Thursday, 28 April 2011

Last one till next week

Of all the rough jobs in the world (I use to hose out the toilets in a wildlife park!), this equivalence assessment for Sol II third countries must be right up there. Bermuda in the summer - what a drag eh...

Hugely important comment from Gabriel Bernadino at EIOPA

Again our friends at Insurance ERM are justifying their move to subscription-only with an exclusive interview with the most successful Portuguese overseas since Vasco da Gama, EIOPA Chair Gabriel Bernadino.

This is subscription only, so please get your department to fork out £600 for the year, as it is well worth it. There are some stunning comments made in this interview;
  • On transitionals "10 years is too long. That is out of the question. No one wants that" - CEA, ABI, Central Bank of Ireland, GCAE, please form an orderly queue!
  • "One to two years" adequate for hybrid debt transitional, "three years" for equivalence
  • On QIS5 calibration, "I don't think that the standard formula will be detrimental to the market" and "the framework is conceptually sound". He does concede that calibration tweaks will come in the heaviest lobbying areas but adds about the controversial cat risk sub module "I cannot say that the outcome will be to change the parameters"
  • On ORSA "the ORSA won't have level 2 implementing measures, but there needs to be consistency in the way it is implemented"
  • On implementation "we will have a single rule book - level 1 and level 2 implementing measures and EIOPA's guidelines and recommendations [which] will not be binding on local regulators, but they will need to comply with them, or explain whay they are not doing so"
  • Working on supervisory convergence
I have to say I like the guy's style - I suspect his views on transitionals may not be at all welcomed, but I'm sure we'll hear more on it - EIOPA guidelines and recommendations is a new one on me though - any ideas?

Under the Governance Sun...

Intriguing for various reasons, the report referenced in this article may be of some use internationally - by all means cite it if required when rolling out board training, but you may need to buy it!

I wouldn't concur with much of what is said in this extract, in particular that boards do not seek external advice through fear of "treading on management's toes" - can't say I've ever met a board member who cared less in that respect!

Different take on Risk Appetite, Profile and Tolerance - reinsurance

I spotted this on Guy Carpenter's "most read" list, and even though it is 2009-old, I liked the definitional attempts for Risk Profile (which they have as qualitative), Risk Appetite (which they fix as risk/return determining high or low appetite) and Risk Tolerance (quantitative piece).

Some of this runs contrary to Sol II approach that the ORSA will obligate firms to report on (profile in particular would not get through the front door), so this is handy for illlustrating the shifting sands of risk terminology.

Hurricane vs Insurance consultant - only one winner...

I haven't found this research on Northdoor's site yet, but to know I am potentially more devastating than a hurricane is very ego-boosting - maybe need to stop working out so much...

PS Please push it on if you find this research, I am fascinated!

Reasons for Two Tier Model Approval - exhibit A...

No qualms whatsoever with the end result, but nice to know why some model validation is being passed back in house!

As promised - direction to FSA slides

The afternoon sessions of the FSA Sol II presentation on the 18th have now been added to their website. You can find everything here, but of more significance to me were the internal model panel session slides and of course the risk-specific presentation .

For the internal model presentation, important to note that this puts more flesh on the bones of the public statements on internal model in Hector Sants' and Julian Adams' speeches. Some particularly ropey diagrams used, so we know they are not wasting money on consultants! Further details on the one-size-fits-tiny people model approval process won't emerge until July.

Even more significant is the statement "external review" is qualified as "external to the FSA" - however they must be "suitably skilled", which rules out Internal Audit I would dare say - again, rollout of additional info in July, with a few lucky blighters piloting in the meantime.

For the risk, governance and data presentation, I was sad to see the comment on ORSA that "easier to say what it is than what it isn't" from the regulator - this is not my view at all, and betrays a certain lack of desire bearing in mind the riches to be found in the Level 3 papers. Again, plenty more in the way of dodgy diagrams and "holistic" planning (I can't be the only person who thinks of tie-dye t-shirts and alternative medicine when I hear "holistic" - "enterprise-wide" please people!).

Other than that, there was a lot of very simplistic terminology and recommendations, as if the perception was that a lot of organisations had not made progress in these fields, as well as a lazy attempt to stick Fukushima in as a case study. However, it redeems itself towards the end with a dashboard-type slide which may get some juices flowing in the risk functions across the land...

We don't do bank holidays!

