Capital Management in the new regulatory environment - Towers Watson

A cracking piece from TW on capital management in Solvency II context, highlighting a number of critical areas for consideration as we approach ORSA public consultation. I noted;

• Experience of the Swiss Solvency Test on capital, which TW suggest caused such an immediate shift in capital strategies to accomodate (i.e de-risking Asset/Liability mismatches and purchasing additional reinsurance), that one's current capital plans should be revisited for future-state appropriateness , and not just taken as read.
• A suite of 7 key questions on capital management - all of these worth asking at any juncture, but even more so now.
• The capital management toolbox depicted is worth considering in the context of potential management actions in the ORSA
• Big section of branching and redomiciling, in the context of (publicly commented on by the head of the Irish regulator) "hub and spoke" approaches to reducing capital requirements, in the absence of the Group Support elements of early Solvency II drafts. The Central Bank is having to think specifically about the practicalities of supervising such arrangements, I guess on the premise that, with 12.5% corporation tax, they might be the main landing area for such schemes!

All in all a very good, and very timely effort

PwC, Central Bank of Ireland - ORSA Briefing

For anyone who just cant wait for the ORSA public consultation next month, PwC and the Central Bank of Ireland have clubbed together to publish this presentation on ORSA (given last week).

From the CBoI section I would flag;

• Firms already have "some" of the components of ORSA in place - in a country where the Financial Condition Report is alive and kicking, you might expect more confidence than that!
• Most of the rest of CBoI's presentation very plain vanilla - concerning if you are looking for firm guidance.
• Not sure how the Q&A went - if anyone attended, I'd love to know!

From the altogether more monied PwC, I would flag;

• Nice process maps that should visualise the suite of work that will ultimately comprise of an end-to-end ORSA process, including the reporting which spews out of the back end.
• A decent attempt at prescribing an ORSA Report structure (of course, if you have seen one punt from the consultancy firms at an "ORSA Report", you have seen them all, buit this does elaborate on each section).

Useful for anything you can extract from it, most concerning perhaps is the divergence in certainty and standard of presentation between the big 4 consultant and the regulator.

AON research paper - Solvency II revealed

AON have fired out another worthy paper regarding the changing landscape for insurers during Solvency II implementation, as well as what an "optimal" insurer will look like post-Solvency II.

I enjoy reading anything that looks at post-Solvency II implementation, as well as anything which touches on the reinsurance potential on the capital requirements front, so this was right up my street. I particularly liked;

• Their process for optimising insurance risk and asset strategy in tandem (rather than the two, being the preserve of the actuarial and investment functions respectively, being operated in isolation)
• Articulation of "risk appetite" as a percentage of own funds surplus volatility above and beyond SCR (interesting way to communicate it)
• Table on capital changes for market risk and implications for insurers by sub-module - easy to digest
• Good sections on Catastrophe risk (if that is your cup of tea!)
• Ratings agency drivers, which stress the importance of transitional measures (for orderly transitions to preferred Tier 1 capital vehicles), the likelihood of ORSA-related criteria on future solvency sliding into their assessments.

Nice sales pitch for ReMetrica at the end as well - for all your ORSA needs...

Towers Watson paper on Extreme Risks - useful for Reverse Stress Testing

For anyone who has reverse stress testing on their agenda, this release from Towers Watson should help you on the "unlikely but extreme" events front.

They categorise these events into three types - Financial, Economic and "Other" (being environmental and political), and provide 15 solid risk events, some ideas on ranking, hedging and parameterising impact and likelihood., all of which are valid in the face of a lack of guidance from EIOPA on the subject at this juncture (remember ORSA requirements!).

Certainly worth using in your next FSA-driven reverse stress testing exercise if you are UK-based, and considering in the context of the forthcoming public consultation on ORSA for the rest of you Euro-landers.

