Society of Actuaries in Ireland - response on Market Consistent ESGs discussion paper

In the interests of being prepared to scrutinise internal models to the letter of the existing text, I have spent more examining the hot topics on Pillar 1, and the SOA have provided an excellent response paper to the Central Bank of Ireland's ongoing discussion on market consistent black boxes.

I have tried to pick out the key themes in the absence of having detailed knowledge!

• Difficulty is calibrating market-consistent ESGs where deep and liquid markets don't exist
• Risk margin consideration appears and reappears throughout - the SOA advocate clarity and methodology disclosure wherever a risk margin is allowed for (which in my head would be an area the risk function could then scrutinise when validating the Internal Model)
• Process of converging insurance pricing with market-based pricing will involve considerable expert judgement (problematic for pure Risk functions to validate I suspect).
• Easier to use the ESG for interpolation as opposed to extrapolation - organisations need to be able to "show its work" when extrapolating beyond the region of the data (another good area for would-be validators to focus on)
• Also need to be careful when accounting for margins (implicit, explicit, illiquidity premia) that they are also appropriately extrapolated.

I suspect I will be referring back to this as the Level 2s and 3s make there way into their final form, as I found it a reasonably accessible pointer for potential Internal Model weaknesses (and I make no apologies for misinterpretations as a non-mathematician!).

Insurance SIFIs - Metric ideas from the AAA

Spotted this, and it looked intriguing - American Academy of Actuaries proposing metrics "regarding size, interconnectedness and risk assumption" to assess whether insurance companies are systematically important - the AIG angle still seems to be driving this desire (resisted by almost every insurance lobbying group) to include a couple of insurance giants in the SIFI pot. I haven't looked for the paper itself, so google away if you are hot on this topic!

The second notable point here was that a "voting insurance expert" has beeen elected to the Financial Stability Oversight Council - not sure if that increases or lessens the likelihood of some insurers being captured as SIFIs.

Accenture Global Risk Management Study 2011 - talking points

A rather lavish piece of research from Accenture on developments in using risk as a source of competitive advantage was pushed out yesterday - All industry version here, with Insurance-specific report here.

Solvency II doesn't really feature in the global study (which covered just under 400 risk execs), but some aggregate trends are worth noting (observations against their 2009 survey);

• Increased likelihood of execuitve-level oversight of the risk function
• Increased concern about coverage of the spectrum of risk (types and severity coverage)
• Almost half of respondents had "reducing costs" as one of their main challenges in next 2 years
• Vast majority have either a CRO or an executive with Risk responsibility
• Majority of medium term spend seems to be focused towards data and technological improvements
• 40% have responded that regulatory risk will be "significantly increasing" in next 2 years
• Integration of risk measure capture and use across busienss areas particularly poor (most categories of risk were under 50% rated as "highly integrated across business units".
• Some lareg gaps between the importance of the risk function's objectives against their achievement (worryingly large on the matter of ensuring sustainability of future profitability)

For Insurance-specific, I noted the following (around 50-odd companies by my count);

• 80% of respondentshave ERM program in place or in planning
• Top risk executive reports to CEO in almost 90% of respondents (a truly horrifying statistic, and the highest of all industries) 
• 81% of Life company respondents felt regulatory pressure is creating an increasing gap to achieving compliance
• 54% have a CRO who owns responsibility for Risk in their organisations (surely a massive no-no under Solvency II)
• Integration of Finance and Risk and improving reporting capabilities on risk-adjusted performance management are the highest Life company priorities for improving capabilities.
• To achieve "Risk Mastery", a rather anodyne list of enhancements are depicted - invest in analytic tools, integrate risk and finance, improve approaches to fraud and financial crime and leverage compliance initiatives (such as Solvency II I guess, though I wouldn't call it a compliance initiative!)

They create a sub-category of "Risk Masters", whose risk management capabilities are assumed to be superior to the crowd - these are the component parts of "risk mastery";

1. Creation of shareholder value from Risk Management
2. Risk Management involved in key decision making process
3. Improved sophiostication of measurement, monitoring and analysis
4. Going beyond a compliance mindset
5. Integration of risk management capabilities across business units and structures
6. Establishment of a "c-suite" role for Risk
7. Infusion of "|risk awareness" across the organisational culture
8. Investment in continuous improvement

Risk masters (around 40 of the respondents qualified) either have or are in the process of establishing ERM programs, and tend to use their Risk function outputs to achieve quantifiable business objectives considerably more than the pack. They also had significantly higher scores for having "highly integrated" risk measure capture and usage across business units (including using these measures in their decision making process), and the majority participate in most areas of the strategic decision making process.

Interestingly, almost 90% of Risk Masters said that they are active in influencing risk regulation in their relevant industry - Solvency II anyone?

FSA plans for conduct of business under the FCA

Speeches today from Hector Sants and Margeret Cole on the future of regulation for the 24,000+ small financial services firms who will not fall under the auspices of the Prudential Regulatory Authority.

Both provide quality insight as to how the risk/reward argument is playing out at the FSA as they prepare for the 2013 split - particularly liked the parallel of cost of extra regulatory visits against the cost of product failures such as Keydata.

Groupe Consultatif - Actuarial Function research (Solvency II slant)

I really liked this doc, released last week by Groupe Consultatif Actuariel Europeen (GCAE), which ostensibly is used to confirm that there is sufficient actuarial resource in the union to address the future requirements under Article 48 of Solvency II. Covers 20 countries and 18,000+ actuaries - of particular note;

• Most work on setting, validating and certifying technical provisions (all sub categories were 80-90+%)
  
• 46% of Life actuaries have a role in risk management
• 48% of Life actuaries have a role in Internal Modelling
• 54% of Life actuaries are involved in Internal Model validation (high, bearing in mind this at least nominally moves to Risk under Solvency II)  
• 8 countries will only have qualified actuaries running the function (Life only) - 12 will be run by "mostly qualified actuaries"
• The Groupe "will ensure that education is enhanced to capture the changed environment, especially in relation to risk management"
• Highlight "concerns that the use of actuaries may be diminished in some way by the apparent change in role from the current position".