Massive suite to catch up on here, mainly due to the incessant bank holiday noise which prevents business as usual (at Governance Matters, we don't do bank holidays!) - if you are set up on the RSS feed, apologies in advance for the subsequent avalanche...

Wednesday, 20 April 2011

Irish Banking Crisis Inquest - dumbstruck...

As I suspected, the inquest into the emergence of the banking crisis in Ireland made quite astonishing reading, and is teeming with jaw-dropping examples of dire governance that one would struggle to believe happened in this generation (indeed some the exponents are still on the boards discussed!).

I have picked out some of the most prominent areas from the perspective of governance code divergence or professional incompetence;
  • Anglo promoted CEO to the Chair
  • Anglo FD took over CRO responsibilities in 2007
  • Irish Nationwide MD assumed delegated powers from the Board in 1997 for pretty much everything, and took direct lines of reporting from most functions (including key control functions). There was also no formal risk management function
  • Regulator had to beg for Irish Nationwide to produce Terms of Reference for sub-committees
  • Banks blamed Basel II preparation for taking away their best risk staff for project work (quick warning lads - Solvency II is doing this right now for the insurance industry!)
  • Risk function at Anglo criticised for not interrogating the available data (which was complete), as well as not having the conviction to prevent credit excesses
  • Regulatory findings letters were evidently not tabled at Risk and Compliance Committee meetings at Anglo
  • Perhaps the biggest rollocking in the report is reserved for the Internal Audit function at Irish Nationwide (point 2.10.3) - it is hard to believe that the litany of unprofessionalism noted here resulted in some external consultancy work rather than multiple rolling heads.
  • Regulator was unwilling to engage in a process of "intrusive verification", though I believe they are making up for it now!
  • Regulator's view that it was understaffed at the time appears to conflict with the report writers - "this would not explain why available information was not acted upon"
It isn't difficult to think of these matters, the impact they have had on an amazing people, and be fortified the next time an executive chews your ear off for being a party pooper...

KPMG Insurance Regulation research - Sol II and ICPs Conjoined twins?

KPMG have just kicked off what I hope will be a regular release on Evolving Insurance Regulation. Quite weighty at 60+ pages, so just skip to you favourite bits.

It draws attention to the forthcoming adoption of the IAIS's Insurance Core Principles (expected Oct 2011). When I first saw these back in Oct 2010 I was stunned at how little divergence there was from Solvency II content (indeed in areas of capital adequacy, Internal Models, ORSA and Governance the two are almost verbatim!). That potentially gives the worldwide insurance industry something approaching a level playing field (even if the EU can find arbitrage opportunities in their neighbours back yards!).

That is of course with the exception of the States, who have the Solvency Modernisation Initiative - I have no familiarity with this whatsoever, so might give it the once over...

FSA and the big stick - N&P

I noticed in a presentation from April 2011 from one of the technical specialists from the FSA an intriguing piece of language regarding the trend of FSA regulation from "light touch" to "Intensive and Intrusive".

Today's detail on the whipping dished out to Norwich and Peterborough for misselling is a good example of that. They note in the summary that as far back as 2007 the N&P compliance department had warned on the selling of the product in question (having seen the geographical split of readers, you guys in Germany and the States will be familiar with death bonds, but this case is a beauty!).

I wondered why this wouldn't have been picked up aggresively in FSA site visits at the time, yet now a substantial fine is being applied as well as redress to affected customers - the acknowledgement of the regulator's shift in approach probably covers it.

Post Europe Solvency II Survey - raise your glass

A very small sample (8 respondents) was taken to compile this survey from Post Europe magazine, but I gleaned much from it.

You may need to fill out a form for this survey, but I thoroughly recommend it - there are so many unattributed gossipy quotes I felt like I was reading TMZ!

Being focused on UK and Ireland, it was hilarious to see what the Mainland Europe guys had to say (as you will see in these bullets;
  • Real expectation of regulatory arbitrage opportunities, to the extent that at least one respondent advocated fines at national supervisor level for non-alignment!
  • General fears of regulatory staff shortage (proven at UK level)
  • Fluidity of ORSA requirement still a concern (rightly so)
  • Shoft from driving for Sol II benefits to basic compliance
  • Shift to risk based capital allocation is already improving "simplistic" approaches to underwriting
  • Northern European countries thought to be in the vanguard (Dutch, German and UK authorities), ahead of the "laissez faire attitude of the wine drinkers of the south"! [I must add that, with a viticulteur for a father in law, I can buy in to this one!]
  • Level playing field not expected for some time - one particular exception highlighted was small French mutuals who provide single line cover, where the suggestion was that an exemption may be sought
Whilst mediterraneaan readers may be hurt by the wine drinker sleight, they at least have the comfort of the better temperatures - my northern European friends and I can keep shivering while we laugh...