ABI - Solvency II Bulletin for October 2011

The ABI have put their Solvency II Bulletin out today (link is to the pdf version, as there is something weird going on with their HTML version!).

Plenty of goodies in here, in particular;

• Omnibus II update - confirms that the trialogues are in the offing, but also that Parliament will not have its text for bringing to the negotiation table until late November. Any danger this is a bit late, and that February 2012 might be a push for Parliament to sign off on the negotiated text with their plenary vote?
• Also confirms that the 'outsourcing' of drafting Level 2 measures by the Commission to EIOPA via ITS or RTS also needs to be agreed with Parliament (who would of course lose the right to reply on some of the content subsequently produced.
• Decent timeline diagram for anyone who needs one (p3)
• Reporting templates consultation coming in November - also mentions that their will need to be national-specific templates (highlighting importance of with-profits business in the UK, but same for other countries and their favoured savings vessels).
• Confirms that the ORSA consultation is also about to kick off with the Level 3 guidance paper soon to be released (most of the industry has of course seen the early draft of this, so it will be interesting to see what has changed).

PwC Annual Corporate Director survey 2011 - more time for Risk?

PwC kindly fired out the findings from their (US-centric) poll of corporate directors. Decent sample at 834 respondents, and two-thirds were sitting on boards with $1bn+ in revenue, so worth heeding. Both RM Professional and Norman Marks have taken it to task, so I won't dwell on the findings other than the following;

• 72% would reconsider pay awards in the face of "significant shareholder dissatisfaction" - just wondering what "significant" is.
• Relatively little planned change in reaction to clawback legislation embedded in Dodd-Frank
• Almost 60% of boards wanted to spend more time on Risk Management, putting it third behind Strategic and Succession planning
• Less than 10% plan further than 5 years ahead
• Almost half discuss strategy viability no more frequently than annually
• Amusingly, both racial and gender diversity is referred to as a "Skillset/Attribute" - 23% find it very difficult to obtain directors with the racial "attribute", while 15% struggle to get the "gender" one!

Handy in its own way for the Europeans amongst us as a proxy, a more pertinent document for the statesiders.

Solvency II Internal Model Validation slides - from the US!

Of use to anyone working on internal model validation, I clocked this presentation from one of Ernst and Young's finest across the pond. Some useful context within it, particularly showing where the E&Y guys have come across gaps in validation policies, methodologies, documentation.

This is all in the context of the States' own preparations for ORSA under the guise of the NAIC (indeed I touched on it the other day), but is of course very handy on our side of the Atlantic!

Institute of Risk Management - presentations on Risk Culture and embedding risk management

Delivered last week at the Solvency II Special Interest Group were a couple of presentations regarding embedding risk management and "risk culture". I generally think that "culture" is something you find in a yoghurt pot, but to be fair there is some good stuff in the materials below;

IRM Chair's presentation - some nice elements in this, such as

• Risk culture being "at its simplest...how 'risk management' is factored into decision making" - I would go further and make this the most complex definition, rather than elaborate
• Nice transposed diagrams of how certain risk cultures need to implement ERM in certain ways

Survey on risk culture and embedding risk management - remember at 28 participants it is a small sample, but flags the following;

• Around half are lumping "risk culture" and "embedding risk management" into their (Risk?) Solvency II Workstream (i.e weren't planning for it otherwise)
• Quarter had no sponsor for risk culture work
• Around 30% cited "lack of access to management time" as a challenge
• No real favoured technique for assessing risk cultures or embedding risk management - number of options cited
• None of the 9 relevant participants had received a "poor" rating from S&P for their ERM structure
• Not many outliers on the questions regarding risk governance, risk resources, risk transparency and responding to bad news - most were 2/3 out of 4
• Few more outliers in questions on risk competence, making risk decisions and rewarding risk taking - suggests that, while companies are relatively competent at 'playing at doing risk', at the sharp end the relevant skills and attributes are by no means compulsory

Not exactly my cup of tea this subject, but this is still useful stuff.

