Solvency II and asset allocation - mixed messages

There seems to have been a suite of materials on Solvency II and predicted asset allocation impacts recently, from the great and good (Gideon on the Solvency II Wire has kept on top of these, and I took a look at the Oliver Wyman/IIF document last week - much of the materials pointed towards a drive towards short term EU government debt (capital-free, and no duration penalties) ahead of where an insurer may traditionally have invested for policyholder benefit, corporate (and specifically bank) debt.

There were some left-of-centre views that I spotted, one from a representative of Markit opining that, in the current climate, government debt was now being viewed as riskier than Western European corporate debt. Another covered the potential for Insurance Linked Securities demand to increase under Solvency II, thus necessitating more issuance to be EU-based (as opposed to traditional homes Bermuda or Cayman). The third came from Union Banque Privee, with research cited in the FT that, with appropriate asset selection (cheeky derivatives used as examples), asset arbitrage will allow insurers to obtain exposure and performance without necessarily holding onerous amounts of capital as prescribed under Solvency II.

The first then indicates that the weightings may need a genuine re-examination with the Eurozone debt issues as the backdrop, while the other two suggest there are investment options to counter the new requirements. Is the IIF research therefore much ado about nothing, or perhaps is the mighty banking lobby having one last "flex of the guns" before its emasculation over the next few years?

FTSE Insurers - last but not least...

Having tried on a number of occasions to complete the traipse through FTSE interims for Solvency II progress and mistakenly thought I was finished, Chesnara (a Resolution-style acquisition vehicle) dropped their results today - Reuters take on them is here, but I would highlight;

• On target for the current implementation date of 1 January 2013. "...the exact date is currently being reconsidered by the EU and may be deferred to 2014”
• [We] also believe that the current climate and the challenges of Solvency II will give rise to possible acquisition opportunities and [we] remain keen to progress these.
• Current planning indicates that [we] are well placed to meet the deadline and that there is not expected to be any increased capital requirements in the Group's UK businesses.

Irish Life and Permanent also got in on the act - I had spotted a few years ago (p21 of the document, p23/24 of the pdf) that they were massively ambitious to enjoy the capital savings expected under Solvency II (this was pre-crisis of course!) Their ambitions seem rather curtailed now, commenting only that "The group believes that the adoption of Solvency II will increase available capital resources." 

ERM benchmarking - Accenture - "High-performance insurer of the future"

A decent effort from the guys at Accenture on identifying and explaining the kinds of strategies which in their mind will separate the insurance men from the boys in future.

They have researched 70 companies (mix of single line, multi line and multinational companies) and come out with;

• A suite of KRIs to measure and benchmark corporate performance
• 5 Key attributes of "high performance" insurers; Customer-centric distribution, responsiveness to market, operational excellence, pursuit of cost reduction and focus on risk management
• 5 forces for change in the industry; growth shift to emerging markets, increases in technological development, escalation of risk and regulation, changes in consumer behaviour and changes in the competitive ladscape
• 6 distinct business models that should flourish

Very useful for benchmarking, KRI and ORSA purposes, particularly if you are working for a "multi" - the future growth aspects are likely to be hitting a strategic plan near you in the next couple of years...

Think piece from CII - rethinking risk management (Solvency II angle)

In the context of the FSA's perceived wish to have more mathematicians in charge of Insurance company risk functions, it is always nice to wrap one's self in the comfort blanket of some views from the soft side of the fence.

This paper from Dr. Ashby, taking a sample of 20 risk management professionals (no mention of their backgrounds, which would have been handy in the context), is a look back over the causes of the credit crisis and how to negate such causes in future. It points at the following;

• Consensus that inappropriate risk culture, poor risk communication and over-reliance on modelled risk assessment were significant contributing factors (both institutions and regulatory/ratings agencies highlighted). These are of course the kinds of aspects most difficult to attack without an appropriate remit and seniority (i.e CRO seat)
• Recommends more of a balance "between modelling and judgement", to counter the increased focus on "objective measurement over effective management" - guessing the quota of pure risk versus actuarial-style in the 20 person sample was weighted towards my kind!
• Fairly critical of risk functions for either alienating themselves from the business with a compliance-led approach, or for lacking the skills to communicate risk exposures
• None of the sample agreed that Solvency II would lead to improvements in risk management.
• Strangely highlights operational risk as an aspect of risk management "that does not lend [itself] to formal mathematical modelling" - couldn't agree less, and I'm not an actuary!