FSA Conference - Make with the surveys!

No sign as yet of some of the meatier materials from the afternoon session on Monday, although InsuranceERM tweeted the outcomes (context being 500+ attendees, though perhaps not all with a vote!)

On the model side, the 100 expected applications for pre-approval has been whittled down to 78. Despite this relief, the FSA has had to follow the path noted yesterday.

Surprising number of respondents were down for poor board engagement (23%), whereas ORSA and Governance are down for greatest programme management challenges (that'll be me then!).

I'm not holding my breath, but if I spot anything I will post it.

Tuesday, 19 April 2011

Ireland - Freestyle battles during banking crisis?

The Irish Independent insist that "authorities rapped in stinging bank report" - no word on which rap tunes they laid down, but my money would be on;
  • It's Like That ("unemployment at a record high") - Run DMC
  • Mo' Money Mo' Problems - Biggie, or
  • 99 Problems (but Fitch ain't one) - Jay Z
OK, pretty ropey gag, but the content of the report must be fairly meaty, and I will be trawling through for governance material. There surely won't be a better case of regulatory-sponsored executive avarice in the next century, and any risk pro worth their salt should be stripping this for case study materials.

Let's hope that the introspection lasts only as long as is appropriate before focusing on the brave new world in the IFSC - after all, it wasn't your fault!

Operational Risk and (super)models

Have been researching Op Risk modelling under Sol II recently (having not touched the subject for some time), and have been struck by the lack of clarity in the area.

Our friends at the Institute of Risk Management have made some sterling attempts to rectify this with a series of seminars over the last 18 months, the presentations from which I have had a run through (not solely dedicated to Op Risk, but all Sol II themed).

One entitled "Op Risk Modelling - What's the point" maybe says it all, though the content is much less dismissive! The reasons against are all valid, in particular lack of data (which I suspect the QIS4 Op Risk Questionnaire may have highlighted in concert across the EU) and relatively small capital saving available against, say, Insurance and Market. Less inclined to agree that the data is "infuriatingly inconsistent", certainly if an organisation is even remotely ERM-enabled. I especially liked the correlation piece at the end, which should be perhaps number 1 reason for modelling (diversification opportunities across the rest of the correlation matrix).

This excellent Dec 2010 survey on Op Risk modelling is perfect for benchmarking for UK guys (and still valid for you sportsfans further afield!). Relatively small sample at 36 participants (and three quarters internal modelling), but some great ideas on what "the industry" is contemplating;
  • Around half already at 10% or more for their ICA Op Risk capital proportion (so, worth playing for)
  • Only around 20% are banking on a fall in this amount under Sol II
  • Scenario Analysis, Self Assessments and Internal Loss Events were the most popular quantitative techniques planned for their Sol II preparations (only around half using external loss events)
  • Of the half not using external loss event data, half have no plans to (ORIC database of course being the main source)
So while there is money in it (some respondents being in the 15% of ICA bracket), it doesn't look like the sweet science of loss event numbers can carry the load on their own at the moment.

In addition to this, a fantastic article from covers in some detail the Sol II Op Risk zeitgeist, most notably;
  • Won't come up the priority list for most companies
  •  Little incentive to make the ICA-generated number more precise
  • Capital consequences not thought of in current regime (they had better be soon!)
  • Anecdotal evidence of FSA pushing the loading towards 15-20% during arrow visits
  • ORIC and IRM heads naturally supporting full modelling of Op Risk (indeed, to pass ORSA how could one not?)
  • Need to reconcile with standard model approach, and perhaps add a levy to their internal model outputs
  • Diversification effects on other categories are a bigger carrot than in isolation
  • 5 years of back data would be a suprise, and external databases "insufficent"
  • ORIC looking to drive standards (already doing so for scenario analysis). With 27 members out of the 100 in the the pre-application model queue, lobbying potential.
  • Use output to justify mitigation techniques for "use test" evidence
Love to hear from anyone fishing in the same pond at the moment - my view is that, as there is an obligation in the Level 3 papers for collecting Op Risk loss event data, the time to refine what needs to be collected, and indeed start capturing it, is right now, regardless of other pressures. There will be plenty of time for Risk and Actuarial to plug it in next year...