I struggled to work out the missing parts. From what I could see;

• Only 20 actuarial associations covered by the research, against 27 EU members - the following countries are not covered; Bulgaria, Cyprus, Latvia, Malta, Romania, Slovakia, Slovenia. Would love to know if that is because they don't have associations worth talking about, or the function itself it not afforded the same gravitas as in other jurisdictions
• Two countries have no qualification requirements!

Fitch on Solvency II - Asset Allocation

Fitch pushed out a paper on Solvency II's implications for Asset Allocation - well worth a read if you are a Pillar II & III dweller like I am (registration required, but free), as it simplifies a lot of the key areas that will drive strategic decision making outside of one's qualitative comfort zone, and will certainly help on the ORSA/Model validation front.

Solvency II and IMD - Parallels

Post magazine editor's comment on Solvency II deadline shenanighans highlighted an intriguing parallel with IMD, saw the UK industry in the vanguard, and the rest of the union complying at their own pace, if indeed at all.

I can certainly vouch for the tardy and decrepit attitudes towards IMD's pan-European application first hand, so let's hope this isn't too accurate a prediction!

Sr. Montalvo - "No delay to Solvency II" - sure about that?

Forgot to post this yesterday - outstanding quote from the EIOPA chief executive at the ABI's conference on the same day that the Council text was published!

ABI supports FSA Solvency II stance - 2013 regardless

Peter Vipond (Association of British Insurers head) is quoted in InsuranceERM today as supporting the FSA's "2013 regardless" stance for Solvency II implementation.

The logic is cold but impressive, as not only is the ICA process already onerous enough to dismiss any kind of parallel run, but the Internal Model application process has been structured to deliver concrete decisions on admissability by Jan 2013.

Certainly don't fancy the FSA's chances of getting a 2013 Solvency II "parallel run" levy out of the ABI based on this statement!

PS Shouldn't have access problems, the InsuranceERM guys made this one free!

Vince Cable speech at the ABI Conference

Always noce to get a steer from Government on future policy in the governance world (bearing in mind that, even with a coalition, it will get enforced quicker than Solvency II!).

Dr Cable in his speech to the ABI today seems to be fishing hard at the "voluntary" targets for improving gender diversity on boards (I believe if enough FTSE companies haven't declared by September we are probably looking at quotas). Executive pay and short-termism also feature high on the Business Secretary's agenda.

ABI Conference - Single European Regulator?

EIOPA's Chief Exec kindly planted the seed of the single EU regulator at the ABI today - bearing in mind how the EU functions are struggling with consensus for Omnibus II right now, this is one matter best pushed to the back of the cabinet!

International Insurance Society Annual Seminar 2011 - insights from Toronto

Having had a hard look around for material from this weeks IIS seminar (plenty of big hitters present), I have come up empty handed on accompanying speeches/presentations.

This article does let slip a few pieces, which were worth logging;

• Head of Canadian regulator urging insurers to move risk management efforts to the forefront by enhancing the CRO role and engaging properly in stress testing - talking my language there!
• She also added that a global capital standard would benefit the industry, and while Solvency II is an improvement, it is probably insufficient.
• Research from Robert Klein presented suggested that the US should go in for a more modern regulatory regime (citing "antiquated" US capital standards). This runs contrary to the views of the NAIC head who spoke in Bermuda only last week. Would love to see Prof. Klein's research, but couldn't find it today.

AIRMIC Conference 2011 - Presentations now available

Was very kindly directed to these by the AIRMIC guys - two of use in my line of work were the Solvency II specific presentation from some Allianz reps and a good one from Lloyds on emerging risk - the former gives some decent insights as to how a massive organisation has to administrate the Solvency II project, while the latter is a decent benchmarking piece for performing qualitative risk identification, analysis and synthesis.

Solvency II - Official Shift to January 2014

Some guys were pretty quick off the mark in the Tweetosphere - Text out of the Council meetings over the last few days confirms a wish to shift to Jan 1st 2014 - implications will naturally emerge over the next couple of days, but in the meantime, you might want to adjust your calendars by 12 months (unless you are in the UK of course!)

ABI Solvency II Newsletter for June - clear words (and nice pictures!)

The ABI have pushed out their June industry newsletter, and it's a beauty. Highlights;

• Compromise for long-term products appears to be palatable (to the ABI's working group at least). Final proposals in their 'package deal' will be discussed tomorrow at the Commission's Solvency II experts group
• Clear "that some of the Level 3 guidance will not be available, nor imminent by go-live date
• This will require regulators to "cede some autonomy" to the industry over implementation techniques
• Asking for 1 year grace period between presentation of Implementing Technical Standards and actual application (indeed the ABI seems a little anxious on developments in this area)
• Nice piece on justifying their approach on contract boundaries
• Some good schematics on legislative timelines and Implementing Technical Standards due dates

Barnier on video - from CEA June conference

I don't have the luxury to watch it right now, but apparently this video of Michel Barnier at the CEA conference last week (various quotes have made it out since this on the 16th June) may, in combination with the Omnibus II revisions published on June 7th, help identify exactly what was said and by whom to perpetuate the deadline extension rumours.

FSA revised approach as the Prudential Regulatory Authority

The FSA pushed out their revised approach yesterday, which will be fully implemented after they change the sign out front of Canary Wharf next year.

