such a move will bring the asset manager operationally closer to the insurer with the result that the asset manager will have a better understanding of the insurers challenges. 9 l`aj\ g^ j]khgf\]flk )/ jek! Yj] not planning to undertake any activity in terms of modeling solutions.

Af j]dYlagf lg eg\]daf_ kgdmlagfk lg kmhhgjl Kgdn]f[q AA j]imaj]e]flk$ \g qgm hdYf lg7

18 16 Number of respondents 14 12 10 8 6 4 2 0 Create an in house SCR model build ;j]Yl] kh][a[ models to create data for internal model treatment Intend to arrange for these models to be externally validated n/a

How asset managers are preparing for Solvency II | Kgdn]f[q AA ^gj Ykk]l eYfY_]e]fl kmjn]q f\af_k *()*

*+

Adapting to Solvency II

Af\mkljq ]ph][lYlagf ak l`Yl afkmj]jk oadd j]\m[] l`] jakc g^ l`]aj Ykk]l allocations as a result of Kgdn]f[q AA&

Actuarial models are moving forward in a particular way with respect to Solvency II. The standard model was originally seen as a simple model for small and medium insurers. Larger insurers, with more developed actuarial models, larger scale and more resources, were expected to develop a more sophisticated response, known as the internal model.

The survey found that the insurance clients of 36% of respondents are running an internal model. These are ka_fa[Yfldq egj] [gehd]p Yf\ ]flYad Y greater requirement on the amount and granularity of data.

9j] qgmj afkmjYf[] [da]flk eYafdq jmffaf_7

7%

13% Standard model 44% Internal model/ partial internal model Dont know Mix of internal and standard models

36%

*,

How asset managers are preparing for Solvency II | Kgdn]f[q AA ^gj Ykk]l eYfY_]e]fl kmjn]q f\af_k *()*

There has been a lot of discussion in the market as to when, and if, insurers will move into different asset classes as a result of Solvency II. Some commentators have suggested that insurers tend to move asset type after a major event, but it is interesting to note that 64% of asset managers are already witnessing shifts in demands for different asset classes. It is perhaps unexpected that this change in demand has arrived so early. The remaining 36% suggests there eYq Z] Y ka_fa[Yfl dYl] hmk` Yegf_ insurance clients to alter their asset mixes. For asset managers that have had minimal engagement from their insurance clients, such a late push may prove very demanding.

9j] qgm k]]af_ Y [`Yf_] af \]eYf\ ^gj \a^^]j]fl Ykk]l lqh]k ^jge afkmjYf[] [da]flk7

36% Yes No 64%

Industry expectation is that insurers will reduce the risk of their asset allocations as a result of Solvency II, with a gradual shift away from equities and toward safe havens such as investment-grade bonds. Insurers will need to maximize riskadjusted returns and optimize their use of capital. This may involve minimizing interest rate and FX mismatch and reducing holdings of equities, long-term corporate debt and structured credit while boosting exposure to short-dated corporate bonds and longer-dated sovereign debt. Our survey, however, found that the only asset types that are experiencing increased demand among insurers are bonds and derivatives.

@go \g qgm k]] \]eYf\ ^gj l`] ^gddgoaf_ Ykk]l lqh]k [`Yf_af_ mf\]j Kgdn]f[q AA7
30 Number of respondents 25 20 15 10 5 0
Less More Same

Eq ui tie s Pr op er ty

Bo nd s

Co lle ct iv e

in ET ve Fs st m en ts ch em es He dg e St fu ru nd ct s ur ed pr od uc ts

De riv at iv es Pr iv at e eq ui ty Co m m od iti es

How asset managers are preparing for Solvency II | Kgdn]f[q AA ^gj Ykk]l eYfY_]e]fl kmjn]q f\af_k *()*

*-

Adapting to Solvency II

Fund structuring will be a key consideration for asset managers as a result of Solvency II, and our survey sought to reveal the intentions for product development, SCR and other impacts on the operating model of the asset manager. Gmj f\af_k [gf[]jfaf_ l`] ]ph][l]\ impact on fund structuring and actions planned or taken to date generated a varied response, but the launch g^ Kgdn]f[q AA%kh][a[ hjg\m[lk$ l`] provision of look-through on positions and the inclusion of SCR in modeling were the main themes to emerge.