Media comment on FSA industry presentation

Quick addendum to last post - the FT obviously found the thought of two tier too tasty to pass up on , a rare foray of the subject into the pink pages.

Barely able to contain his glee (and I'm not talking show choirs here people), one of the Deloitte directors found the thought of additional outsourced model validation work a very appealing idea. Whether they are brought in as auditors or consultants, this is a sneaky piece of cost avoidance by the regulator, while simultaneously turning salaried work into (much higher) day rate work for the industry.

Hope the budget holders have got their wallets out...

FSA - "Delivering Solvency II" (if you're big enough...)

I hope everyone has had an opportunity to get bogged in to the materials from yesterday's FSA presentation to the UK Insurance Industry on Solvency II delivery (full menu here). I sadly didn't attend, but webcast and morning materials are available.

Obviously some pretty eyeraising items emerged (alongside the normal bluster) bulleted below;

Hector Sants Presentation
  • Dry speech in the main
  • Further emphasis that the UK is not looking to "gold plate" Sol II (an expression I find weirder with every mention)
  • Highlights that the FSA (and its successor) will be a supervisory arm of an EU policy making body once Omnibus II clears - Tories are sure to like this come the next financial crisis!
Julian Adams Speech
  • Stresses that there is "no information" to suggest transitionals will actually move any goalposts
  • Prudential Regulatory Authority will be influenced significantly by Sol II - important to note divergence between that and the Irish approach of being best in breed
  • Attempts to "draw attention" to the ORSA in his speech, with little success (the struggle continues...)
  • BIG ISSUE - Tiering of the Internal Model refinement services into tier 1 (top 10 by APE/PVNBP, plus Lloyds and Large multinationals requiring college supervision) and Tier 2 (every other mug!)
  • BIG ISSUE - Tiering means intensity of review and agreed workplans between FSA and top boys, followed by a "reduced level of engagement" (skeleton staff) for the other levy payers.
  • BIG ISSUE - To replace this, "various tools" will be made available to assist , after consulting with the ABI (so much for risk based and proportional!)
  • BIG ISSUE - "Elements of external review" will be permitted by FSA as the second part of not providing a full model acceptance service - I can only read this as having to write out another cheque to Big 4/Consultancies to see if models pass an as yet undefined propriety test.
  • Big shift in planning for processing final applications for Internal Models (previously planned for late 2011, now moved to March 2012 at earliest
  • Reduced level of attention "does not necessarily imply" a decreased likelihood in getting day one model approval (not necessarily doesn't mean implausible in my book!)
  • As a by-product of all of the above, there appears to be an increased emphasis on contingency planning should one's model not pass (including where one might raise additional capital to beat the Standard Formula SCR, with a 7-9 month deadline to do so)
 FSA Solvency II Delivery Doc
  • Confirms that the request for illiquidity premium from the UK industry is for 12 years on the back book (This matter is only down for 7 years in the transitionals currently)
  • Amusingly refers to the tacit withdrawal of model support for smaller organisations a "graduated approach"
Interested to know what anyone else thinks of these developments. Apart from illustrating that the FSA, despite the levies, cannot recruit mathematicians when the going rate is a grand a day, it will in my view create a competitive advantage for participants in the first tier. Additionally, resources which will be used to "practice" being supervisory colleges for mainland Europe dominated forms seems a little spurious in a country with more model validation to do than most other countries put together.

Mind you, I don't do maths...

Thursday, 14 April 2011

Willis Re publication - speak for yourself...

Wasn't convinced by this one - Willis Re with their barking dogs analogy with a large regurgitation of EIOPAs work, followed by a "how can we help" tagline.

There are a few outlandish references. Their assertion on page 1 that industry preparedness "depends on how credible you think the QIS5 results are" is as bizarre as it is utterly false. The "limited number of insurers who used internal capital models" doesn't have to reflect a lack of preparedness when there is an approvals process that didn't end at the QIS5 completion cut off, and to say that "most insurers are still struggling with model construction, validation and documentation" is reaching just a tad - I personally prefer the word "working", and reserve "struggling" for people who can't make ends meet.

Woof woof!