I pretty much glazed over at Hector Sants' speech, which had to fish pretty hard for examples of why Insurance justified more intrusive supervision than banks (Independent Insurance and Equitable both being a decade old). However, the Proactive Intervention Framework (PIF) is no different to Solvency II's intervention process, with a "capital add-on" level, an SCR breach and an MCR breach all dressed up in different clothing. The main document is out of necessity pitted with Solvency II references, and all in all, no new news.

Solvency II - additional FT articles

FT also posted a couple of supplementary articles on Solvency II today. One covers some old ground on calibration lobbying, but notes that the Solvency Experts Group is meeting this week with the Commission (one to look out for). It also reiterates that FT party line of move to 2014 implementation as more of a fait accompli.

The second quotes an ABI and KPMG straw poll that talks of the raft of supervisory changes in the UK (Solvency II and FSA-PRA changeover) is not helping support consumer trust in the industry.

Insurance Day Summit 2011 - Bermuda shorts

Exceptional pun in the headline aside (?), there was a few tasty pieces from the Insurance Day summit in chilly Bermuda at the end of last week. Not sure if these are free or not, but I didn't struggle this morning;

Bermuda Monetary Authority
- their man Jeremy Cox spoke, emphasising how mutually beneficial the Bermuda/EU market is, and why it justifies increased headcount spend to ensure equivalence. He also spoke of their 3 year roadmap to equivalence, as well as 6 areas where they have expanded their output to achieve equivalence.

Mike McGavick speech
- CEO of XL Capital chipped in with a more industrial quality speech, albeit making the salient point that, should Solvency II inadvertently lead to mergers and larger insurers, it would not be a systematically great thing.

He comments (ironically, bearing in mind my last two posts about soft launching) that because the EU like their version of the rulebook, then "everyone else should follow suit".

He followed that with "...why is it that we just have to swallow your [the EU's] proposal" - again, this seems a little misguided, bearing in mind the IAIS have xeroxed most of the Solvency II text and obligations, so this is not far off being international best-in-class, as opposed to being EU-centric.

Certainly didn't stay on the fence, and should be applauded for that at least.

NAIC CEO speech

Pretty blunt speech from the head of the National Association of Insurance Commisioner in the US - that, while she likes soome parts of Solvency II ("ORSA and some of those Pillar II things"), the Pillar I stuff will not wash over there. In particular, quite scathing about regulatory capital being used to incentivise good risk management.

Omnibus II - June version with substantial illiquidity premium transitional changes

A linked story was reported in parallel by Risk magazine (again, subscription only), highlighting that the June version of Omnibus II contained a dramatic shift in the area of illiquidity premium. You will see the section itself near the very back of the June Omnibus II text.

The language used by Risk.net is not helpful (we are after all talking about a transitional measure, yet they and their RBS talking head note it "effectively means the full impact of the directive will not be felt until 2019").

They note more importantly that the revised transitional will allow a lock-in of yields at the 2012 year end which can be used as the basis of the transitional for the 7 year duration (if beneficial I guess).

Solvency II timeline changing - 2014 anyone?

Not sure who the moles are in either London or Brussels, but there appears to be some water-testing ongoing about a soft launch of Solvency II over the weekend, with the FT reporting that "people familiar to the process" have it chalked down for implementation in 2013, but not active until 2014.

I can't quite work out if there is some confusion over transitional measures already in Omnibus II just being regurgitated, or if they have a genuine sniff of a shift in timeline here.

They interestingly note that the French had previously asked for a 2013 launch, with a year's grace on Pillar 1, and that this had made it on to the table at the Commission.

[Apologies in advance if you cannot link through, some of these are subscription/limited access]

Equivalence, captives and Solvency II - different strokes...

A subject close to my heart as a Manxman, I keep an eye on equivalence-related material, and this has been a relatively busy week. Guernsey have had a nice soiree in London to emphatically support their captive industry by confirming there would be no Solvency II equivalence sought.

For a captive-heavy country this makes sense - Ireland (who like a bit of captive themselves) have been prominent in catering for some element of proportionality at national level, and at a Solvency II presentation in the Isle of Man (where we are also partial to captives) in November 2010, the locals were equally vociferous on the problems it could cause them, so were delighted to hear that equivalence was not on the agenda.

This contrasts to the Bermudans, who are seemingly happy enough to trod the path to equivalence as early as possible. However, there seems to be a desire for a specific carve-out to put some meat on the bones of the proportionality concept which, at this juncture, is most certainly not a given.

Four captive-loving islands, four different approaches - whoever's approach is ultimately victorious, I hope it is for the right reasons.

Economist Intelligence Unit - New Challenges for risk management in financial services

As ever, the Economist Intelligence Unit have come up trumps with a very worthy piece on risk management progress and problems over the last year (relatively small sample at 315 participants, and a touch US heavy would be the only bits I would flag for benchmarking purposes).

The increase in risk appetite over the last 12 months flagged by participants seems logical, and the general observation that boards are paying more attention to risk also fits in with the prevailing mood from supervisors and regulators post-credit crunch (bear in mind this facet would be overwhelming if it was EU-only thanks to Solvency II et al).

