Solvency II Delay to 2014 - bit firmer?

From the same rapporteur that was responsible for yesterday's blog post on Omnibus II text changes, Insurance Times are reporting that Burkhard Balz has issued a report which supports the June Omnibus draft direction of a desire to phase-in Solvency II implementation throughout 2013 (with regulatory reporting requirements kicking in at the half year).

Haven't located the report as yet, but will post when available

Committee on Economic and Monetary Affairs - proposed text changes to Omnibus II

The GCAE published this on their site today - while I am not an expert on the legislative process, this looks like the proposed text for Omnibus II, hard-coding in deadlines for EIOPA to present draft Implementing Technical Standards and/or Regulatory Technical Standards for the articles which are subject to transitional measures. Justifications for the proposed change are generally provided.

Not sure if these deadlines are new news though (drafts to be provided to the Commission by EIOPA in most parts between March and July 2012).

Elderfield speech to the MacGill Summer School - governance angle

Matthew Elderfield's speech this week to the MacGill Summer School was on the future of Irish banking, but has a heavy corporate governance flavour, so I picked out the pieces with cross-over relevance for Insurance;

• "We have learned from the banking crisis the importance of good corporate governance" - I actually thought we learned about the folie a deux of rancid corporate governance mixed with an intimidated and unskilled regulator, and the inquest seemed to support that. 
• New powers on fitness and probity (for all financial services) will come in later this year (prohibitions, suspensions and removals of execs and non-execs)
• Law containing new powers has been drafted in a way that "grandfathers in" existing board members - regulator however will retrospectively review all bailed-out bank board members if they haven't been replaced since the crisis
• Anticipating legal challenges from said executives!
• Invites said executives to "take up the Minister's (Michael Noonan's) request to act in the public interest" and jump before being pushed
• PRISM framework for a tiered supervisory approach will be rolled out towards the end of this year, and more fully next year - He is "sure it will take a while to bed down" - I'm not sure how much leeway that gives any non-conformists however!

FSA "quantitative tools" for IMAP candidates - Life firms

The FSA have pushed out their "quantitative techniques and tools" for (Tier 2) internal model pre-application candidates to help assist discussions with everyone in the application queue. Primary objective of this is "to identify and prioritise areas for review".

First they are asking for ICA, Internal Model SCR and Standard Model SCR figures as at end of 2010. A questionnaire wil be out in the next couple of weeks, to be returned by end of September, and analysed by the FSA over Q4.

They are also asking for risk dependency and aggregation structures, also in a questionnaire format, along the same timescales (however, as there is an EU-wide aspect to this, the timescale is looser).

Solvency II Equivalence - Jersey's turn...

Just to complete the crown dependencies set, Jersey have piped up with their view on Solvency II equivalence...namely that they are as enthused as their cousins on Guernsey and my Ellan Vannin, the Isle of Man. Probably more to play for on Guernsey (captives) and the Isle of Man (offshore life), but as there seems to be a general desire in the dependencies for following IAIS ICPs regardless, all three are looking at Solvency II in all but name.

IRM Solvency II SIG Presentations from July - Risk Appetite focused

The Institute for Risk Management's Solvency II Special Interest Group have published their July presentations, which were centred around the White Paper on Risk Appetite that they published back in April/May.

The survey on that white paper's content was quite telling - bearing in mind the sample is still relatively small (23 respondents), they were nicely split between agreement and ambivalence on;

• Whether the white paper provided a "workable basis" for developing risk appetite and risk tolerance approaches
• Whether there was sufficient guidance on the development of risk appetite in the doc
• Whether there was sufficient guidance on board/risk committee oversight of risk appetite development

Seems to be general consensus on;

• Organisations having "multiple risk appetites"
• "Risk management maturity" being an appropriate concept to build appetite and tolerance from (large number of "partially agrees" however, which could mean anything!)
• That more guidance is needed on the concept of "Risk mmanagement maturity"
• That "propensity to take risk" and "propensity to exercise control" are appropriate concepts
• That listed companies should consider shareholder value as an appropriate measure of risk appetite
• That Risk Appetite should be measured
• That there are (a range of ) critical elements missing from the paper (range of qualitative and quantitative suggestions provided)
• That a short version would be appreciated for Board consumption
• That the approach in the White Paper will be useful for Solvency II purposes

Two presentations have been published - one from Grant Thornton, which even in slide format looks like a decent stab at getting to the measurables of Risk Appetite, the other from Crowe Horwath which is a more meandering view with some nice touches (the idea of Capability versus Ability is very smart). They also cross-pollenate the Survey results with those of the ERM SIG, with some interesting divergences (namely that the ERM SIG are much more definitive in their responses, and rarely say "don't know"!)