Barnett Waddingham - SMEs under QIS5

Was happy to have this flagged by our friends at Insurance ERM - a UK based SMEs survey on QIS5, which is full of fascinating gear, for example;
  • Some participants are hoping for the calibrations to change - as a response to missing the SCR! (PS I checked, and it wasn't published on 1st April)
  • Data collection processes feature high on most participants agendas, which is great news
  • ORSA and Documentation highest on the "next steps" agenda - good boys!
  • The implementation of an ERM framework also features on the priority list - not a surprise in that the larger organisation will have early adopter benefits in this field.
  • Relatively small number of internal model applicants
  • Over half needed external help with QIS5 - around 40% found this a beneficial experience in some way
  • Similar problems with data suitability as reported at aggregated level in UK and Ireland (risk margin, counterparty default and health underwriting risk all scoring low)
  • Op Risk SCR calculation rated highest in meeting technical specifications (my impression was that it was too simple)
Great insight, and I have added them to my RSS, so look forward to more!

Commission open letter to EIOPA - Salon de dernier chance?

So off the back of QIS5 the Commission have asked for the last efforts from EIOPA, some by request, and seemingly some at the point of a gun. My read was;
  • 4 sub-modules still clearly miles away, and advice required immediately
  • Happy to simplify (over-complexity now referred to as a "fact", but Commission will not accept a laundry list from EIOPA
  • Proportionality guidance only to be issued at Level 3, and EIOPA are in charge
  • Clearly worried (and rightly so) that guaranteed products are about to become like hen's teeth, so EIOPA are already on the case
  • EIOPAs voluntary work on EPIFP is not especially welcome, needs to hurry up just to get on the table, and EPIFP will be Tier 1 regardless

Offshore trend for captives - escape excessive capital requirements

Little creepy as a Manxman to see any Crown Dependencies being championed in a race to the bottom, though the captives are clearly having a tough time of it under the current formula.

Whaty surprises me about this article is that the IAIS standards are being used for regulatory arbitrage - fascinating as, for all areas of ORSA and System of Governance I am currently working on, there is almost no difference between the two (to the extent that swathes of Sol II and the IAIS ICPs are twins, and not in the De Vito/Schwarzenegger sense).

I wonder where the gap is?

Central Bank of Ireland - Solvency Matters?

The lads in Dublin have just released a third instalment of their Solvency Matters newsletter - sadly from the country of Yeats, Joyce and Wilde, I've seen more material on Paris Hilton's chihuahua's coat.

Disappointing from a body which is clearly going some lengths to be best of breed to take up one page of four with a meeting agenda when the industry is crying out for direction of ORSA and proportionality, two matters where friendly guidance now would count a long way in two years time.

However, there's another preparedness survey to come in July - one to look out for!

More from the Deloitte EIU survey

Thanks to Gillian at Deloitte for pointing it out - the survey on Sol II preparation trends went live today!

Some standard fare in there (bearing in mind it was 60 companies polled, split around 50/50 life/non-life)
  • Some smaller companies yet to commence board briefings
  • Implementation planning is currently priority 1
  • Increase in the number of companies considering restructure (from subs to branches)
  • Shift in product lines or pricing anticipated in order to shift the risk of guarantees on to policyholders (which doesn't sound like the desired outcome at a political level)
  • Two thirds introducing new risk mitigation techniques (I guess more reinsurance)
  • IT upgrade highlighted as one of the biggest costs - as Pru showed us today, shifting things from legacy to warehouse is a sharp shock, but it is surely good for the industry to do this work, even if it is at the point of a gun
  • Areas of most concern are sponsorship and engagement and clarification (or lack of) from FSA/EIOPA

And some more startling aspects;
  • One non-life company has no knowledge at all of Sol II at board level!
  • Despite 80% of respondents going for full or partial internal models, Data Quality and use test featured low on the list of priorities (some guys will have a pretty busy 2012 if they are leaving this till late!)
  • One of the 4 largest respondents is considering relocation (my monies on Pru)
  • Larger insurers were budgeting for up to £75m - as my earlier posts highlighted, Old Mutual, Aviva and Pru have already laid down more than 50% of that in 2010 - lets hope for their sakes that was the data warehousing spend, and it's all finished!
One can take a bit of comfort from other companies travails, but it is much more significant to see where the industry has its priorities right now, and I fear that if it isn't in accurate data and improved governance, we could be missing a trick