That Enterprise-wide risk management was receiving the most attention from the risk function and the boards in insurance/reinsurance participants is also no surprise, with Solvency II/Equivalence/IAIS ICPs to consider. I also liked the acknowledgement that improving skills in identifying interdependencies in enterprise risks is seen as a priority by risk professionals

However, there were a number of areas which ranged from mildly concerning to shocking, such as;

• Nearly a quarter reported that the Risk Function is more often than not overridden or ignored (bear in mind these are financial services risk executives that have been polled)
• No improvement y-o-y on the percentage of respondents with a "clearly defined risk strategy"
• Investment in Risk functions has fallen in aggregate in almost every area
• Almost 2/3rds said complexity is incresing the risk exposure of their company
• Only 21% were confident that 100% of their risk exposure was measured and monitored accurately
• Only half felt members of the risk team played an important role in strategic decision making
• A similar percentage note that their boards have become more demanding with their risk reporting expectations (there must be some boards therefore asking for more from the function, then excluding them from the decision making process)
• In only 55% of participants the head of risk had a mandate to report to the Board independently
• Only 39% said their organisation has a "common risk language" - this is especially poor for financial services
• Effectiveness of organisations in managing "real-time risk" was rated poorly - this is fundamental to the risk function adding value and influencing strategic decision making, so must improve.
• Only a third have improved the quality of their board information on emerging risks
• 29% of respondents said they did not have "adequate expertise" in operational risk

I would add that the case study of Metro Bank (first new bank in the UK in 100 years) seems very unusual, in that they have decentralised responsibility for risk instead of having a dedicated function - very interested to know how this is approached by the banking regulator.

Barnier Letter to CEA/CRO Forum/CFO Forum - full text

Bit late, but for my own records I'm just making sure I have Michel Barnier's full response to the lobbying forums on the blog (previously only had an abridged version).

Few notes;

• Solvency II "has been subject to more consultation and impact studies than any other piece of legislation I am aware of" - referenced like a badge of honour, as opposed to any negative connotations
• "Not surprising" that surplus capital has declined - is the implication that the industry is undercapitalised
• Commission is not convinced by lobbyists argument on contract boundaries in particular

Solvency II - Outsourcing Policy test

A pretty monumental announcement from Zurich and Capita today about outsourcing pretty much all back office for the next 10 years. Not sure exactly where the Zurich lads are with equivalence etc, but this contract is a mighty test of the quality of their outsourcing policy wording, Solvency II aside!

In addition, as I had blogged earlier, there is an interesting angle on VAT-able services for Insurance administration which may make claims administration etc more expensive for companies who "in-source", so these kinds of deals could circumnavigate that possibility.

Risk Mapping - Like reverse stress testing, but less of a mouthful...

Nice piece from an heavyweight board member stateside on how the risk agenda at boards is increasingly diverted onto ticklists of things done, rather than the future risks that would materially affect the organisation.


This is very much in the vein of the Reverse Stress testing in the UK, and he has a lot of good things to say in this article, in particular about creating a risk mapping advisory committee (which I read as Reverse Stress Test committee) which includes members from outside the executive, and even the organisation itself.

Value of Corporate Governance - US Research

With a book named "Corporate Governance Matters", I was immediately interested in this piece of research from a couple of Stanford University dons trying to pinpoint the value of "good" corporate governance.

I found the summary here very light (and some of the citings are incredibly old for such a hot topic), but they have probably kept the good stuff for the book! There are certainly some good alternative angles for supporting the value of Solvency II/Corporate Governance Code obligations etc in here (impact of majority "independent" boards on stock prices, board information gaps and merger & acquisition outcomes).

CEA Annual Report - Solvency II review

The CEA pushed out their annual report today – some very convenient Solvency II and other insurance undertaking-related progress summaries with regards to their lobbying progress.

Solvency II Points;

•  Commission reiterated that the industry should not need to raise additional capital for Solvency II (supporting their view on inclusion of EPIFP in Tier 1, contrary to EIOPA’s wishes
•  Impact assessment will be published when the Commission puts out the Level 2’s later this year 
• “Large part” of the CEA’s Level 3 lobbying work has been on Pillar 3 reporting templates (two rounds of consultation). For some issues they have argues for exclusions on the grounds of utility or cost, as opposed to confidentiality 
• Submitted responses for Level 3 ORSA, System of Governance, Own Funds and Internal Models sounds like these were priority 2. 
• CEA highlights its desire for transitional measures in; hybrid capital; internal models; equivalence and supervisory reporting 
• Commission aims to finalise technical work on L2 this month, CEA provide, in some detail, their lobbying views on; Long-term guarantees; Car Risk; Non-life premium and reserve risk; complexity; EPIFP; Contract boundaries

Other points

• Big reliance throughout the document on CEA’s preferred version of Solvency II application as the supporting excuse for opposing SIFI, Financial Services Tax, extension of Sol II to IORPs and Insurance Guarantee Scheme draft legislation
• Submitted comments to the IAIS on their ICP consultations for global supervisory convergence (they note that it is “moving in the same direction as Solvency II”, whereas I thought the ICPs were pretty much a photocopy!) 
• They note that, unfortunately, Life Insurance products will remain in the scope of EU Savings Directive legislation, as the current impasse is unrelated.
• Very non-committal on progress of the VAT directive, which doesn’t sound promising for “insourcing” of insurance administration 
• On FATCA, they give the impression that their best efforts will be to secure some exemptions for small and irrelevant lines of business, rather than to lobby the USA into submission on this incredibly onerous piece of draft legislation.
• Some constructive effort in the field of cross-border distribution via Insurance Mediation Directive 
• Potential for increased compliance risk off the back of Test Achats ruliing

Central Bank of Ireland - Solvency II FAQs

The Central bank pushed these FAQs out last week (fair play to the various tweeters on the Emerald Isle, who are all much faster than the Central Bank's RSS feed!).

Just like my barnet, it is a bit sparse, but they do note that it will be updated monthly, and you will need to refer back for an updated version (hence I have directed to the landing page, rather than the doc).

Admirable start, and look forward to seeing more of the party line in black and white.