Van Hulle, Bernadino, SIFIs and Solvency II "chafing"

It was raining comment on the Thomson ILS news today (may need to subscribe, but it's free and worth it). Both van Hulle and Bernadino are quoted as playing down the significance of any decisions made on SIFIs, or "too big to fail" insurance institutions (as I recall there is some kind of decision pending, or may indeed have been released, on SIFI criteria).

Sr. Bernadino (our EIOPA big-hitter) is more concerned with low investment return and high inflation than the threat of SIFI classification on the insurers under his watch, while the thought of additional capital burdens for any EU insurers that qualify as SIFIs is "complete nonsence" to van Hulle, the Commission's Solvency II scribe.

This all despite KBW claiming that only a couple of insurers will fall inside the net (though I think this may have been US-HQd only).

Finally, AM Best got in on the act after the delays announced to Solvency II implementation last week - as well as highlighting the benefits of preparedness from a mergers and acquisitions angle (which may now also be put back a year), they also add that, while smaller companies are probably happy to receive an additional year of prep-time, the larger companies "may chafe" at the delay.

I have a nice cream for that...

Solvency II and CRO jobs - speech from president elect of the Institute and Faculty of Actuaries

Some very intriguing words spoken by the incoming president of the IFA regarding the challenges and opportunities for the Actuarial profession in Asia (summarised at the Actuary Magazine). As you know I keep a watching brief on the likely collision at C-suite level between the Risk and Actuarial professions, and so I pulled the following out from the "opportunities" themes in Mr Scott's speech. They were;

• The skills of actuaries helped keep the insurance industry out of the headlines during the "enormous economic storms" (pulling a rabbit out of an empty hat for an encore I guess...)
• Acknowledges that Solvency II does not require an actuarial function to be run by an actuary
• "...Many [actuaries] will expect to be able to find employment in the risk function
• Lines up a few soft skills which will need to be enhanced in this regard (improved comms and decision making understanding, as well as "becoming more risk focused")
• Skills from the CERA qualification "should open up a whole range of career opportunities for those who take up the challenge"
• Looking to define (with CERA) "the distinctive contribution that actuaries provide as practical, mathematically skilled, rigorous and regulated risk professionals"

I guess it is the last statement that would perhaps put one or two IRM/FERMA/GARP noses out of joint* - is the Risk profession itself so disregarded that the Actuarial profession can usurp the established offerings with CERA?

* I say this somewhat reluctantly as someone who, thanks to a rugby players errant knee, literally has his nose out of joint currently!

Allianz CFO and Solvency II

Few nice nuggets of truth from the Allianz CFO on both Solvency II and IFRS, where he candidly stated that he has "expressed his concerns several times" on Solvency II from the perspective of onerous treatment of long-term guarantees.

NAIC, ORSA, ERM and SRQ - Acronym day!

Saw this nice piece from Towers Watson on ERM developments Stateside (I had blogged on this from an ORSA perspective a couple of weeks ago). The pressure from the AM Best ratings agency seems to be pretty intense to this regard, and indeed Towers Watson's article here highlights what AM Best consider "leading" and "lagging" practices.

"Leading" practices have all the hallmarks of the IAIS/Solvency II world that we all know and love ("tolerance", "appetite", "risk-adjusted return", "modelling used in strategic decision making" etc etc). What is more enlightening is the section on "lagging" practices, as it seems pretty bold to say that by not adhering to the AM Best standards you are a laggard.

However, the stats are pretty sobering (and mouthwatering if you are consulting over there!). 90% of respondents' risk tolerance definitions were "too broad", 12% had no ERM Committee/CRO and 72% do not use internal models.

Towers (who have issued guidance on the 2010 iteration) go as far as to say that the new ERM section on Best's SRQ (Supplementary Ratings Questionnaire) will '...become more influential on ratings outcomes' and that this evolution will compel insurers to 'stay ahead of their peers and Best's evolving ERM criteria'. How the SRQ obligations marry into the ORSA guidance due out soon is another thing, but fascinating times ahead for the North Americans...