A worthy paper, good for benchmarking, and good for reassurance - well done to all involved.

Gender Diversity on Boards - the drive continues...

Lots on gender diversity this week, which I keep a watching brief on for obvious corporate governance purposes as well as impact on the post-Solvency II board, bearing in mind the Level 3 guidance on System of Governance in the area of "collective knowledge, competence and experience of the management body" (Guideline 12).

The Guardian highlighted progress towards Lord Davies recommendations (where the 6 month "ticker" has almost "tocked"), and flagged that there is some rather specious cramming of female non-execs since February to get the numbers up (only 1 executive appointment since Feb!). Interestingly, the responses sent to the FRC on adding a piece into the Corporate Governance Code on promoting diversity have been mostly in favour.

Looks like the 25% target could be a while away yet, and may be against the spirit of Lord Davies intent if completed by using the Non-Executive tactic.

The FT also flagged up a drive in Norway to extend the 40% female quota past listed entities and on to large unlisted companies (where it currently stands at 17% in the numbers quoted). The positive criteria cited made me chortle with my own inadequacy, namely that female board candidates;

• Are younger and better educated
• Are less risk prone (NB as a risk professional I have no idea what to think of this "trait")
• Are not as driven by high salaries and bonuses
• Generate deeper and broader discussion 

Evidence cited below this argues against, whilst highlighting that it is a fait accompli when considering the political persuasion of the current government.

Staying in Scandinavia, I checked out the recently revised corporate governance code in Denmark. Whilst they have a number of pieces on board "diversity", its benefits, and recommendations on regular reporting on diversity, they also slip in a clause (4.1.4) recommending the board discuss annually their activities to "ensure diversity at management levels, including equal opportunities for both sexes", as well as recommending that "measurable objectives" be set to this respect and publicly commented on.

Further comment gets to the heart of the recommendation by using the proportion of women at specific management levels as an example - they could just put the quota in and be done with it!

FT report on listed insurer's capital trends

Just in case anyone missed out on Monday, the FT provided a quality summary on perceived advance capital planning by UK and EU insurers ahead of Solvency II. I say quality despite the couched terminology (SCR referred to as the "softer capital requirement"!)

The suggested SCR coverage targets referenced are interesting (125-150% in the UK, and as much as 170% in continental Europe) – I have heard generalisations on target SCR surplus before (in the context of economic capital targets), but the guy from JP Morgan obviously thinks he’s onto something.

I had a quick look, and thought Generali may struggle on the European side (they had 168% as their Economic Solvency Coverage on p23), but everyone else was well covered.

The schematic also highlights the increase in surplus capital pre and post-credit crunch.

Implications of financial regulatory reform for the insurance industry - IIF and Oliver Wyman Paper

I managed to get a good look at the paper reported widely last week on how Basel III and Solvency II appear to have conflicting end-games, which could prove calamitous for banks should there not be at least some cognisance of each other's ambitions - thanks a bundle to the guys at Oliver Wyman for sending me a copy gratis (just fill in the form here to get your own, much trickier from the IIF website).

More important to note the additional lobbying angle and indeed the people behind it (Zurich's CRO and Swiss Re's CEO appear to be prominent in the IIF's insurance working group, with Allianz and Aviva also participating), rather than the minutae of the report (which is less than 30 pages regardless).

It of course points out the folly of EU government debt being "risk free" in the current environment, but also shows the differing capital requirements for corporate bonds in the NAIC, Basel III and Solvency II approaches, highlighting how relatively onerous long-term corporate debt will in terms of capital consumption, despite the fact that long-term bonds are ideal from an ALM perspective for many insurance products.

Bermuda, Solvency II and equivalence (and some US comment)

No doubt you would have seen the release of EIOPA's equivalence work to date on Japan, Switzerland and Bermuda. Summary articles here and here if you haven't.