FSA - Annual Report and Accounts - Solvency II and other bits

Few noteworty bits from the FSA's Annual Report and Accounts published today;

• Solvency II consultation paper for the UK industry due "later this year" - still can't be specific, I guess for the same reasons that the EU can't be!
• Will  be "assessing the efficiacy of firm's reverse stress testing exercises" over the next year - as per my last post, get started early by going through the Cass Business school paper!
• References both in the paper and in the press here and here. 
• Fines revenue up from £33.5m to £91.2m - a 'fine' achievement, if it means the bad guys are paying an appropriate share
• Over budget by £3.4m on contractors for "project activity" - not certain if Sol II is in that number or not.
• One very sharp piece in the Enforcement Annual Performance Review about "credible deterrence" and their increasing wish to use the threat of custodial sentance.
• Risk department up in headcount from 672 to 880 people in one year - the kind of recruitment numbers the Central Bank of Ireland would be delighted with!
• Cost of the Risk department up from £112m to £155m - at least the fines money is up to cover some of that.
• Solvency II revenue of £16.0m booked, against £5.8m the previous year. Those were the days...

AIRMIC and Cass Business School - Study of Major Risk Events

I blogged last week about a number of references at the AIRMIC 2011 conference regarding some research conducted by the Cass Business School. A sneak preview of this substantial piece of research on the origins, impact and implications of major risk events is available here (you may need to do a quick registration).

This is an excellet idea in principle, with a very astute summary in this document, so I cannot wait for the full research to come out in July. My take on this summary document was;

• 18 companies who experience "high profile corporate crises", but thankfully they have selected a range of crises, not just straight-up financial implosions (much better for reverse stress testing purposes)
• Talk of "severe, uninsurable" losses as the effect of the crises, which again will make for good reverse stress testing
• The seven "underlying" risks that they identify as being present across industries all seem fair, some more than others.
• That the risk profession is identified as being unable, through lack of experience, remit or courage, to intervene in the materialisation and occurrence of these 7 types of risk is a bold statement (bearing in mind who commissioned the research!) is also fair to varying degrees. It is not so much that the profession is not cognisant of them, more that one is generally not in a room full of strategists as an equal.
• Strong comment that many of the 7 underlying risks are "taboo", as tabling them as a risk professional is tantamount to questioning a director's professional competence.
• "Risk of self-deception" by not receiving this challenge from either an INED or a CRO-type
• Strange comment that Risk and Internal Audit would not be comfortable questioning strategy and leadership risks without further training/experience - personally, if it is in my remit, it gets done.
• Followed by a more conventional flag that questioning leadership can put careers at risk (true for Risk professionals, but not for internal audit surely.

Concluding points were;

1. Rethink risk analysis techniques to cover non-routine risk
2. Extend skills of profession to be able to analyse risk emerging from ethos/culture/strategy/behaviour
3. Change role and status of Risk to ensure open discussion at all levels, including board
4. Boards need to recognise importance of non-routine risks

Unsackable CRO and robust reverse stress testing should do most of that...

Ireland - Corporate Governance Code FAQs and Fit and Proper letter

I got the following Corporate Governance Code FAQs through my RSS feed today, and I was quite shocked about the timing, bearing in mind the 30th June transitioning deadlines for the code - I expect the responses have been shared with the individual questioners prior to this, so the main value is for Board Membership-related questions, which is the one element of the code which compliance can be postponed for another 6 months.

Summary points;

·         Teleconferencing permissible “on occasion” – majority of meetings must be attended in person

·         Time commitment in Letter of Appointment up to firm, Regulator can overrule

·         No plan to kick 9yr+ INEDs off boards as matter of course

·         CEO may not be chair even for a one-off meeting, unless exceptional circumstances

·         Group executives may be subsidiary Chairs (surprising)

·         For 5yr review of CEO clause, the count-back is from Jan 1^st 2011

·         Consulting actuaries would count as Head of actuarial function in absence of anything else

·         Industry asking for regulatory guidance on Risk Appetite, and it is actually being considered

The overwhelming feel from the document was one of regulatory fatigue at the line of questioning from the industry, unsurprising as the document is 50 pages long, and most of the questions centre around "What can I get away with"!


On the same day the following chase up letter on Fit and Proper was sent to the banking industry executives, and again underlines how aggresive the Central Bank can afford to be with the Irish banking crisis as its cornerman, let alone the political promises of Mr Noonan.

Ireland - Some random Solvency II/ERM bits

Couple of topical pieces from the Emerald Isle - A whopping, yet apparently generously applied fine for incorrect submissions to the Central Bank. The generosity was applied due to their being forthright upon discovering the error, as well as their rectification efforts. Rack this one up in your Op Risk tail events log.

Secondly, the Society of Actuaries newsletter for June. Great piece on risk aggregation on page 8 (as I blogged earlier, Mr Elderfield has indicated this is a neglected area so grab everything you can on the topic!), a more actuarially slanted breakdown of Ireland's QIS 5 exercise on p16-17, and notification of some pipeline work on ERM, which I look forward to checking out in the near future.

Third, and somewhat bizarrely, a thinly-veiled attack in the Irish press on the FSA's recent efforts in instigating a fistful of white collar arrests - the implication being they were sleeping on the job when the real crime took place. 2011 seems a odd time to point the finger of shame at narcoleptic regulators, particularly when, once their rather 'toppy' staff turnover levels are accounted for, there can't be many of the class of 2007-08 left!

Lloyds of London - Governance, Risk Management and Use workshop

Some excellent material in this presentation which shows progress to date on these Lloyds worstreams. I noted;

• Seemingly the majority are behind the expected self-assessment score for Model Governance at this point in time
• ORSA process, outcomes and documentation work therefore necessarily further behind
• Actuarial function preparation providing thick range of self assessment scores at the low end
• Rest of the presentation has some good elements on Risk Appetite and Use Test

Obviously has some uses for benchmarking as well.