Solvency II/FSA reference documents catch-up

Thanks to a dodgy laptop, I am a bit behind with blogging, although to be fair all of the real drama happened last week! I came across a number of handy documents this week which you might find handy, listed below;

Clifford Chance document "Guide to the European Union" - very useful if you have board training/briefing requirements and need to explain why Solvency II is taking so long!

Lloyds ORSA Guidance - in order to assist their syndicates in preparation for their December ORSA submissions, but obviously useful for all of us. In particular, they are not asking for a a great deal (15-25 pages), which seems a touch light, but probably proportional for a lot of syndicates.

SCOR Presentation at banking conference - Some cracking stuff in here related to risk, capital deployment and strategy in preparation for Solvency II. Model enhancements for Solvency II, diversification benefits, and risk appetite all touched upon in the slides, and should give you some good ORSA/MI ideas.

Milliman paper on Pillar III - Nice summary on the forgotten pillar and likely requirements!

Milliman legislative update - Generic and very useful Solvency II  presentation from Messirs Claffey and Coatesworth which again should be useful for anyone who needs to explain to their Boards what the hold up is! Three slides on proposed timeline divergence between Parliament, Commission and Council are very sobering...

FSA Newsletter - Fresh from the horse's mouth, the Solvency II update (including last week's news on internal model application timeline changes) confirms that "we must maintain the momentum and stay focused on implementation", despite adding as much as 14 months onto some firms' model submission windows! The Small Insurers Seminar on October 20th sounds like it will be a hoot. Also a nice piece on reverse stress testing which should help anyone in ORSA land.

PwC piece on FTSE 350 strategic/risk reporting - Claims that, having studied the FTSE 350, less than half explain the impact of identified risks to their business model (despite almost all detailing what their principal risk are), and subsequently portrays the downside of this being felt in a marked-down share price.

Gender diversity on boards feedback statement from the FRC- a topic I have blogged on before, and one which is seemingly the zeitgeist. This came out almost hand-in-hand with the Cranfield school monitoring report on Women on Boards which is reasonably critical of progress to date (bearing in mind the political pressure commenced around February).

From a Solvency II project planning perspective, the issue in hand is reconciling the Fit and Proper requirements in the System of Governance articles with "decision making bodies" in 2014/15 being artificially loaded with female Execs/NEDs/function holders. Likely that I will blog more extensively on this from a pure governance perspective another time, but some good media comment already out on this document (see here and here).

GCAE minutes for September - Quiet month by the looks of it, though it does mention that at the International Actuarial Association meeting in Zagreb, they discussed ORSA and ERM "including the need for educational material and standards" - land grabbers!

FSA ask risk and internal audit to "step up" - Slightly provocative language from Andrew Bailey, where wimpy Internal Audit and Risk functions appear to be the "untold story" of the financial crisis (provocative but pretty fair?). His point on the role and influence of both functions not being as it should be is also fair, though I would have some truck with the suggestion that companies want the FSA to do risk and internal audit for them (I would actually rather they discharged their Solvency II obligations in a timely manner, cheeky beggars!)

"First Class" FSA - last but not least, delightful story on how much it costs to fly the FSA Chair and Chief Exec around - it certainly puts my annual Flybe bill in the shade, though there isn't a business class option to be fair!

More on FSA Solvency II delay to 2014

Some cute contradictions beginning to emerge off the back of the FSA's pronouncement on extending the IMAP window to 2013 and the go-live date itself to 2014 - EIOPA's top man Carlos Montalvo warned the following day not to "put Solvency II in the fridge" (chillingly?), which is all well and good when Omnibus II appears to be pretty well refrigerated itself!

