Wednesday, 25 May 2011

Matthew Elderfield speech to European Insurance Forum

The European Insurance Forum has been the poor relation in terms of big events in Dublin this last week (Queen's visit, Obama's visit, Cup Final etc), but the big presentations given are available off this link

I haven't been through all of those yet, but I rushed to go through Matthew Elderfield's keynote speech on the regulatory landscape. Some media comment here and here might help sift through the 20 pages of detail, but my take was as follows;

  •  Take some comfort from his comment "rule book for banks should not be Xeroxed wholesale onto insurance"
  • Attributed Irish problems to lack of regulatory resource (and an adequate assessment framework) and lack of effective standards for Fit & Proper assessment ("gaping hole")
  • Having done the work on corporate governance standards at macro level, the Central bank will be looking at "internal governance standards" later this year - this is intriguing to say the least!
  • Only 11 "major institutions" in Ireland according to his definition (significant policyholder detriment and reputational damage to Ireland)
  • FAQ's will be publised on board participation requirements - truly staggering if this is correct, and flies in the face of the views of the IOD on skills adequacy just blogged on.
  • "Corporate Governance standards were improved due to the input of industry comments" - I analysed these at the time, and they barely changed after feedback ("Major institutions" definition notwithstanding)!
  • Fitness and probity standards under consultation compared to Approved Persons regime in UK
  • Big section on Variable Annuity providers who have set up en masse in Dublin - they have responded by setting up a bespoke VA team.
  • They will require all VA writers to produce an Internal Model for Sol II - no mention on whether, if a model fails the application test, it will be forced to move jurisdictions!
  • "Invested in building up staff levels" for Solvency II - yet can still only produce their Solvency Matters document quarterly, with virtually no "new news" in it.
  • General sympathy with deadline pressures at EIOPA/Commission level, noting that the intention is "to progress as much of the non-Omnibus II impacted work as possible"
  • "Need to give consideration to the phasing of particular obligations on supervisors and insurance firms" - asking for transitionals?
  • Emphasised the usual areas requiring change in the QIS calibrations (nothing new), EPIFP and Contract boundaries etc.
  • Central Bank favours a "middle course" for recognition of EPIFP in tier 1 - CEA estimated the gap would be €100bn of capitalisation if it was excluded, against €3bn if fully included across the whol industry.
  • Wants to "disabuse" the industry of the fear that a beneficial step change in capital requirements using an internal model will necessarily lead to model rejection - peer comparison will be used for reasonableness though.
  • VERY IMPORTANT - highlights that diversification benefits derived from correlation matrices or copulas that include "a significant degree of subjective judgement" are not currently given enough regulatory attention, due to excessive focus on risk buckets - "...the marginal impact of these changes are dwarfed by the impact of judgement calls on correlation or dependency".
  • VERY IMPORTANT - planning to introduce a special levy for internal models - unlucky Ireland!
  • Refers to the trend of hub-and-spoke models rather than subsidiaries due to loss of Group Support section of Solvency II. He wants to "...make sure that the hub [in Ireland] is substantial and has sufficient critical mass to exercise effective control over its branch operations". Basically negating any regulatory arbitrage plays.
  • As a hub supervisor, he will be "prepared to exercise effective direct oversight over branch operations",
  • Notes that, in the absence of the IAIS ComFrame framework that Solvency II as become de facto binding international standard on solvency
Change of model scrutiny focus to correlation is a big call, and the special levy is sure to go down badly in a country which has just hit pension providers with a separate one-off levy.

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