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...