Solvency II and the ongoing debate regarding the matching adjustment will force insurers to adapt their approach to Asset Liability Management (ALM). This, in turn, may prompt many to review the mandates that they have awarded to asset managers and to put existing and new relationships under closer scrutiny. Therefore, asset liability management may have an important role to play in terms of client retention. Thirty-six percent of respondents already assist insurers with ALM, and 11% plan to provide this service.

This still leaves more than half of respondents without a current ALM service or intention to provide such YkkaklYf[]& O] ogmd\ ]ph][l l`ak _mj] to fall as we approach the January 2014 deadline, or asset managers will potentially risk losing insurance clients. When those who currently or intend to supply ALM assistance to insurers were questioned about their detailed plans for ALM data, there was a fairly positive response. The majority of respondents aim to provide at least one of the two options: to provide asset data or take in liability data. There was a slight bias in favor of supplying asset data only.

<g qgm Ydj]Y\q Ykkakl afkmj]jk oal` 9DE7

11%

36% Yes No Intend to

53%

*.

How asset managers are preparing for Solvency II | Kgdn]f[q AA ^gj Ykk]l eYfY_]e]fl kmjn]q f\af_k *()*

Progress to date

How active has the asset management community been in terms of its preparation for implementing Solvency II?
This section addresses program implementation with a detailed breakdown g^ kh][a[ lYkck oal`af Y[lan] hjg_jYek& Al also provides a benchmark as to the level of engagement asset managers currently display and highlights areas where there is still room for improvement. Sixty-four percent of respondents have a Solvency II program under way, in most cases with budget being allocated. L`ak [gjj]dYl]k oal` l`] ]Yjda]j f\af_k

surrounding strategy development, o`]j] log%l`aj\k `Yn] Y [d]Yjdq \]f]\ Solvency II strategy. On the other hand, 18% of respondents do not have a program under way and \g fgl afl]f\ lg \]hdgq gf]& L`ak f\af_ seems to challenge the response to the question concerning the asset managers approach to Solvency II, where only one je kYa\ l`Yl l`]q `Y\ fgl ]f_Y_]\ gf Solvency II. Without a program under way (or even an intention to deploy a hjg_jYe!$ al ak \a^[mdl lg na]o l`ak _jgmh of asset managers as being anything other than disengaged.

L`] ljm] ha[lmj] ]e]j_af_ ak gf] o`]j] Y ka_fa[Yfl fmeZ]j of asset managers \]k[jaZ] l`]ek]dn]k Yk Z]af_ ]f_Y_]\ gf Solvency II yet may not `Yn] l`] ^mf\Ye]flYd [gehgf]flk af hdY[]&

<g qgm `Yn] Y Kgdn]f[q AA hjg_jYe mf\]j oYq7

18%

Yes No 18% 64% Planning to

How asset managers are preparing for Solvency II | Kgdn]f[q AA ^gj Ykk]l eYfY_]e]fl kmjn]q f\af_k *()*

*/

Progress to date

Kgdn]f[q AA akkm]k Yj] \]Ydl oal` gf Y [Yk]%Zq%[Yk] ZYkak&

Our survey revealed that the main reason for respondents not having a Solvency II program under way is a lack of client requests. This highlights the need for insurers to engage more with their asset managers and is perhaps surprising, given that Solvency II is a regulation with which all European-based insurers must comply.

The additional comments made by respondents to this question indicated that a full Solvency II program was deemed unnecessary by some asset eYfY_]e]fl jek$ af[dm\af_2 Our system is ready to meet clients Solvency II reporting needs, but the number of clients is limited. Solvency II issues are dealt with on a case-by-case basis.