GCAE Minutes - "disappointing" delay

The Groupe Consultatif Solvency II working group pushed out their minutes for June (post-Omnibus II announcement). Interesting to see that they are disappointed with the "very probable" delay, as well as a conspicuously larger-text paragraph on how a lobbying point on calculating Life Technical Provisions has yet to be resolved to their satisfaction (and indeed looks like they will lose out on it).

Not sure who the victor is (EIOPA at a guess), as it is not completely clear who they are lobbying against on the "principle of market consistency"

CEA on EC Green Paper on Corporate Governance

The CEA have published their response to the EC's Green Paper on Corporate Governance, with an overriding desire that the content should be principles-based does not contradict Solvency II. More detailed responses included;

• No prescriptive box ticking
• Nature scale and complexity also referenced, noting "size is less important than the specific risk taking activities of a company
• No regulatory prohibition of chief executive and chair dual role, rather application of proportionality
• No requirement for published diversity policy
• No formal restriction on NED roles
• Strong support for board evaluation, but don't agree with formal evaluation, preferring "comply or explain"

Bernadino interview - short summary

Again, one for the subscribers, Insurance Times had an interview with Gabriel Bernadino this week -not much in the summary, other than a prediction that Internal Models will become more prevalent under Solvency II

AIRMIC and Cass Business School - Full study available (at a price)

Having already blogged on the executive summary of this paper, I was delighted to see the full version has been released (available here) - however, you may very well need to pay up (pdf version is around £100). I would suggest if you have reverse stress testing work to do that it would be money well spent.

The evolving role of the Actuary - Towers Watson insights

A little more on developments in the Actuarial function under Solvency II, this time from Towers Watson.Worth looking out for more material from the "European Actuarial Director's Forum", but they provide the gist in this doc, most notably (on the future of the function);

• "Growing need for company boards to receive and understand risk information and data" seen as a likely workload increaser
• "Up-skilling" may be required for some actuaries to provide the opinions on underwriting and reinsurance policies (was surprised at this, but these are EU-wide findings)
• Requirements for separating "operating" and "controlling" functions to ensure independence, as well as (potential) whistle-blowing requirements still to be decided
• Concern that supervisors may provide stronger challenge on undertakings with combined Actuarial & Risk functions
• Pretty even spread of "biggest challenges" to the function - only 19% had "contribution to the risk management system" as their number 1
• Spectacularly aggressive comment from Axa's Chief Risk Officer - "Risk management is too important to leave to the risk management function"
• Small fear that restrictions on who can head the function may be relaxed due to the legislative ambiguity
• Around 60% looking to reorganise their Actuarial function
• Three quarters of respondents have Risk and Actuarial function positioning as a "significant issue", with various states of preparation
• Towers Watson drop in their idea of industrialising actuarial process and output in order to aid with all of these concerns (i.e freeing up actuarial resource for the new Solvency II remit, including the land grab in the risk function already discussed on this blog)
• Both Solvency II and IFRS cited in the summary as reasons why the function may not only be considered "purely technical specialists", but also develop into a "wider business advisory role in relation to risk management".

McKinsey survey - Governance since the economics crisis

The guys at McKinsey have fired out an interesting survey on the activities they currently spend time on (and indeed what they would like to spend more time on!) Sample is around 1,600 respondents with a decent worldwide spread in April 2011. What they came up with was;

• Boards are spending around 14% of their time on corporate governance and compliance - relative to the value the activity adds, fewer boards wish to increase time spent on this matter (and more wish to reduce time spent) than on any other activity. Most would rather increase time spent on Strategy and Talent Management.
• Surprising number of boards either develop strategy with management (41%) - wouldn't say I am phenomenally convinced by boards trying to do "a bit of both"
• Only 14% have "complete understanding" of the risks that their company faces, with 32% having "little or no" understanding - sobering and, in the context of their wish to spend more time on strategy, offensive.
• Almost half though a better mix of board member backgrounds/skills would improve performance, a third would prefer more timely company information, and a quarter would prefer better induction and director assessment processes
• Both Chairs and normal directors would prefer to spend significantly more time on board work (around an extra 33%)

Nice bit of work, as you would expect from the big boys. Always good to take a look at the wider picture every now and then, and in this instance it points at boards wishing to get busy with anything as long at it doesn't involve risk.