Wednesday, 13 April 2011

Some useful materials

Risk function-related material keeps pouring out, so I'm trying to keep an eye on the Solvency II impacts;

Black swan scenario testing – likely to become much more significant to the risk management function judging by the Level 3 guidance. This is from Booz&co, and is essentially a begging letter, but the disrupter analysis described I imagine many risk functions having to complete in order to get their scenario testing in a Sol II compliant manner

KPMG Evolving Insurance Regulation – published last month, but strongly supportive of the IAIS's Insurance Core Principles (ICPs) which come into force later this year. If you have read any of the IAIS materials, it is essentially Sol II in a different jacket, and KPMG do a decent cheerleading role for the ICPs in this

Accenture website boast about Sol II compliance consulting with a middleweight insurer - sounds like a familiar scenario for anyone who didn't have their ERM in place before their Sol II projects kicked off

Guy Carpenter guides to the Three pillars - I would recommend these to anyone, as they look after the timeline requirements well enough to save me a job!

Pillar 1 - some very salient points on data quality issues that smaller companies may suffer, twinned with the necessity of internal modelling in order to capture diversification benefits. In part 3 they note that reinsurance demand is likely to increase as a risk mitigant (targetted at the highest capital requirements), as well as M&A activity being driven by the desire to obtain better diversification benefits

Pillar 2 & 3 (or "Pillar V" as the cool kids now call it! - Not quite as useful, but here for consistency

Tuesday, 12 April 2011

Deloitte Survey - cause for alarm?

Deloitte and our friends at the EIU have come together to provide an updated survey on Sol II readiness
I cannot find the actual  publication for the life of me (and I’m normally pretty resourceful!), but it has made pretty big waves in the risk press. While it is only 60 insurers that were polled, there were plenty of stand out stats;

·         Confidence in compliance by 2013 less than 75% for respondents – their views on the industry as a whole were much less generous

·         Almost half think they will restructure (I’m right in thinking this will be a move toward branch structures rather than subsidiaries?)

·         A third of life companies think they will need to launch new products (perhaps a move away from guarantees and options is sensible)

·         Only 52% are in the implementation stage (actually quite startling)

·         Board awareness at 95% of respondents, despite all respondents having submitted budgets (what on earth the boards of the outlying 5% were doing when the invoice was put on the table is beyond me!)

At this juncture, an “unaware” board is criminal – the money committed and the non-negotiable aspect of compliance means they will struggle to make the required governance changes by 2013. More than anything, unless the boards meet more regularly than quarterly, I suspect there won’t be enough time to do the training needed, in particular using ORSA outputs to drive the decision-making process that they are the custodians of.

Transitional comment

Very nice piece on transitional rules from Insurance ERM (sadly a subscription website now, but you can get a free trial!) The KPMG director quoted draws attention to the fact that there simply isn't enough lobbying time left to do anything but the hard maths (hybrid debt and its tiering in Own Funds and the risk-free rates).

For my money, this means that governance will not be featuring high on anyone's transitional list, and I'm not banking on any leeway at my end!

Sunday, 10 April 2011

Plenty to catch up on

After a week of non stop ORSA, lots of little bits worth a comment over the last few days.

Cesare Geronzi, the Chairman forced out of Generali this week, could very well become the poster boy for old-school governance in this run in to Sol II. Having speculated publicly on a number of strands of strategy that he of course had no business doing, he became yet another high profile Latin 'Cesare' who took a few puncture wounds to the back...joking aside, everything that the System of Governance articles aims to address in nicely encapsulated in the story, so have a read.

Nice bit of stable door closing by the Irish Central bank (albeit shortly after Ballabriggs had bolted) with their enforcement threats to the Irish banking executives. Interesting angle on what might transcribe into Insurance governance, but ultimately I suspect this would not be welcomed by the non-Irish contingent in the IFSC, and is therefore a non-starter.

On the Sol II front, the compromise text for Omnibus II was published, with no surprises - time to start picking out which of the range of transitionals may actually be used (capital instruments and equivalence were the ones I had seen given most hope, but not as generous as the lobbyists would like. 

FRC have jumped in on the simplification game for annual report content, which is a noble thought, which may benefit from rules rather than recommendations. However, having trudged through over 200 pages of IFRS and EEV notes to the accounts for Pru, is the issue not in that field, rather than the jaw-jaw and faux-strategy that pads out the rest. More than that, the public disclosure requirements under Sol II could have been used to dictate some of this across the EU with a little more forethought.