A^ qgm \g fgl `Yn] Y Kgdn]f[q AA hjg_jYe mf\]joYq$ hd]Yk] k]d][l l`] j]Ykgfk o`q7
6 5 Number of respondents 4 3 2 1 0
bu dg et av ai la bl e No cli en td em an d un Lim de it ed rt ak a e pp pr et gr ite am t No m o e ta rg et cli en ts eg Ex m ist en in t g sy st em mf sc \] ap jl T Yc hi ab af rd le _ p og ar ty jc gf adm j in e ist k ra Z] to `Y r d^ Ot he r

*0

No

How asset managers are preparing for Solvency II | Kgdn]f[q AA ^gj Ykk]l eYfY_]e]fl kmjn]q f\af_k *()*

The survey now delves deeper into the group of respondents who either have a Solvency II program under way or are planning to deploy one. If we study the absolute numbers, it is fglYZd] l`Yl o`ad] *0 jek kYa\ l`]q have Solvency II programs under way, 1 je af\a[Yl]\ l`Yl al oadd fgl Z] hjgna\af_ additional data to their insurance clients. Given the intrinsic necessity for additional data in order to support Solvency II requirements, this brings into question l`] Kgdn]f[q AA hjg_jYe af l`ak je Yf\ eYq km__]kl l`Yl l`] je `Yk lYc]f Y purely alpha-generation-based approach and is passing on any data requirements to a third-party.

One might expect that the number of respondents citing the development of hjg\m[lk lg Z] `a_`]j l`Yf *+ jek$ given the limited revenue opportunities available in the current climate. This klYlakla[ e]Yfk l`Yl l`]j] Yj] )+ jek that are not planning on developing Solvency II-optimized products. Although four of these respondents are among the *( jek ^gj o`a[` l`]aj afkmjYf[] [da]fl ZYk] [gfljaZml]k d]kk l`Yf MK)(Z 9ME$ l`] f\af_ f]n]jl`]d]kk af\a[Yl]k l`Yl asset managers are still predominantly viewing Solvency II from a compliance perspective as opposed to a potential revenue opportunity.

A^ qgm Yfko]j]\ q]k gj hdYffaf_ lg af j]_Yj\ lg `Ynaf_ Y Kgdn]f[q AA hjg_jYe mf\]j oYq$ \g qgm afl]f\ lg h]j^gje Yfq g^ l`] ^gddgoaf_ Y[lanala]k af j]dYlagf lg Kgdn]f[q AA7
30 Number of respondents 25 20 15 10 5 0
of da add Pr ov ta itio isi P fo na on rS l as rov su isi 2 of re on po d pu da of q Re la ta ua te qu fo lit d ire rS y re m Un po 2 en d rt s( ts ert Pr QR (S ak ov CR in Ts is )a gS ) ca ion ss olv et e in lcul of d nc su at a ca y e t lcu C Un rer SC a to la ap to R e de tio ita ca in na rt ns l te clu bl ak go d e t in g ris ing he m e as in od th s su el e ist re in as in r g se g to ac t d th tiv at e iti Po <] a es rt n] fo fo dg lio ri he ns op ]f ur tim lg er iza ^k s h] tio [a n ac [ tiv K* iti ^j es a] f\ dq h jg \m [l k Ot he r

Pr ov isi on

How asset managers are preparing for Solvency II | Kgdn]f[q AA ^gj Ykk]l eYfY_]e]fl kmjn]q f\af_k *()*

*1

Progress to date

Gmj kmjn]q af\a[Yl]k l`Yl l`] eYbgjalq g^ Ykk]l managers are still in l`] ]Yjdq klY_]k g^ l`]aj preparation in a number g^ Yj]Yk&

@go [gf\]fl Yj] Ykk]l eYfY_]jk feeling about their level of preparation for Solvency II?
In terms of engagement with insurance clients, the response is predominantly eg\]jYl]& L`ak j]kmdl [gfa[lk oal` l`] f\af_k [gf[]jfaf_ l`] YhhjgY[` g^ l`] asset manager to Solvency II, where more than half of respondents described their approach as being pro-active. If we consider all the tasks being assessed, the overall evaluation is low to moderate in nature, with only the a\]fla[Ylagf g^ \YlY j]imaj]e]flk Z]af_ rated as high. It is a predominantly

negative picture that emerges, with few respondents feeling bullish about their level of preparation. Asset managers need to accelerate the progress of their programs as we move into 2013. Our survey indicates that the majority of asset managers are still in the early stages of their preparation in a number of areas. This may not be surprising, though, given the lack of clarity within the regulations, but the industry must do something to prepare itself. We have seen a number of industry working groups set up to address potential challenges, which is a positive step forward.