FSA - Operational Risk Framework enhancement consultation for banks

Consultation alert! Anyone who likes their operational risk benchmarking and best practice will want to give this document released today their attention (divided though it may be by being Bank-oriented).

Whilst "the aim of this guidance is to assist supervisors in assessing and challenging firms' documentation and the way it is managed" as well as to "help Operational Risk functions at firms to meet the standardised approach requirements for operational risk", it actually reads like a best practice list which, in the shadow of Basel's efforts last week, is worthy of the attention of the insurance industry. My take was;

• Heavy on document maintenance (definition/descriptions/formula consistency)
• "Good practice" to map SYSC/BIPRU references to op risk documentation "on a periodic basis"
• Firm wide terms of reference, naming conventions and mutual references in documents noted as "good practice"
• Created 3 tiers of a "possible document hierarchy" which could be linked together in a firm-wide documentation map
• "Good practice" to implement controls around documentation ownership, and a central register of all documentation "could be practicable"
• Very unwieldy list of categories recommended for the document register
• "Recommended" that firms identify all policies and documents that are critical to the operation of the firm
• Practice of sticking revised documents on shared drives/intranet pages actively smacked down, advocating a proportional approach ranging from memos to formal training workshops
• Advocates KRIs (or KCIs, which was a new one on me!) for documentation monitoring - I actually quite liked their suggestions
• Recommends that firms meet a "use test" for documentation

Not seeing exactly how any of this might transfer over to the Insurance industry, but it doesn't augur well for anyone without SharePoint!

The Actuary magazine - handy piece on reserving

Really liked this breakdown on technical provisions calculation and reserving from The Actuary magazine- stored here for admin purposes rather than elaboration.

Society of Actuaries in Ireland - Land grab for the Solvency II grey areas?

Having already blogged on the brewing discomfort of the Institute of Risk Management regarding the perceived preference of the FSA for Actuaries to run Risk functions under Solvency II (and had to follow up as the story developed), I was very interested to read through the Irish Society of Actuaries strategic plan released today.

There is definitely the beginnings of a land grab here, with a number of statements eagle-eying the juicy cuts of what is currently ascribed to the Risk function as per the extracts below;

“We also aim to have our members recognised as being committed to the highest standards

of skill and professionalism and well equipped to take up both actuarial and risk management

roles under Solvency II.”

"enhance the standing and role of actuaries within insurance and reinsurance

companies, and in particular, to enhance the standing of actuaries as risk managers"

"Promote the qualifications and relevant experience of actuaries as risk managers."

"Increase awareness of the CERA (Chartered Enterprise Risk Actuary) qualification."

"Another area that is becoming increasingly important for actuaries is risk management,

including the management of risks beyond financial risks. We have already delivered a

number of CPD events aimed at improving members’ knowledge and understanding of risk

management concepts and skills and this will remain an important area of focus."

And perhaps the most land-grabby target;

"Explore the feasibility of partnering with an appropriate university or similar body to

develop a comprehensive risk management training programme for actuaries who want

to skill up quickly in this area."

It's a good job I'm all about openness and competition, otherwise I might start to get an inferiority complex!

Irish Corporate Governance - first forced shift of director?

Bit busy on the UK front at the moment, so not sure if this is the first "forced" change in directorship as a result of the revised Irish Corporate Governance code, but it is very high profile, being a subsidiary of supermarket behemoth Tesco. The latest deadline of obligations to comply with would have been last week (end of June).

Strange in a number of ways - firstly that as an "adviser", he is reportedly keeping the same influence he wielded as non-executive chairman (surely not in the detail or indeed spirit of the code), and more significantly, that a large, well connected company couldn't find it's way around the code (not reported, but I suspect this would be due to the number of other directorships this gentleman holds) - this surely shows that the Central Bank will be taking no prisoners on the board composition front. Well done!

EIOPA Stress Tests - come on Germany, who failed!

The pressure on the insurance industry to 'fess up to the undertakings who failed aspects of EIOPA's stress tests appears to be ratcheting up. Reuters claimed this morning that the UK and Germany has 'stayed mum',, while the French and Italian contingents were happy to announce they had a clean bill of health.

This was followed by the ABI reporting that the UK were similarly clean. This increasingly makes our friends in Germany look like the odd-one-out (indeed I blogged yesterday on the unique problems facing insurer's balance sheets in that country).