Groupe Consultatif Solvency II workgroup - meeting with Karel van Hulle

I suspect the GCAE's Solvency II workgroup is more prolific than their minutes suggest, however I noticed a couple of areas of note in their progress report for June;

• They met with Karel van Hulle, who noted his intention to "publish hopefully" (!) final Level 2 text in October, and that binding technical standards work is underway with EIOPA
• They discussed transitionals only insofar as "agreement on the need for these"
• They separately note that they are working with EIOPA on future premiums, but are "reserving their position on any conclusions"...

AIRMIC Conference 2011 - No presentations yet, but...

The AIRMIC conference is chugging away nicely in Bournemouth, and whilst I am not there, I have clocked a few bits of output, most notably a piece of reserach due out next month from Cass Business School called "Asleep at the Wheel" about 7 categories of underlying risks that lead to corporate failure - brief outline here.

The risk profession willl love the seventh item about the Risk Function's concerns hitting the "glass ceiling" - the research will apparently encourage the re-evaluation of procedures and structures in order to avoid this, while auditors and risk professionals will be encouraged to develop "additional skills".

If reverse stress testing is your bag, then this research should be on your shopping list.

European Economic and Social Committee paper on Solvency – 5th May

I do recall fishing for this and having no success, but the EESC Opinion Paper on Solvency II (agreed last month, but not sure when released) makes for fascinating reading.

As with most things relating to European bodies, I struggle to identify exactly what the purpose of it is, but the committee, at the behest of the European Council no less, make a number of substantial points;

• Solvency II "should not result in market consolidation, especially in respect of small and medium insurers
• Focus very hard on sustaining the provision of guaranteed long-term products, and therefore an "appropriate" interest rate term structure is indispensible in calculating SCR
• That this is not just a technical issue, but also a political issue when involving provision for old age
• Explains the reason for "implementing measures" becoming "delegated acts" at Level 2 (which I never knew the driver behind until today!)
• Heavy on smoothing the transition between Solvency I and II, and states that the transition should cover "all three pillars"
• Proper assessment of how transitional rules can be consistently linked with supervisory actions in cases of non-compliance post go-live date
• "Transition should refer more explicitly to the upgraded Solvency I standard as an (optional) minimum level" - I may be wrong, but is Solvency I not a retrograde step for UK  plc, who are already knee deep in ICAS?
• "Interest Rate term structure and illiquidity premium will not be determined by legislative bodies"
• Timeframe for effective launch of Solvency II "particularly challenging" - "Insurance companies cannot be held accountable for instructions that are to be published at a later stage"
• "The proposal that EIOPA develop draft implementing measure by 31 December 2011 at the latest would seem to be somewhat ambitious"!
• Discourages developing more Level 3's where Level 2's already exist - "In case of any doubts, for individual implementing measures (Level 2), no additional technical standards (Level 3) should be provided for; eg Level 3 would not appear to be necessary in respect of own risk and solvency assessment (ORSA), the classification of Own Funds or ring-fenced funds" 

I honestly don't know how to read this - is it the start of the goalpost moving process, the issue of a public challenge to meet tight dealines, or a reprimand for CEIOPS/EIOPA for regurgitating most of Level 2 into Level 3? I guess there will be more to follow...

Insurance Banana Skins 2011 - PWC and CIFI

A regular publication (free from PWC at this link (fill out short form)), the 2011 Insurance Banana Skins document contains some extraordinily candid insights into the thoughts of the Insurance industry across the globe, with a heavy Solvency II and ERM flavour this year. My summary points on the rankings and quotes below;

• 490 responses, 190 from UK (two from my stomping ground on the Isle of Man!)
• Regulation and Capital fairly in my view occupy number 1 and 2 respectively
• Actuarial assumptions incredibly low at 12, bearing in mind how much they will need to be documented, challenged and validated in the ORSA process under Solvency II. It is higher in non-life companies, and more intriguingly, in Regulator's views!
• Talent is a new entry, and is certainly reflective of the consulting industry
• Highlights fear that Solvency II is not just expensive, but takes smart professionals away from their day job (an excuse used by the Irish Banking industry with Basel II in the recently published inquest). They cite a CRO at a major UK insurer noting it could be "to the detriment of oversight of the commercial challenges" of the industry.
• Risk management well down the rankings, after Insurance outperformed Banking in this respect - I would note that the CEA/Geneva Association et al lobbying on Insurers being classified as SIFI's by the G20 is still ongoing.
• Fantastic consultant quote that "Those entities which do not hold high quality capital and have poor risk management tend to be overly critical of Solvency II" - it wasn't me incidentally!
• Prudential Financial Risk director quoted as saying there is "significant risk" that the industry could "platinum plate" models, rather than company-specific versions, though this isn't substantiated
• Solvency II "Largely pointless" to one Lloyds underwriter
• Comment from Axa COO in Asia that "...some lines of business will suffer due to missing capital"
• On Actuarial Assumptions, divergence shown with quotes like "Are actuarial models...becoming the main operational risk", versus "I'm not sure why this [actuarial assumptions] is a risk".
• Quality observation that "generally, the world is moving increasingly quickly, and so the validity of assumptions is falling" - needs substantiation, but is a salient point
• Aon analyst notes that with the focus on internal models, "risk managers and underwriters may start to place more reliance on the model, and less on judgement".
• Neglected area of reputational risk highlighted by an Australian respondent, who looks at the industry reputation damage caused by procrastination, sneaky clauses, exclusionary language etc, which I really liked (easy to focus on single entity reputation).