I'll take a breather at that...

Tuesday, 5 April 2011

And in quick time, CEA's response...

And as might be expected, the CEA have chipped in with a last minute land grab for the industry off the back on the QIS5 calibration results.

Very straightforward list of demands, most of which have been acknowledged at national level (Contract boundaries attention, retain VIF as Tier 1, reflect loss absorbency of taxes in risk margin, improve calibrations for a couple of SCR modules) . Their request to include Deferred Tax Assets in tier 1 may fall on deaf ears even if it is 'economic', whilst their request for transitional measures seems entirely in keeping with the, errrr, transitional measures already announced in Omnibus II.

It remains to be seen what can be whipped out of EIOPA at this juncture, particularly now they have considerably more power (when omnibus II passes of course!) than their previous incarnation. However, the outcomes in the UK and Ireland seem pretty conclusive about what is bad and what is merely unfortunate.

Let battle commence...

EC Green Paper - and the news is?

The EC's green paper on corporate governance hit the newstands today, and may as well have been written on parchment, so far behind the sketch its content is.

Having given it the appropriate once over, I struggled to find anything that the UK and Irish corporate governance codes haven't already captured, and I would love to know if the guys riding this particular gravy train have been in touch with the EIOPAs of the world before releasing.

Indeed the very idea that a question such as "Do you agree that the board should approve and take responsibility for the company's risk appetite and report it meaningfully to shareholders" in 2011 is a hundred kinds of wrong. Luckily Sol II doesn't leave any room for debate, should the local regulators not already have this covered.

FSA QIS 5 aggregated response

Having jumped in feet first with the Irish result, I can jump back eurovision style to the London office for the FSA’s verdict on QIS5. I have flagged the differentiators between par for the EU or indeed the Irish result below;
  • Only 70% participation, par for Europe, but lower than Ireland (80%)
  • Twice as many groups participated (FSA should be delighted with that, though not sure how many are missing)
  • Despite the lobbying interest on the matter, data quality assessment for Risk Margin data was high (Irish were not so happy). Common ground between the two on USPs and Non Life Underwriting risk data, while the UK were also less confident on Life and Health underwriting data quality.
  • From preparedness perspective, similar results to Irish on SCR readiness, with 70+% of all sizes of firm having issues with either data or methodologies.
  • Large firms flagged as having methodology issues in calculation of own funds – likely to be driven by existing complicated capital instruments and technique for including EPIFP.
  • Interestingly, FSA suggest that it is maybe a weakness in Sol I, rather than onerous requirements under Sol II, which increase requirements of large non-Life firms
  • Very similar numbers of companies missing SCR (20%), and they add that the ratio changes little between Life and Non-Life – Irish did better, though diverged between life and non-life.
  • “Relatively few” missed MCR, little expansion on the subject as well.
  • Unit linked highlighted as a beneficiary of surplus increase compared to Sol I, with reasons for the ravails of annuity writers are detailed.
  • They note that simplifications used in the risk margin calculation may have skewed the results (80% using one of the simplification offered), as very few calculated technical provisions in full, and of those, almost all were unit linked.
  • Annuity writers happy to use illiquidity premium, though with-profits struggled with the modelling side of less predictable cashflows.
  • Allowance for future management actions flagged as one of the most challenging aspects of technical provisions calculation.
  • Op Risk add-on for Life companies was larger than in Ireland, but the adjustment for loss-absorbing capacity of technical provisions/deferred taxes was considerable larger (almost double)
  • For non-life, Op risk add on was around the same, adjustment for LACOTP/DT much lower.
  • Respondents flagged that the measurement of Op Risk was overly simplistic (reflection of sophistication of modelling techniques available perhaps).
  • Struggle to calculate EPIFP mirrored from Ireland, for same reasons (contract boundary, assumptions and indeed conceptual difficulties).
  • FSA seem very unhappy with the effort put in on transitioning capital instruments, despite the likelihood that some types will not qualify under Sol II. Tier 1 capital for industry currently only at 85% (96% in Ireland)
  • Comparables where provided for Standard Model vs Internal Model left a number of life companies looking at higher requirements
  • Interesting detail on how some people have modelled (non-modular, comparable or mega matrix!)
As per the next post, now the results have been counted, time for the last minute lobbying to commence...