Tripartite template: how data can help reduce capital consumption under Solvency II

In this episode, we want to explore with you the hidden power of TPT data.

Solvency II and the tripartite template

Frank Roden: Welcome. You are listening to BNP Paribas “Thinking Aloud” podcast series. I am Frank Roden, Head of Asset Owners and Asset Managers EMEA at BNP Paribas Securities Services, and with me is my colleague Sami Meftah, Regulatory Product Manager at BNP Paribas Securities Services.

In this episode, we want to explore with you the hidden power of TPT data. But first, let’s say a few words on Solvency II.

What is Solvency II?

Frank Roden: Solvency II is a European regulation designed to establish risk and governance requirements for EU-based insurance groups. These insurance groups have to maintain defined levels of capital to cover their risk exposures and liabilities as per Solvency II requirements.

In assessing these exposures, insurance groups need to consider the risks associated with the assets in all their investment portfolios. And here lies one of the many challenges for insurance groups since those portfolios can be managed by multiple managers or held through different fund structures.

What is the Solvency II tripartite template?

Frank Roden: Getting an aggregated view of the assets and associated exposures means consolidating portfolio data from a wide array of sources. This is where the tripartite template, or TPT, comes into play. In order to facilitate this consolidation of data, the TPT is the agreed template that was set up by the industry.

The latest version of the Solvency II tripartite template was introduced in December 2021. Insurance groups can use the TPT data that is collected to reduce their capital consumption, but it seems that only few leverage the full potential of this data. Let’s explore now these themes with Sami.

Solvency II tripartite template – TPT V6.0 and collateralised bonds

Frank Roden: Before we talk about what we have learned from the data, Sami, can you say a word about what is new in this TPT V6.0?

Sami Meftah: The main objective of the Solvency II tripartite template is to provide a standard exchange model between asset managers and EU insurance companies across Europe. The TPT is managed by an entity at European level. Called FinDatEx, this European entity provides regular evolutions to account for market evolutions and needs as well as regulatory developments. In December 2021, FinDatEx issued a new version of the Solvency II tripartite template – TPT V6.0 – that will be applied as of July 2022.

With TPT V6.0, the focus is on collateralised bonds. The European regulator considers that collateralised bonds are less risky than their equivalent without collateral with respect to capital consumption. Capital consumption could benefit from a 50% decrease but we have to see that the market is still lacking data regarding collateralised bonds.

Thanks to this new version of the Solvency II tripartite template, insurance companies and asset managers will have all the tools to monitor in a simple way and accurately this decrease of capital consumption for collateralised bonds.

TPT: an evolving Solvency II template

Frank Roden: You used the example of collateralised bonds but I am really interested in exploring this point about capital consumption a bit more: what is it that can we see in the TPT data that might highlight some trends or raise some points of attention?

Sami Meftah: The Solvency II tripartite template has been evolving since the beginning. The TPT is following the regulatory evolutions that can bring about some opportunities of investment with less capital consumption.

For example, in 2018, FinDatEx issued a version 4 of the TPT that was more focused on a new category of asset: infrastructure investments.

The regulator wanted to promote investment in infrastructures across Europe. For example, investment in highway infrastructure or hospital, essentially public utilities infrastructures.

The TPT version 4 included a granular update that took into account two categories of bonds and two categories of equities that benefit from capital reduction.

The objective was to provide insurance companies and asset managers with this tool to help them define accurately the capital consumption for this type of assets. Concretely, it proposed a decrease of 30% in average for eligible bonds and a 25% decrease for eligible equities.

TPT data and private capital investment

Frank Roden: Sami, we can see insurance companies allocating more assets to alternative or longer term strategies and that, in turn, can increase their capital consumption and thus reduce their solvency ratio. This can lead them to look at increasing their own capital or otherwise reduce liabilities, but do you see that they could use this TPT data to potentially and directly reduce their capital consumption?

Sami Meftah: Private equity investment is more and more important for investors who are looking for alternative sources of revenues in addition to investing in the real economy.

Solvency II requirements were often criticised by some market actors because they consider that they represent too hard a constraint on private capital. In the first version of Solvency II issued in 2016, private equity investment was considered as very risky asset, and, as a consequence, it was charged in average by 49% capital consumption.

In 2019, the regulator proposed amendments to some Solvency II requirements in order to ease investment in private equities. Depending on given criteria, private equity investment could go from 49% capital consumption to only 39%, so the same amount of capital consumption as large listed equities.

The regulator imposed as well different conditions to be eligible for this type of capital consumption decrease. For instance, private companies have to have their head office in Europe and have to hire more than 50 % of their staff across the Union.

Nevertheless, this gain in capital consumption was still theoretical. In actuality, it was quite difficult for asset managers and insurance companies to concretely benefit from this decrease of capital.

Therefore, in 2020, FinDatEx issued a version 5 of its Solvency II tripartite template in order to propose a simple approach to benefit from this capital reduction.

Solvency II and TPT: how BNP Paribas Securities Services can help

Frank Roden: So, let’s do a quick recap. We have seen that insurance groups are diversifying their investment portfolios, and that this portfolio data is aggregated using the Solvency II tripartite template. The most recent version of this template is now including very useful data allowing insurers to optimise their capital consumption by asset class and we can see from the data that insurers could actually be making more use of this than they do today.

Sami, how can we help at BNP Paribas Securities Services?

Sami Meftah: First of all, we have the experience. Since 2014, we have been supporting more than 40 institutional clients, asset managers and insurance companies across Europe. We are connected to dozens of third party asset managers in order to support our insurance company clients in their look through capabilities.

Moreover we are an active member of the FinDatEx Solvency II working group at European level. As such, we play a crucial role in TPT evolutions.

Finally, we continuously update our calculation tool and data model in order to take into consideration regulatory evolution and TPT developments.

Frank Roden: Sami, thanks so much for sharing your insights on Solvency II and the hidden power of TPT data. This has been a BNP Paribas “Thinking Aloud” podcast. I hope you found it as interesting as I have, and please do have a look at the other similar podcasts available on our website. Thank you for joining us.

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Frank Roden and Sami Meftah