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🔍 '''Look-through approach''' is a valuation and risk-assessment methodology used in insurance regulation that requires an insurer to identify and evaluate the underlying exposures within collective investment vehicles, [[Definition:Special purpose vehicle (SPV) | special purpose vehicles]], and other pooled structures rather than treating the fund or vehicle as a single, opaque holding. The principle is straightforward: if an insurer owns shares in an equity fund, the [[Definition:Solvency capital requirement (SCR) | capital charge]] should reflect the actual equities, bonds, or derivatives inside that fund, not simply the fund's wrapper. This approach is formally mandated under [[Definition:Solvency II | Solvency II]] and has parallels in other risk-based capital regimes, including Bermuda's [[Definition:Bermuda Monetary Authority (BMA) | BMA]] framework and elements of China's [[Definition:C-ROSS | C-ROSS]].

⚙️ Applying the look-through in practice means an insurer must decompose each indirect holding into its constituent asset classes and run the relevant [[Definition:Stress test | stress scenarios]] — [[Definition:Market risk module | market risk]], [[Definition:Credit risk | credit risk]], [[Definition:Concentration risk | concentration risk]] — at the granular level. Under Solvency II's Delegated Regulation, if the insurer cannot fully identify the underlying assets, it must treat the entire investment under the most punitive [[Definition:Capital charge | capital charge]] applicable to any asset the fund is permitted to hold according to its mandate. This creates a strong incentive for insurers to obtain transparent data from [[Definition:Asset manager | asset managers]] and fund administrators. The operational burden is significant: large insurers with diversified investment portfolios may hold hundreds of funds, each requiring periodic disaggregation and mapping to regulatory risk buckets. [[Definition:Insurtech | Insurtech]] and [[Definition:Regtech | regtech]] vendors have built dedicated platforms to automate this data collection, cleansing, and mapping process.

💡 Without the look-through approach, insurers could inadvertently — or deliberately — obscure concentrated or high-risk positions inside opaque fund structures, understating the true risk on their [[Definition:Balance sheet | balance sheet]] and the capital needed to support it. The approach therefore serves as a critical transparency mechanism, ensuring that [[Definition:Own funds | own funds]] are genuinely sufficient relative to actual economic exposures. It also affects investment strategy: insurers increasingly favor [[Definition:Separately managed account | separately managed accounts]] or funds that provide daily position-level transparency, partly because the data requirements of look-through compliance are easier to meet. For [[Definition:Risk management | risk management]] teams, the discipline of look-through analysis often uncovers unintended concentrations — for instance, multiple funds holding the same sovereign or corporate issuer — that would otherwise go unnoticed at the aggregate portfolio level.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Market risk module]]
* [[Definition:Solvency II]]
* [[Definition:Solvency capital requirement (SCR)]]
* [[Definition:Concentration risk]]
* [[Definition:Asset-liability management (ALM)]]
* [[Definition:Regtech]]
{{Div col end}}

Definition:Look-through approach - Revision history

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