Similarly, Post magazine have reported that smaller firms will be relatively happy at the FSA's news on the basis that they are not as far down the road. Interestingly one of the "Big Small" firms, LV+, has an executive quoted in the Wall Street Journal no less to express his dissatisfaction at the "unhelpful" prospect of delay, and noting that they plan to crack on with a 2013 target.

It should be noted that the quote was pulled from a press release from some Marketforce research due to be published in November which seems to be focused on supporting the very early adoption ruled out in the same week!

IAIS - Revised Insurance Core Principles

Only an optimist would think that, at 400 pages, the revised ICP document is a light read, but it has been approved after the IAIS meeting in Seoul (press release here). May be worth a quick cross-cast against Solvency II CEIOPS/EIOPA advice in the ERM, Capital Adequacy and Internal Model-related sections, but as these borrowed heavily on Solvency II at outset, the final revision is not likely to contradict.

In addition, the latest IAIS Annual Report and Accounts has also been published - some good commentary within this around the purpose and scope of the ICPs and ComFrame. The latter perhaps has more significance for anyone in the UK, on the basis that the FSA are citing groups as one of the reasons for extending the go-live date and IMAP approval process.

CRO to CEO - what's your skillset?

As flagged on the Reputability blog, Allianz Re have recently promoted their Chief Risk Officer to the top job. Fantastic news for those super-ambitiousin the function, and tactit recognition perhaps that the balanced skillset of the latter day CRO is coming the boil nicely. You will notice that the blogger doesn't prescribe to CRO-to-CEO promotion, seeing the role as a destination, not a hub.

As an avid follower of activity on the CRO front (in particular the sustained attack on the role from the Actuarial profession as an alternative avenue to the C-suite), and was delighted to see that his background was...errr...Actuarial! To all you "Riskies" reading, please see the earlier comments from the FERMA VP on upskilling...

A nice translated piece was published by Clifford Chance regarding CROs in the EU (specifically with Germany in mind) - covers the EC green paper angles on risk governance and risk executives, as well as correctly highlighting that "Solvency II is a key ally in institutionalising the new role of the CRO"

FERMA Risk Conference - various content

Seems to be a good amount of debate and activity over in Stockholm for the FERMA conference - I heartily recommend the blog.

So far the VP of FERMA has blown FERMA's trumpet, a futurologist (now there's a profession!)recommends looking out for "ninja" trends whilst referring to risk professionals as "sexy magician types", and the head of an enormous German bank telling us that "risk management deficiencies" were at the heart of the financial crisis (as opposed to avaricious bankers). The phrase schadensh*zen springs immediately to mind...

In addition, there was a nice piece on Captives under Solvency II (I liked the parallel between a tightening reinsurance market alongside the expense of allocating additional capital to captive vehicles looking like a double-whammy), and FERMA's VP in the action again recommending that the risk profession engages in some 'upskilling' in order to be engaged more fully with the board, noting "It is all about talking the language of the board...and that is financials".

I wouldn't agree with that, but I appreciate the sentiment in the context of the actuarial professions' upskilling exercises with the CRO/Head of Risk Function role in mind.

FSA Deadline for IMAP - formal extension to "mid-2013"

After a week of innuendo and winks, the FSA have finally committed to removing the deadline for IMAP submission from end of May 2012 to "mid 2013" for anyone who needs the extension, with allocated slots being issued "which we and they must stick to" instead.

This has a whiff of issues around Group supervision, with the word 'group' standing out amongst the other criteria depicted that will determine allocation slots.

The press release of course confirms 2014 as the official go-live date in the UK, leaving 2013 as a parallel run year at this juncture (summarised in Actuary Mag). There will surely be a few dummies spat out at this, as this is very much a penalty for any early adopters or successful project managers.

This may have increased the likelihood of Lloyds et al's requests for approval to start using the model from 2013, as they will surely need to be thrown a bone after this news.

PS - More for the industry's benefit, or for the institution that is struggling to stay staffed?