Investments Look-through for Insurance Companies: needs, tools and opportunities

Roberto Nicolini, Senior Sofia Consultant, SimCorp

The term 'look-through' refers to the practice of examining the underlying characteristics of an investment or portfolio of investments, especially in mutual funds. In other words, instead of focusing on the overall value or performance of an investment, one has to look through the container, i.e. the fund, and analyse the content, i.e. the individual investments that make up the portfolio.

Regulatory authorities, such as the Insurance Supervisory Authority (IVASS), the Commission for the Supervision of Pension Funds (COVIP) or the European Insurance and Occupational Pensions Authority (EIOPA), often require insurance companies to adopt a look-through approach in risk management.

This is particularly true in the context of the European Union's Solvency II directive, which sets strict requirements in terms of capital and risk management: the directive explicitly requires insurance companies to adopt a look-through approach when calculating the Solvency Capital Requirement (SCR), and when compiling the Quantitative Reporting Templates (QRT). The look-through approach is also mentioned by the Manual of Statistical and Supervisory Reporting of Pension Funds (COVIP Circular No. 250/2013 and subsequent updates) and, more recently, by the Monitoring of risks arising from ESG factors (IVASS letter to the market 27/07/2022 and subsequent updates). The breakdown of exposures due to fund investments is also of fundamental importance for the correct calculation of Principal Adverse Impacts (PAIs) introduced by the Sustainable Finance Disclosure Regulation (SFDR).

 

Specifically, for the compilation of QRT and COVIP tables, it is possible to import into Sofia the composition by macroclasses on the basis of the detail required by each. In the case of SCR calculation, in addition to the percentage of exposure to each of the Market Risk sub-modules, it is also possible to import the average duration and average Credit Quality Step of a given investment class, or even the unit capital absorption associated with the class. In the area of Sustainability, and in particular the PAI calculation, all the fields necessary to correctly calculate the contribution to a portfolio's result by each fund position on the basis of its overall indicators are available.

Sofia's standard look-through functionality also allows for the calculation of the complete breakdown - i.e. at the level of the individual invested position - of the funds held; its use has as a precondition the initial census and subsequent maintenance of the master records relating to all the investments comprising each fund. Depending on the quantity and type of funds in the portfolio, the adoption of look-through may mean the management of a much higher number of master records, with significant impacts on both back office organisation and the cost of additional master and market data.

A possible alternative solution, in response to these difficulties, comes from the Tripartite Template (TPT), a model developed by a consortium of banks and fund managers, which consists of a standardised format for collecting and sharing data on fund compositions to facilitate look-through analysis.

For this reason, there is a dedicated repository in Sofia that allows the TPT compositions of the funds in Sofia's registry to be imported and saved. In addition to saving compositions, the module offers standard functions that allow aggregated information to be extracted from the TPT data for Solvency II compliance purposes (QRT and SCR). It is also possible to activate a look-through view, which shows together both the positions directly held in a portfolio and the indirect exposures corresponding to the compositions on file.


Despite its advantages, the information contained in the TPT also has some limitations, both because it is focused only on Solvency II issues, and because the various fund houses that adopt the TPT may make available data that are not homogenous and consistent among themselves, and it is therefore not possible to use it as a basis for the construction of complete Sofia databases with the necessary information.

For this reason, Sofia's TPT module saves imported information on fund components in a dedicated repository, segregated from the standard master database; even the look-through view of the portfolio provided by the module is segregated and allows only the fields present in the TPT to be considered.

This breakdown cannot be by individual security, since the components of the TPT do not correspond to real Sofia master data, but will be by clusters created on the basis of

- Issuer (determined on the basis of the LEI code)

- Currency

- CIC Code

It will therefore be possible to have a representation in all standard Sofia environments of the exposure through UCITS with such granularity as to allow risk analyses or impact calculations to be carried out, having all the fields relating to the issuer (such as the NACE code and all sustainability data) and all the analysis tools of the Positions screen.