Oal`af qgmj [mjj]fl Kgdn]f[q AA Y[lanala]k$ o`a[` g^ l`] ^gddgoaf_ lYkck `Yn] qgm [gn]j]\$ Yf\ o`Yl klYlmk Yj] l`]q Yl7
Very little Little Moderate Nearly complete Complete

16 14 12 10 8 6 4 2 0

+(

En Re i ga vi nsu ge ew ra m A\ of nce ent ]f w in la su clie ith [Y n re lag r m ts f an g^ da \Y te lY s j] im aj] e ]f Da Da lk ta ta ga go p ve an rn al an ys <Y ce is lY ga im p Yd an alq al hj ys g is daf _' Yf Yd Sy Da qk st ak ta em re sr m ed ea ia di tio ne An ss n al as ys se is ss of m no en n t re fu qu n F] ire cti o m ona en l hj g\ ts m[ lk 'k ]j na [] k
How asset managers are preparing for Solvency II | Kgdn]f[q AA ^gj Ykk]l eYfY_]e]fl kmjn]q f\af_k *()*

Achievable before 2014

Can the asset management industry be in a position to support insurance jek Zq l`] lae] Kgdn]f[q AA ak implemented in January 2014?
Many are anticipating completion by Q2 2013. Although acceptable from the insurers perspective, we would suggest l`Yl l`]k] jek k`gmd\ Z] Yaeaf_ ^gj l`] end of Q1. We know from experience that large change programs generally take dgf_]j l`Yf ]ph][l]\$ Yf\ a^ l`] je ak aiming for Q2 2013, there is potential that completion will drift into Q3.

Gfdq k]n]f jek Yj] Yfla[ahYlaf_ completion after 1 January 2014. If we probe deeper into this group, the criteria that respondents expect to remain outstanding are surprising. As we noted previously, data and reporting are generally perceived by insurers as being relatively base-line requirements. Therefore, we would have anticipated l`]k] log lYkck lg Z] Yegf_ l`] jkl to complete.

L`] ha[lmj] ]e]j_af_ is a relatively positive k[]fYjag2 Y imYjl]j g^ j]khgf\]flk oadd [gehd]l] l`]aj hjg_jYe Z]^gj] BYfmYjq *()+$ Yf\ l`j]]% imYjl]jk oadd [gehd]l] Zq l`] ]f\ g^ *()+&

A^ mf\]jlYcaf_ Y Kgdn]f[q AA hjg_jYe$ o`]f \g qgm ]ph][l qgmj hjg_jYe lg [gehd]l]7

12 Number of respondents 10 8 6 4 2 0

How asset managers are preparing for Solvency II | Kgdn]f[q AA ^gj Ykk]l eYfY_]e]fl kmjn]q f\af_k *()*

20 Ju 13 ly S ep te m be Oc r2 to 01 be 3 r De ce m be r2 01 3 Po st 1 Ja n 20 14 Do nt kn ow or N/ A

Ja n M ar ch

Ja n

20 13

Ap ril J un e

Pr e

20 13

+)

Survey approach

=a_`lq h]j[]fl g^ j]khgf\]flk hjgna\] k]jna[]k ^gj )%-( afkmj]jk& Gf] ak af l`] -)%)(( jYf_]$ Yf\ k]n]jYd Yj] Yl l`] `a_`]j jYf_]k& L`] `a_`]kl fmeZ]j g^ [da]flk ak egj] l`Yf +-( afkmj]jk$ o`a[` Yhhda]\ lg gf] Ykk]l eYfY_]j&

E]l`g\gdg_q
The research methodology was a series of face-to-face and telephone interviews with staff of 44 global, domestic, alternative or other European asset managers. These interviews were conducted in the spring of 2012. The questions were mainly quantitative in nature, with a limited number of semi-structured questions.