I will take a more substantial look at Bermuda's report shortly (in the context of Ireland's captive preparations, it could be a welcome fillip to the country if there is an exodus). They were certainly singled out as the least-well prepared, being criticised on a number of legal requirements as well as wholesale gaps in governance requirements and, more worryingly, capital requirements which, in EIOPA's words, "in practice can be very low for insurers with a high risk profile".

Interestingly one of the USA's finest insurance commissioners weighed in on equivalence this week. I suspect it was not intended as a sleight to refer to the prevailing European regime as "admittedly outmoded", though he appears to be to be staunchly conservative in his stance, commenting "...any equivalence process must respect the different legal and regulatory systems that exist around the globe".

A request perhaps to "respect his authoritaah" a la Mr Cartman? Certainly a view not shared by the queue of other countries wishing to attain equivalence, and a repetition of the IFRS/US GAAP protracted convergence the most likely result.

Irish Corporate Governance Code for captives

The Central Bank of Ireland pushed out the Corporate Governance Code for Captives this week, which is to all intents and purposes a lightly abridged version of the main event.

My particular interest was their approach to governance and risk appetite, and there is no let-up from the obligations on insurance undertakings in this regard.

• Full qualitative and quantitative documented Risk Appetite required - argued against by some in the industry on the basis of "natuire, scale and complexity"
• Material deviation from Risk Appetite to be reported CBoI within 5 days - regardless of whether parent company or captive manager identifies it
• "Where appropriate", the board may consider a risk committee
• Internal Audit function required, but may use Group resource, or indeed outsource

Handy FAQ document accompanied its release - unlike in the consultation for the main code (in which almost every suggestion was ignored save for tiering supervision between 'big' and 'little'), they have actually made a few tweaks in response to the industry, which is very healthy. They have increased the transitional period by an extra 3 months, dropped the requirement for a deputy chairman, and permitted non-directors to aid in the development of captive strategy.

I am by no means an expert in the area, but they seem like proportional, tailored solutions to retaining a presence in this market, and the Central Bank ought to be applauded for the effort, even if judging by the number of "no's" in the consultation, the industry wanted more!

FTSE Insurers - last interim result (I think!) and Solvency II progress

Resolution/Friends Life, the darlings of the disclosure world, released their half year results today (there is a location check on the way through on this URL, but don't be put off, it's a Guernsey thing!). This of course compliments the other FTSE Insurers' releases which I have blogged on previously.

As ever, Resolution are very forthright on most aspects of their raison d'etre, including Solvency II preparations - they note the following;

• "The implementation of the EU Solvency II Directive continues to be a key focus of attention for the Group...Friends Life group is closely involved with the industry in lobbying on key areas where uncertainty remains"
• £24 million of cost booked in respect of Solvency II and finance system developments, complimented by "overall [Solvency II] implementation programme is on track against its plans and budget" 
• "the Group believes that [Solvency II] will have a favourable capital impact on the Friends Life group relative to current Pillar 1 solvency requirements"
• "Disappointingly, there is a lack of clarity on the final position with respect to Solvency II, and the implementation date looks likely to be delayed" - no commitment on date, unlike some of the others
• “participated in the EIOPA stress test exercise” and are “closely engaged in the development of the tax proposals including any changes arising as a result of Solvency II”.
• "The Group has been accepted into the FSA’s pre-application process"
• "Providers, in anticipation of the higher capital requirements under Solvency II, have been adjusting their pricing which is leading to increasing margins." reinforced later specifically on annuities
• Solvency II considerations down as a "key driver" in the context of the cash generation result - presumably in the context of how much they can pay away and how much must be retained, though I could be wrong
• German product range directly affected by "the impact of Solvency II [which] is expected to limit market participants' ability to provide traditional with-profits product offerings."

The comment that "The Group assesses strategic developments and opportunities on a Solvency II basis" was perhaps the most fascinating part - how you do this without clarity on the suite of transitional measures, Omnibus II elements etc is beyond me.

