Articles

What does it cost when an insurer cannot look through a fund?

The capital charge on a fund is decided by what the insurer can see, not by what the fund owns.

Julian R. Sterling · from Insurance Capital for Asset Managers

An insurer that cannot look through a fund to its underlying assets must treat the whole holding as unlisted equity at 49.00 per cent. The private credit fund in this mandate, looked through to its loans, costs 18.90 per cent. The difference is €45.2 million of capital on a €150.0 million allocation, or +30.10 percentage points. The fund is the same fund in both cases. Only the reporting differs: a line-by-line inventory, at every reporting date, in a format the capital function can use.

The rule, and the two numbers it produces

Article 84 of the Delegated Regulation requires that collective investment undertakings be treated by look-through: the capital charge is computed on the underlying assets, as if the insurer held them directly. Where look-through is not possible, the holding is treated as type 2 equity, at 49.00 per cent.

Calder Life, a European life insurer with €12.0 billion of assets, has €600.0 million to place across four candidates of €150.0 million each. One of them is a private credit fund making senior secured loans to mid-market borrowers, BB equivalent, 4.2 years of modified duration. Read through the spread table, that fund is charged 18.90 per cent. Read as an opaque holding, it is charged as unlisted equity.

The same €150.0 million fund, with and without a look-through inventory.

Treatment of the private credit fund	Charge	Capital required
Looked through to its loans (BB, 4.2 years)	18.90 per cent	€28.4 million
Not looked through — type 2 equity	49.00 per cent	€73.5 million
Cost of opacity	+30.10 percentage points	€45.2 million

The fund is identical in both rows. The loans are identical, the borrowers are identical, the manager is identical. Only the reporting differs, and it differs by €45.2 million of the buyer's capital.

The inventory is not worth the same on every fund

Look-through pays only where the underlying asset is cheaper than 49.00 per cent. Priced on the same €150.0 million allocation, across the four candidates in front of the same committee, the lever runs from the largest in the mandate to nothing at all.

What a look-through pack is worth on each candidate, each sized at €150.0 million.

Candidate	Charge, looked through	Charge, opaque	Worth of the pack
Private credit fund	18.90 per cent	49.00 per cent	€45.2 million
Direct real estate fund	25.00 per cent	49.00 per cent	€36.0 million
Listed equity fund	39.00 per cent	49.00 per cent	€15.0 million
Private equity fund	49.00 per cent	49.00 per cent	€0.0 million

A private equity fund looked through to its unlisted portfolio companies is still type 2, because the underlying holdings are themselves unlisted equity. The charge is 49.00 per cent with the inventory and 49.00 per cent without it. Reporting infrastructure built to move that charge cannot move it. The lever on that fund is long-term equity status, worth €40.5 million on the same allocation — and it is granted by the insurer, not earned by transparency.

So the first piece of work is a classification, not a build. Where the underlying is credit, listed equity, property or infrastructure, look-through is the highest-return operational project available to the firm. Where the underlying is unlisted equity, it is not a project at all.

Partial data is priced as partial

No pack is ever complete. Cash in transit, a position acquired since the reporting date, a holding whose valuation is pending — there is always a tail, and the regulation permits the insurer to treat the uncovered portion conservatively, which in practice means type 2. A pack covering 95 per cent of a fund therefore does not deliver 95 per cent of the benefit. It delivers the looked-through charge on 95 per cent and 49.00 per cent on the rest. The insurer computes the blended figure and notices the difference between that and the coverage the manager quoted.

Frequency is priced the same way. Quarterly position-level data is usable; annual data is not, because the insurer reports quarterly and must treat the holding conservatively between updates. The charge then lands materially above 18.90 per cent on data that is otherwise correct. This is the concession managers make without noticing, because annual reporting feels like a reasonable compromise.

Where full look-through is genuinely impossible, the regulation permits grouping by the fund's target asset allocation, provided that allocation is a real mandate constraint and the groupings are applied prudently. That result sits between 18.90 per cent and 49.00 per cent, depending on the residue, and it is where most funds of funds and multi-strategy vehicles land.

Precision inside the pack is worth capital too. The spread charge has two inputs, credit quality and duration, and both move the answer hard. The same fund at A quality and two years of duration is charged 2.80 per cent; at B quality and eight years it is 50.10 per cent. A manager who describes the book as “investment grade to crossover, medium duration” is inviting the insurer to assume the conservative corner of that range, and the insurer will, because it has to defend the number to a supervisor.

What to send, and to whom

Per underlying position the insurer needs the asset class, the market value, the credit quality step or a defensible internal assessment, the modified duration, the currency, and the issuer identity for concentration purposes. It must arrive at each reporting date rather than once at closing, and it must be capable of being audited. A marketing summary is not a substitute for any part of that.

Then route it correctly. The investment team wants the strategy. The capital and actuarial functions want the inventory, and they are the ones who say no. The sequence that works is to send the strategy materials as usual and ask, in the same message, whether there is a capital or actuarial contact who would like the look-through specification and a sample pack. On a €150.0 million allocation that sentence is worth €45.2 million of the buyer's capital — and a manager who never sends it is rarely told that this was the reason.

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