Hjgd] g^ j]khgf\]flk
Global asset manager Domestic asset manager Alternative asset manager Other 23 11 8 2

@go eYfq afkmj]jk \g qgm [mjj]fldq hjgna\] k]jna[]k ^gj7

0% 0% 2% 4% 4% 2% 2% 2% 4%

In terms of insurance AUM, 45% of j]khgf\]flk eYfY_] d]kk l`Yf MK)(Z in insurance money, while the same h]j[]flY_] eYfY_]k egj] l`Yf MK)(Z&

@go em[` g^ qgmj afkmjYf[] egf]q \g qgm eYfY_] af l]jek g^ 9ME7

10%

45%

80%
45%
0 150 51100 101150 151200 201250 251300 301350 350+ Not provided

<US$ 10bn

>US$ 10bn

Not available

+*

How asset managers are preparing for Solvency II | Kgdn]f[q AA ^gj Ykk]l eYfY_]e]fl kmjn]q f\af_k *()*

Number of respondents

The insurance client base of the respondents is predominantly life and non-life, with almost half managing money for mutuals and health insurers.

>gj o`a[` lqh] g^ afkmj]jk \g qgm lqha[Yddq eYfY_] egf]q7

40 35 30 25 20 15 10 5 0 Life Non-life Mutuals Health Funeral Other

Number of respondents

Almost two-thirds of respondents do not manage money that belongs to a hYj]fl je$ Zml Ydegkl Y ^l` `Yn] a captive business that accounts for more than 70% of their insurance assets under management.

A^ qgm `Yn] Y [Yhlan] afkmjYf[] Zmkaf]kk$ o`Yl h]j[]flY_] g^ qgmj gn]jYdd afkmjYf[] 9ME \g]k l`ak j]hj]k]fl7
30 25 20 15 10 5 0 <10% 10%-30% 30%-50% 50%-70% >70% N/A

How asset managers are preparing for Solvency II | Kgdn]f[q AA ^gj Ykk]l eYfY_]e]fl kmjn]q f\af_k *()*

33

Appendix

Glossary of acronyms

ALM AUM EIOPA EU FATCA SCR SOC 2 T+3 UCITS

Asset Liability Management Assets Under Management European Insurance and Occupational Pensions Authority European Union Foreign Account Tax Compliance Act Solvency Capital Requirement Service Organization Controls Report 2 Three days post-trade Undertakings for Collective Investment in Transferable Securities

How asset managers are preparing for Solvency II | Kgdn]f[q AA ^gj Ykk]l eYfY_]e]fl kmjn]q f\af_k *()*

+-

;gflY[lk
For further information, please contact:
Kieran Murray EMEIA Asset Management Solvency II Leader +44 20 7951 5888 kmurray@uk.ey.com Jgq Klg[c]dd =E=A9 Yf\ 9kaY HY[a[ Asset Management Leader +44 20 7951 5147 rstockell@uk.ey.com

Or, contact a representative near you:

Kris Volkaerts Partner, Belgium +32 (0)2 774 9670 kris.volkaerts@be.ey.com James Maher Senior Manager, Ireland +35 31 221 2117 james.maher@ie.ey.com

Christelle Pariat Senior Manager, France +33 14 693 8239 christelle.pariat@fr.ey.com

EYmjarag ?ja_gdg Partner, Italy +39 02 7221 2412 maurizio.grigolo@it.ey.com

FY\]j JYrgmc Senior Manager, Germany +49 89 143 312 7511 nader.razouk@de.ey.com

Laurent Denayer Partner, Luxembourg +35 24 2124 8340 laurent.denayer@lu.ey.com

HYmd \] :]mk Partner, Netherlands +31 88 407 1829 paul.de.beus@nl.ey.com

?addaYf Dg^lk Partner, UK +44 20 7951 5131 glofts@uk.ey.com

Henrik Axelsen Partner, Nordics +45 5158 2663 henrik.axelsen@dk.ey.com

?mq EYmd] Director, UK +44 20 7951 0437 gmaule@uk.ey.com

Phil Vermeulen Partner, Switzerland +41 58 286 3297 phil.vermeulen@ch.ey.com

Amarjit Singh Partner, UK +44 20 7951 4419 asingh@uk.ey.com

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