As a post script, Phoenix also posted interims, albeit a little later than the others - again, a lot of disclosure on Solvency II, quotes as below;

The Group remains actively engaged in supporting the development of Solvency II through industry consultation and participation in FSA and ABI industry forums. 

Both the European Council and the European Parliament have proposals to amend the timescales for the implementation of Solvency II and there appears to be growing political momentum towards delaying full implementation until 1 January 2014. At the present time however, there is no certainty that this will happen and the Group continues to plan for implementation on 1 January 2013.

The Group remains on track to deliver an approved partial Group internal model and has been accepted into the FSA internal model pre-application process following the submission of the pre-application process qualifying criteria template in 2010. In respect of the resources the FSA will devote to the pre-application process it has stated that it will concentrate on a small population of firms representing a significant market share and which it regards as having the highest potential impact on its objectives. The Group is included in this category and remains in continuous and constructive dialogue with the FSA.

The Group's actuarial IT systems transformation project will deliver a single actuarial modelling platform across the business, transforming modelling capability and efficiency and underpinning development of the Solvency II internal model and Own Risk and Solvency Assessment.

"We continue to target full Solvency II readiness by the end of 2012.Our Internal Model Self Assessment Template has been approved by the FSA and we are on track to meet the Internal Model Application Process date of 1 April 2012."

On 23 March 2011, HMRC issued a technical note on 'Solvency II and the Taxation of Insurance Companies' outlining changes to the taxation of UK insurance companies with effect from 2013. The Group has been actively involved in consulting with HMRC and HM Treasury on the detail of the new rules, with the aim of ensuring that the Group's policyholders and shareholders are as far as possible not adversely affected by the changes.

The consultation process is still on-going in relation to certain aspects of the new rules, and as a consequence of this and the complexity of the proposed changes it has not been possible to estimate their potential future impact on the deferred tax balances shown in these interim financial statements. Draft legislation is expected in the second half of the year and its estimated impact on the deferred tax balances will be considered and disclosed in the year end financial statements.

Groupe Consultatif and dates for revised pre-consultation docs for Pillar 2

Nice and simple this one - Groupe Consultatif Actuarial Europeen minutes for the last month's lobbying activity. Note the quote that "It is expected that pre‐consultation on ORSA and governance will be re‐published in the autumn." Might want to put that into your diaries...

Central Bank of Ireland - Annual Compliance Statement guidance for new Corporate Governance Code

The fun never stops in the world of Irish corporate governance and risk management - new guidance from the Central Bank has been released to aid with the completion of Annual Compliance Statement (and how to evidence the statement's content) - "compliance" of course being with the new corporate governance code. Some fascinating elements, which should have crossover uses regardless of your jurisdiction, such as;

• Boards must determine breach "materiality", in the context that "the Central Bank views all areas of the Code to be equally important"
• Code will be reviewed "in light of relevant EU developments", naming Solvency II specifically - I personally read that to mean that the new code will be subservient to any Solvency II requirements.
• Retention of supporting documentation section - excellent as a checklist of the kind of materials all Solvency II-affected undertakings should be reviewing as part of System of Governance and ORSA requirements, as well as likely sources of Use Test evidence
• Risk Appetite section (sub section of the above) - confirms that, by implementing these requirements effectively, one should be in great shape for Pillar II

 Look forward to seeing some of the "material deviations" being made public once the guys get up and running, should be some nice test cases over 2012.

FTSE Insurers - Solvency II Progress

Having already checked out the earlybirds in the interim reporting season for their Solvency II progress (here and here), Standard Life chipped in today with their progress.

• Slight IGD surplus improvement (others have followed suit to varying degrees of prudence)
• Having de-risked their business and having a capital-lite business model, they feel "well placed to operate in the currently proposed Solvency 2 environment"
• Transformation costs (including Solvency 2 costs) up from £17m to £23m in the half year
• Solvency 2 "currently expected to implement in 2014" - a little more presumptuous than the others who preferred to stick with 2013, but bearing in mind it is a fait accompli, fair enough.

The recurring motif across the listed insurers seemingly increased costs, increasing own funds (possibly more through equity markets being peaky in June than by design), and a resignation that 2014 is the new full implementation date. 