Please therefore keep a look out for anyone announcing a German 'clean bill of health' - then we can take the guessing game to some of the peripheral European players!

Late post-script - more detail on how German insurers are expected to fare is available here. I couldn't locate the research cited, but the numbers bandied are pretty modest, so I can't imagine there would be too many MCR failures if these numbers stand up.

Swiss Re World Insurance in 2010 sigma study - no love for Solvency II

Swiss Re have pushed out their World Insurance trends research - expect to see it cited from pillar to post, as it is an exceptional body of work, with a whole host of uses (benchmarking, strategic planning and risk monetising as a minimum).

I have just kept an eye on the Solvency II aspects - references were as follows;

• Higher capital requirements for long-tail business and "overly stringent" capital requirements noted as a challenge which could undermine profitability
• "Onerous" capital requirements deriving from Solvency II could harm policyholders and economic growth
• Life companies will be "forced to shift assets into less risk asset classes"
• "Stricter solvency regulation (Solvency II) and higher capital requirements will be implemented by ratings agencies going forward"
• "Positive step" of Solvency II nullified somewhat by the tightening of "key parameters" since the credit crisis, leading to (potentially) higher capital requirements for "the most important life insurance products"

All in all, pretty negative as far as the predicted impact of Solvency II in its current form on the future of the insurance industry. Fair?

IAIS - Comframe is out!

Anyone currently working in an "Internationally Active Insurance Group" will want to get involved in the IAIS's Comframe consultation. I will give it the eyes soon enough, but at 150 awkwardly formatted pages, it may need to wait!

Finanzplatz Munchen Initiative - Solvency II and Basel III impacts for corporate Germany

Whilst I try to restrict my German exposure to Rammstein and beer (ideally both!), this particular piece of research from the Munich Financial Centre Initiative was too substantial to ignore, covering the likely impact of Solvency II (and Basel to a lesser extent) on corporate financing across Germany (summary here).

It loses a little subtlety in translation, but the research certainly helps draw attention to the lobbying direction of the German contingent in CEA, focusing on the detailed investment strategies of national insurers (favouring the routing of institutional investment via banks, being big in the world of hybrids etc). It draws particular attention to the intra-national differences between Germany versus the French and British on these matters. It also suggests that the threats of Solvency II and Basel III twinned have had a substantial downward pressure on insurer stock prices.

It ends by strongly suggesting the EU trigger a QIS to consider the reciprocal effects of the two pieces of legislation, and push those results to the relevant bodies (EIOPA in our case).

Ultimately, my read would be that of all the transitionals currently on the table, the classification and eligibility of own funds would be highest on their list, and if they could squeeze in any calibration-related changes on long-dated debt all the better

EIOPA Stress Tests - all good?

Rather than replicate anything covered by Gideon Benari's excellent piece on the Solvency II relevance of the stress tests, I have just aggregated thoughts a few articles here.

Modelling Design always provide a digestible summary of the mathematic around these things, and didn't fail here either.

It was a bit of a non-story as far as BAU goes (I suspect most participants were furious at having to play at this while so many aspects of the Standard Model used for the exercise are up for debate). Bernadino himself is quoted saying as much when explaining why there would be no "naming and shaming" of non-MCR compliant firms.

However there was a suggestion in the FT today that the companies which missed the MCR under one or more stresses were "widely suspected to be smaller mutuals rather than larger listed [companies]". As they broke the Omnibus II delay story, they appear to have their snitches in the right place, so it would be interesting to know which "smaller mutuals" participated, and what caused the breach.

Assorted comment on delay to Solvency II and FSA's participation in debate

Few bits on delayed timeline, FSA's response, Industry response etc - centralised for my benefit more than anything!

• KPMG take a stab at the FSA for not being influential enough in Europe
• Cockfighting politicians regarding whether EU becomes too influential under Solvency II - a rather frivolous discussion bearing in mind Hector Sants has already emphasised that EIOPA will ultimately have the whip hand
• Couple of shouts on additional year being inappropriate
• Lloyds-specific shout on additional year for Omnibus II

LRN Ethics and Compliance Leadership survey - contradictions

I read through this US-centric publication on corporate Ethics and Compliance trends (107 companies in the sample, you may need to quickly register).