Board Evaluation - 200 Brass plates?

Published back in April, but useful for anyone who benchmarks this kind of thing - the push for Board Evaluation is led more by the Corporate Governance codes of UK and Ireland than Solvency II (I struggled to find any reference to board performance in the System of Governance L3s).

Of note was how little text is required by some astonishingly large plcs to describe how they govern their governors...

The Actuary magazine - QIS5, ERM, Risk Language and Land Grabbing

Busy day today, so apologies if you are not a fan of volume!

I went through a few articles in June edition of The Actuary magazine - as I had blogged earlier, there seems to be a Solvency II land grab exercise anticipated in which the Risk Management profession would lose out to their Actuarial counterparts, so it is good so see where the common ground is.

There are four articles this month which I strongly advise you give a once-over; my take on these was;

Risk Management - Defining Risk Language -  From premise to execution, there is almost nothing I can fault about this article, and I implore you to read it. I hasten to add that I had seen this (or an extract from it) on InsuranceERM, but this is gratis"! My highlights were;

• Ease at which the drill-down from key risks to sub-categories causes confusion in existing categories (project risk held up as a prime example)
• Their tie-in of "risk occurrence" impacting on "economic value", and using that to tie their premise in to impact on Embedded Value or prospective management actions.
• Illustrating the exact damage each of their categories could do to the different elements of the Embedded Value
• Their busting out of Liquidity, Strategy and Frictional risk, and the reasoning for it
• Their explicit inclusion of Diversification and Aggregation risk - I had blogged on how this area may get the 5 star treatment in Ireland, and seemingly, the actuaries behind this paper also acknowledge how the suite of assumptions made in a correlation matrix hold a risk in themselves
• Acknowledgement of the weaknesses in the scope - just for the benefit of actuaries, and only used 4 bodies to show differences in terminology.

A great effort, and worth 10 minutes of anyone's time.

ERM Strategy - Plan of Action - Stake in the ground for how the Actuarial profession can be properly harnessed for ERM, with the following of note;

• Call to arms for actuaries to make a name for themselves in ERM's "exciting and growing area"
• "Analytical skills, judgement and clear communication" attributes of actuaries positively highlighted
• Nice section on modelling Operational risks, including using the Delphi process ("incorporating expert judgement within risk modelling")

You can see why the Risk Profession may be feeling increasingly uncomfortable!


Solvency II QIS 5: The end of the beginning - Direct from the FSA QIS5 lead, he draws attention to a number of aspects which overstate the change in UK plc's capital under Solvency II (£62bn surplus down to £35bn);

• Change is measured against Solvency I, not the ICAS regime
• Surplus is based on Standard Formula, and UK is largest Internal Model market
• QIS5 takes no account of management actions which can easily and fairly be applied
• Transitionals (not that they are guaranteed) could have a massive impact on UK, with the prevalence of annuity providers - A nice example is included

He also notes 600 questions were fielded by the FSA resource - at £15m p.a for the model-specific industry levy, that is a pricey call centre! 

ERM - The Evolution of ERM - Cross references some Towers Watson Global ERM Surveys for 2008 and 2010, and good for general trends and benchmarking on Risk Appetite and ERM satisfaction.

PRIPS - EU Insurance industry dodging a bullet?

I had lost track of this one while concentrating on Solvency II, but the draft EU legislation on Packaged Retail Investment Products (PRIPS) is reportedly due to be watered down into irrelevance.

From a governance angle, there was some leverage in this proposal as it was drafted (sharp remuneration practices on some of these product types would surely have been blunted), but the industry didn't seem to fancy it from the off, and it looks like they will get their way. Admirable ambition from the EU, but may need to wait.

Guest Post on Solvency II Wire - Expansion on Matthew Elderfield Speech

I have just had a guest post published on Gideon Benari's Solvency II Wire website, expanding on my earlier post regarding Matthew Elderfield's speech a fortnight ago. Click through to enjoy it, I won't replicate it here, least of all because it looks better on Solvency II Wire!

While you are there, I strongly recommend signing up for email and/or RSS feed from Gideon's site, which covers a much broader range of topics than I ever could.

Towers Watson MCEV/EEV research - Solvency II comment

Great piece of research from Towers Watson on EEV/MCEV reporting trends at listed entities in UK and EU. The Solvency II section is on page 3, and while it does little other than confirm that Sol II disclosures have restricted themselves to project costs (and may do little else again after 2011 year end), it is really useful for benchmarking aspects of Pillar 1 calibration and methodology.

Barnier fights back - response to CEA/CRO Forum

FT are reporting to have seen the response of Michel Barnier to the lobbying from, amongst others, the CEA and CRO Forum on Level 2 implementing measures. They quote the following;

• Statements that calibrations are too high "have not been confirmed by evidence"
• Commission is taking sustainable provision of long-term guarantee products "very seriously"
• "The industry's position on some of the other issues raised...is not shared by those who will be making the final decisions"

The last quote is obviously quite an aggressive reposte to the list of gripes supplied by the lobbyists in April, and confirms that the bluntness of Bernardino's views from his interview with InsuranceERM last month is very much the party line in the corridors of power.

I will save the gap analysis between the lobbyists and the Commission until after they publish this letter in full!

Institute of Risk Management - June presentations on ORSA

First week of the month can mean only one thing - IRM Solvency II Special Interest Group had their themed presentations, and in a very timely manner, it is ORSA month!

Two elements were of particular interest. The first was this presentation which contains some excellent slides towards the back which demonstrate reconciliation of "Own Capital" with its SCR starting point, as well as analysis of change and projected solvency ratios in a range of scenarios. This kind of material will be very familiar to actuaries (and indeed anyone who has read through a financial condition report), and thankfully the world of risk management is making this ORSA/FCR linkage explicit.