Central Bank of Ireland - Solvency Matters number 5

Still a touch light from a forward looking perspective, the Solvency Matters bulletin from the Central Bank of Ireland. As well as a few reviews of activity already long passed, they "strongly recommend that your working assumption should be that the implementation date of Solvency II remains 1 January 2013... This is what we continue to aim for in the Central Bank of Ireland"

FTSE Insurers - more revealing on Solvency II preparations in the interims

Old Mutual and Pru announced their half years today - much more information around Solvency II preparations than presented by Aviva, L&G and St James's Place earlier in the week;

Old Mutual

Capital - "The Group issued a £500 million 10 year Tier 2 bond in June 2011, which is expected to be compliant with the anticipated Solvency 2 requirements and qualifies as Tier 2 capital for FGD purposes."

Important uncertainties - "The discussion on the treatment of EPIFP (Expected Profits In Future Premiums), as to whether it should be fully eligible to be treated as Tier 1 capital under Solvency 2 continues. No consensus has yet been reached between the different European bodies.

We await the completion by regulators of the initial equivalence assessments of the first three non-EEA jurisdictions, one of which is Bermuda. Results are due in November. "

Liquidity premia assumptions - "In deriving the liquidity premia at 30 June 2011, we have reviewed emerging Solvency II matching premium guidance and a comparison of the yields of similar durations on South African government bonds and bonds issues by state-owned enterprises. At those durations where swap yields are not available, e.g. due to lack of a sufficiently liquid or deep swap market, the swap curve is extended using appropriate interpolation or extrapolation techniques."

Economic capital, risk management and Use Test - "The iCRaFT project is progressing to plan and is on track to deliver the requirements for Solvency 2 compliance. Despite the ongoing uncertainty in respect of certain Solvency 2 detailed implementation measures we remain confident in our current design. We are now entering a phase of the project, in which we will demonstrate the extent that we have embedded the new tools and risk management processes. This marks a significant milestone in the project and ensures that the iCRaFT deliveries are being integrated into business processes and are adding insight in our key risk decisions. This will place us in a favourable position for the ‘Use Test’ requirements under Solvency 2."

Prudential

General - "We are supportive of the risk-based approaches to capital management provided the metrics used are appropriate. Along with our European peers, we do have concerns about the potential volatility which Solvency II could introduce and the degree of prudence built in to the proposed calibrations for the standard formula. We are engaging directly with our peers, politicians and regulators to ensure a fair and reasonable outcome before the regime becomes law."

Lobbying - "Prudential is actively participating in shaping the outcome through our involvement in industry bodies and trade associations, including the Chief Risk Officer and Chief Financial Officer Forums, together with the Association of British Insurers (ABI) and the Comité Européen des Assurances (CEA)."

Key Risk - "There is also a possibility that depending on the outcome reached on a number of key issues, the effect of the measures finally adopted could be adverse for the Group, including potentially a significant increase in capital required to support its business."

Solvency II costs- "A total of £27 million of Solvency II implementation costs were incurred in the first half of 2011 (2010: £22 million) as we continue to make progress in preparing for this change." 

"Central outflows increased to £141 million in half year 2011 (2010: £118 million). Higher tax receipts in the first half of 2011 were offset by increased net interest payments, following the additional debt  raised in 2011, and higher Solvency II implementation spend." 

What makes a great Risk Manager? Survey

I implore you to have a go on this if you haven't already - the (ex) Strategic Thought Group have a psychometric test available to show how your personal attributes map into your professional make-up. They will send you the results (free I might add), and it's only 20 questions, so give it a go if you have 10 minutes spare.

I felt like a sucker from one of those pyschic shows once I read the report back - I struggled to disagree with anything on it!

Aberdeen Group - Managing Enterprise Risks

Relatively small sample size (213), and rather confusedly assembled (constantly referring to an earlier piece of research they also produced), but this piece of research from Aberdeen Group is well worth a read for you benchmarkers out there. You may need to register, but either this link or this link should get you to the right place to do just that. It covers;

• Catalysts for adopting ERM
• Favoured strategic reasons for implementing ERM
• Primary driver of ERM in the organisation (10% CRO!)
• Techniques for optimizing ERM Processes
• Techniques for improving Risk Culture

All of this comparing "best in class" companies against the mean. 