I was surprised to see that, with the majority supporting existing imperatives such as aligning "core values with day-to-day operations" and improving applicability and understanding of individual "Codes of Conduct" that the emphasis on data security centred around privacy and preventing hacks or malicious leaks - surely if one runs an ethical and compliant business, they would not need to worry about Wikileak-style unmasking of institutional misconduct!

Also, over half of respondents report through the General Counsel - not traditionally a path that would allow for enterprise-wide enlightenment, and the recommendations of the research certainly advise as much with its "Less legalistic, more business orientated" theme.

Amusing was the Sales/Distribution function coming top of the ""areas of greatest concern in promoting a strong ethical culture" - poor them!

Basel Committee - Principles for sound management of Operational Risk refresh

The Basel Committee pushed out their new, improved version of the Operational Risk guidance for the Banking Industry - as I suspect the insurance industry will ferret through this for the good bits, I had a good look through myself.

The 11 principles they settle on are all logical - highlights next to each;

The board of directors should take the lead in establishing a strong risk management culture.

• Recommends a code of conduct or "ethics policy"
• Compensation should be aligned to the bank's risk appetite/tolerance statement
• Training needs reflected by seniority, role and responsibilities of staffBanks should develop, implement and maintain a Framework that is fully integrated into the bank’s overall risk management processes.
  
  • Outputs of Op risk framework should be incorporated into the strategy development process (if used for capital allocation, this would be inevitable)
  • Framework should define Op Risk and Op Loss in a comprehensive board approved policy
  The board of directors should establish, approve and periodically review the Framework
  
  • Board should ensure that management avail themselves of best practice as it develops
  
  
  • Ticklists for what the board should be considering in context of this principle
  The board of directors should approve and review a risk appetite and tolerance statement for operational risk Senior management should develop for approval by the board of directors a clear, effective and robust governance structure
  
  • More ticklists for achievement
  • Provides for two-tier risk committee scrutiny based on "nature scale and complexity" (either an ERM committee considering reports from Market Credit and Op, or a flatter approach for smaller banks)
  
  
  • Standard list of identification/assessment tools, which are in use in most industries, so serve yourself if you are not familiar
  • Optional piece on "capture and [monitoring of] operational risk conttributions to credit and market risk related lossess in order to obtain a more complete view of operational risk exposure" - I like this piece on "border risks", and it is important from the Solvency II angle for correlation matrices
  • Differentiate KRIs and KPIs in a way I haven't seen previously
  Senior management should ensure that there is an approval process for all new products, activities, processes and systems that fully assesses operational risk. Senior management should implement a process to regularly monitor operational risk profiles and material exposures to losses.
  
  • "Reports should be manageable in scope and volume"! I suspect this will delight the Op Risk staff as well as the Board's, right up to the point at which something critical is left out on the principle of keeping the reporting 'manageable'.
  • Smal;l ticklist of content that "should" be included in Op Risk reports
  Banks should have a strong control environment that utilises policies, processes and systems; appropriate internal controls; and appropriate risk mitigation and/or transfer strategies.
  
  • Lots of ticklists on policy and process content that "should" be in place
  • Technology and Outsourcing risk given special treatment as far as internal controls go
  • Board of Directors expected to "determine the maximum loss exposure the bank is willing and has financial capacity to assume, and should perform an annual review of the bank's risk and insurance management programme".
  
  
  • Ticklists for continuity management processes and considerations
  Banks should have business resiliency and continuity plans in place A bank’s public disclosures should allow stakeholders to assess its approach to operational risk management.
  • No obligations for public disclosure of Op risk loss events
  • Disclosure focused mostly on detail of the Op Risk framework itself, ostensibly that it should be detailed enough to let the public make an informed judgement on its adequacy.
  
  
  • Ticklist for new product/activity/process/system consideration provided - noted as "should be considered"
  Senior management should ensure the identification and assessment of the operational risk inherent in all material products, activities, processes and systems

Strong culture unequivocally linked to "ethical business pactices"

Solvency II and UK Treasury - Mark Hoban speech

Mark Hoban, Financial Secretary to the UK Treasury, spoke at the London 100 Group event yesterday.

He talsk of the "big ticket item" of Solvency II, and attempts to take some credit for the government's work with the industry on obtaining concessions regarding Matching Premium, as well as highlighting that the next few months are crucial for the ongoing debate (maybe an indication that, despite the handover of the EC presidency to a reportedly more pragmatic Poland today, that Omnibus II will not be getting off the EC table until Autumn).

He also emphasised that the UK Government have ruled that the outcomes of the Test Achats case will not be applied retrospectively.