Buy-side Awards 2016
Europe's Solvency II directive does not prohibit outsourcing, but makes clear that handing over tasks to third-party providers does not mean insurers can outsource their risks. The regulation demands insurers know what their service providers are up to, down to the detail of every security they buy in the case of asset managers, and the ongoing status of operations at administration outsourcers. This can present a challenge in terms of systems interfacing, data collection and validation, controls, monitoring and reporting – which is where Financial Risk Solutions (FRS) comes in.
Dublin-based FRS started out in 1999 developing software to support the investment activities of life insurers, including fund administration, investment accounting and unit-linked processing. Its Invest|Pro platform was already widely used by life insurers, outsourcers and asset managers before Solvency II. The directive means insurers are required to report the assets they hold, down to the individual security. This is easier said than done when the company has outsourced its investment to asset managers that might have further invested in collective third-party funds.
"In an environment where an insurer might hold thousands of funds and hundreds of thousands of assets, it becomes necessary to have an automated solution for look-through, with exception reporting that prompts remedial action where their data is missing," says Frank Carr, chief marketing officer at FRS. "Asset identification is only one out of 26 or so items of information needed for each security under Solvency II, so the requirements are detailed and have to be done in short turnaround times."
FRS's Invest|GRC module of Invest|Pro has helped a number of clients, such as Generali PanEurope, Prudential International and St James's Place Wealth Management to comply with look-through requirements. Invest|GRC interfaces to Thomson Reuters, Bloomberg, Morningstar and other look-through data providers and has a centralised data warehouse to aggregate asset positions and other relevant compliance and risk management data. It will also automatically produce Solvency II or company-specified quantitative reporting templates at whatever frequency is required.
The aim is to give insurers visibility through the process that has been outsourced, particularly where decisions are regularly made according to preset rules. Invest|OPS provides oversight of the application of the rules and notification where there have been breaches and the resulting actions
Frank Carr, FRS
One major European insurer started working with FRS on look-through two years ago. "The type of business we have means some lines are served by discretionary asset managers who can invest in line with our rules and choose from a list of 6,000 funds. Look-through means pulling information from multiple sources and making sure it is correct," says a senior finance manager at the company.
Not only does the look-through information meet Solvency II template requirements, but the company also has its own templates that go beyond the directive and include information for internal governance and actuarial modelling. "The format of the files is very complicated, with 200 validation points. We needed a powerful solution with smart logic to look for gaps in the data and to produce exception reports. FRS was able to provide this for us," says the manager.
Asset management is just one area that insurers outsource. Regulators had noticed insurers often cut whole teams when choosing to outsource, leaving them ill-equipped to monitor service providers. Solvency II addresses this by insisting on greater oversight and control of the outsourcing process. FRS was already on the case through its work with insurers such as Aegon, MetLife and Zurich, and service providers such as Capita Life & Pensions, Accenture Managed Services and Charles Taylor Insurance Services. "This enabled us to see the issues from both sides," says Carr.
The result was FRS's outsourcing partner supervision product, Invest|OPS, a module that automates the validation of operational activity performed by outsourcing partners, enabling firms to supervise outsourced functions and providing them with the data to manage the associated risks. It comes with 400 preprogrammed rules to which clients may add their own.
"The aim is to give insurers visibility through the process that has been outsourced, particularly where decisions are regularly made according to preset rules. Invest|OPS provides oversight of the application of the rules and notification where there have been breaches and the resulting actions," says Carr.
The module is used not only by insurance firms, but also by some of the outsourcing providers themselves – "to enhance their relationships with their clients", says Carr. He also reports there is significant interest in the product in Asia, particularly Hong Kong, where there is an established culture of outsourcing that regulators are scrutinising more closely.
FRS now has over 35 life insurance company clients, of which half a dozen are specialist outsourcers. Invest|GRC and Invest|OPS are just two of the 18 modules of its Invest|Pro platform, which can be installed on premises or delivered via Microsoft's Azure cloud platform – one of the first financial services applications to be available in the cloud.