Additionally, the IRM have also ponied up with another of their surveys, this time on ORSA progress (22 respondents). They summarise in the final slide, but regardless, I found the following noteworthy;

• No one as yet claimed to be fully ORSA operational, and two had not started preparations
• Almost three quarters have been working on ORSA process for 6 months or less
• Risk function overwhelmingly leading the development
• Very low involvement of Internal Audit and Compliance in the process - this despite them being cited as potential "external validators"
• Around a quarter have started from scratch, with 70% using existing processes (I suspect ICA, FCR etc)
• Around half only have their exec involved at a high level, if at all, at the moment - a couple claim their exec have taken active ownership of the ORSA process
• Seemingly it is the risk committee that is the main recipient of pilot versions
• Lack of resource or guidance on style proving to be challenging to respondents
• Half have provided no training or communications to date on ORSA
• Two respondents though guidance to date has been sufficient, the rest were ambivalent or thought it insufficient.

Good work again from the Institute, and plenty of food for thought.

Central Bank of Ireland - Consultation on Risk-based Impact Metrics

Having followed this subject from when the consultation first opened, I was fascinated to see what had materialised. The comment and response document and the individual responses are worth poring over if you are on that side of the pond. My take was as follows;

• Four impact categories confirmed (High/Medium High/Medium Low/Low)
• Surprisingly clear tone that supervision for 'Low' impact firms will be minimal, reactive, and that failure is not a problem. 'Medium Low' firms will however receive proactive supervision with some inspections.
• 'Vigorous Enforcement' will be used to discourage ineffective risk taking - evidence of this already in themed inspections and issued fines
• Best practice from Australia, Norway and Canada utilised (may look into the reasons behind this)
• Impact metrics are being road tested - will not be used for levy setting immediately
• "Primary consideration" for metric selection is measurement of the scale of the firm (as opposed to nature or complexity in Solvency II jargon)
• The PRISM system will be expected to identify business model and governance weaknesses
• Metrics for Life firms all seem reasonable, if pre-determined by common sense. 
• Sticking with the use of divisors to normalise the different metrics onto a common scale - I really like this idea, and advocate it for ERM risk profiling as well, so I'm glad they will "trial and error" it.

Of the comments, I looked specifically at what the IIF had to say, and whether their requirements were met by the outcome. I spotted;

• Alignment of levies with resource consumed was on their agenda
• They wanted weighted averages to be used for the divisors, and regular review of their appropriateness
• Premium income by business line and market share were on their list of possible metrics, but didn't make the cut (the former did, but only as APE).

All in all, the split of impact metrics and PRISM as two ways of determining allocation of resource seems like it has the potential to lead to internal dispute further down the line - hopefully I will get a chance to look in more detail at both aspects at a later date

FSA FAQs - Solvency II Conference

FSA have kindly thrown out some FAQs from their April conference (I suspect in the interests of 'targeting resource'!). Nothing new, though the clarity is appreciated - much of this text is verbatim from the presentation slides.

Central Bank of Ireland - Annual Report

So the Central Bank of Ireland pushed out their Annual Report and an accompanying Performance Review this week. Few interesting things of note;

Annual Report

• Introduction of "Risk Governance Panels" for supervisory staff to 'engage with technical experts, risk specialists and senior staff other than those they report to on a day to day basis' - sounds almost like industry sponsored talking shops.

• Solvency II preparations section seemed very light in content (hosted seminars and workshops, conducted a survey and wrote the Solvency Matters newsletters). However, unlike the FSA, the Solvency II-specific costs are not busted out.

Performance Review

• 7 less (re)insurance undertakingsver the year
• Less inspection work but a third more review meetings
• Already 25 in the policy department from a standing start
• Another 220 staff to come on board over 2011

Fit and Proper - Elderfield asking too much?

A rather bizarre story reporting that AIB, a full 3 months in advance of a deadline for assessing the fitness and probity of certain staff under new legislation, have said they may not be able to do it.

The literal application of the legislation appears to be the issue, with AIB citing a number of around 10,000 staff covered by the definition in the consultation paper (p10 covers the piece about having control over the property of a customer, which appears to be the sticking point).

As Elderfield himself noted in his recent speech, this is supposed to be similar to the FSA approach (which I suspect will drive the as yet undefined Solvency II approach), and I don't believe they ask for administrators to be assessed. One senses that the aggressive regulatory approach currently being taken is leading to a closed door policy between senior staff in the regulator and industry - this kind of private correspondence leaking as a lobbying tactic is very unseemly.

Reputational Risk has a price

Having seen this kind of product mooted in the press recently, I was happy to see details of a Reputational Risk product actually materialise. Would be interesting to know the premium costs and extent of coverage in the interests of quantifying and modelling reputational risk under Solvency II.

OECD and Corporate Governance - anything new?

I had a leaf through the OECD's guidance for Corporate Governance structures in insurance companies. It doesn't add very much to the materials already on the table in the UK and Ireland (indeed most countries with a reasonably up-to-date corporate governance code!), and rehashes a lot of terminology already in play.

The recommend the head of the risk function should be a "non-operational key executive, such as a Chief Risk Officer" - good support for the function which doesn't appear in existing governance codes or Solvency II system of governance guidance.

They struggle with their Actuarial function guidance on the premise that the function (and indeed the role of appointed actuary) on the premise that these are not compulsory in all OECD countries, but what they deliver is almost verbatim Solvency II.

Also of note is their definition of "main categories of risk" - Insurance, Credit, Operational, Market, Liquidity, Business, Contagion (if in a group) and Reputational. They also encourage meetings between external auditors/NEDS and heads of control functions without management present