Matrix to Support Solvency II Implementation

With the capital requirement for property set at 25%, INREV’s focus for its Solvency II work has shifted towards supporting the implementation of internal models.

While the date for the implementation of Solvency II continues to be a moving target, preparations by the insurance industry have begun in earnest. INREV is supporting these efforts with the launch of its Internal Model Data Matrix, which is designed to help insurance companies share information about the development of internal models for property allocations.

With the 25% universally seen by the industry as too high, it is an important next step to support the internal models’ approach.

One aspect of Solvency II that is not expected to change in the near term is the 25% standard capital charge that will be applied to investments by insurance companies into real estate. However, the development of an internal model by an insurance company that is approved by regulators can put forward a risk management approach that sets out lower capital requirements. Therefore, with the 25% universally seen by the industry as too high, it is an important next step to support the internal models’ approach.

The Internal Model Data Matrix is designed to help build knowledge of the resources and calculations for these models. Its main aim is to gather information to enable all insurance companies to benefit from the experience gained by their peers on the construction, operation and maintenance of internal models. This is particularly useful for smaller insurance companies who might not have the finances and resources to develop models independently. To support this project, insurance companies will be encouraged to provide information on the characteristics of their internal model and data sources via an online questionnaire.

The Internal Model Data Matrix is designed to help build knowledge of the resources and calculations for these models.

The Matrix will compile the information for comparison purposes and will be available to all participants. This will not require insurance companies to publish figures that reveal their approach. Instead, it will detail the main characteristics of the data and methodology that they have used in the development of their internal models at a country and sector level. These characteristics include data sources, time periods covered and calculation bases. It will also cover information about which stage the internal models are in the process of getting regulatory approval.

The Matrix does not just help with information sharing, it also builds up a knowledge base that can be used on behalf of the industry to demonstrate what the appropriate data to support capital requirements for property are.

This knowledge can help INREV encourage regulators to re-assess the standard capital charge for real estate under Solvency II. It will also give INREV meaningful information-based arguments it can usein future decision-making on the regulation, as well as on the development of the Institutions for Occupational Retirement Provision (IORP) Directive, which will set solvency capital requirements for pension funds.

The decision by regulators to adopt the 25% standard capital requirement was partly the result of the limited amount of data currently available, particularly in Continental Europe. The development of the Matrix can help fill in some of those gaps and build up a more comprehensive picture for regulators of the data that are available.

The Matrix in effect could provide regulators with more information on the property industry and could in the long run help support a lower capital requirement for property that more accurately reflects its real volatility. For now, it is also useful supporting information to help regulators understand data sources and calculations for internal models during the approvals process.

The key for the Matrix to be effective is that the more information that is shared, the more useful the tool will become.

To promote this, the Matrix will be available to members and non-members of INREV.