Strategic Risk magazine also had a decent stab at summarizing the main points, which may also do a job for you.

FTSE half-years - Solvency II whispers

Not much from the first few half-year results, other than St. James's Place suggesting that 2014 was increasingly likely for Solvency II and that they are looking at a small surplus on the basis of QIS5.

The interesting aspect from those with no particular comment (L&G and Aviva) is that their IGD surpluses are well up, as well as being relatively cautious on the spending front (cost savings and cash generation leading the story, rather than acquisitions or huge new business growth.

More to publish over the next week or so

The Risk Intelligent CFO - Deloitte

Don't believe you need a subscription, so dive in to Deloitte's (US-centric) research on how to make your CFO more "Risk Intelligent". It is light in certain areas (reputation in particular), and outlandish in others (the CFO is apparently "a catalyst, strategist, operator and steward with respect to risk decision making") but has some neat touches such as;

• Concept of Strategy Risk being split between "Risks to" and "Risks of"
• Refining risk reporting/metrics down to the "vital few"

It does however cross over into other Insurance-entity disciplines (CRO, Chief Actuary etc), and it provides 4 "major risk categories" that are wholly unsuited to insurers and banks, but it doesn't purport to be for financial services only - take whatever you can from it, and certainly don't be afraid to wave it under your CFO's nose.

Solvency II and Eurozone debt - Risk Free?

Remembered this from Insurance Times last week, quoting one of Deloitte's partners on EU government debt being risk free under Solvency II "...I imagine it's something they're going to have to consider".

Fast forward a few days, and "The Med" has gone red - you imagined right sir...

Gender diversity on UK Boards - raising the stakes

Becoming a meatier story by the week, the efforts of city headhunters to begin the (necessary?) positive discrimination to up the numbers of women on boards may or may not have the desired effect by the time the Davies committee reports in October.

Supplemented by the Home Office's memo this week that they are expecting more action to achieve the "25% by 2015" targets, it has all the hallmarks of a badly driven juggernaut. The quote "It's about improving performance and having a board that reflects and understands its customers" I found particularly grotesque (offensive to both sexes I would suggest - "Greedy Man" needs empathy lessons from "Lovely Lady").

From the Solvency II angle, this would be much better parked as a requirement in the Corporate Governance Code a.s.a.p, as the Fit and Proper requirements on the Level 2 & 3s are shooting at hard skill sets, so there may need to be some promoting done in UK insurers to get to 25% with sufficient hard skills by 2014/15

FSA revenues and the IMAP refund - the Lord giveth, and he (may) taketh away

Good news? Your IMAP money back coupon arrived this week.

Bad news? Even after roasting Willis Re for seven mill, the coffers are half as light last year according to Insurance Times.

Don't spend it all at once...

Article on "New Risk Manager" and CRO activity

A few ideas I threw down with my good friends at Clarity Resourcing regarding the changing skill set of the Head of Risk - it's nice to do this kind of thing with the recruitment industry at a time where requirements are difficult to pin down with clients, but sadly this was written before the $10m CRO came on the scene so I wasn't able to crank up the salary expectations I'm afraid!

I did spot a few new CRO hires over the last fortnight (here and here) - that's 2-0 to the actuarial profession for those keeping score...

The $10m Chief Risk Officer - every little helps...

Cracking article on the (fiscal) rise to prominence in the USA - before you start pre-ordering Lambhorginis, this covers the headline money for the US "big banks". However the rest of this article is excellent, self-affirming stuff for heads/prospective heads of function, so I recommend a read (and perhaps forward it on to your board colleagues...)

In particular, when analysing the output required to generate that whopping pay packet, the article draws attention to ERM rollout as one of the gentleman's achievements - for $10m, that's got to be one shiny set of powerpoint slides!

In all seriousness, the comment regarding the CRO role being a training ground for future CEOs is a very interesting concept - I would very much like to know which company was implementing it, as certainly for the financial services industry, it is an incredibly sound idea.