CERA and the challenge to the Risk Profession

Very reassuring article in the Actuary magazine regarding one aspect of the inevitable land grab between risk and actuarial professionals (which I have blogged on several times), this one covering the thoughts of a few CERA students as to whether this qualification was likely to enhance their career prospects.

Judging by the responses of those students likely to be CERA-qualified in the near future, I suspect that the Risk profession will still be gainfully employed for some years to come - particularly liked the reponse about selling the qualification in one sentence "It counts as verifiable CPD!"

PS The score on CRO hires moved to 4-0 to the Actuaries this month with Aviva UK's new guy - however, the hunter has become the hunted, with the new top man at the Institute and Faculty of Actuaries being a chartered accountant!

FSA interpretations and Q&A on ORSA, Supervisory Reporting and transposition

Couple of very nice Q&As out today from the FSA (well spotted by Gideon on the Solvency II Wire) which cover last week's releases from EIOPA on ORSA and Supervisory Reporting.

The ORSA Q&A gives a detailed interpretation of what the regulator thinks the processes and reporting entail. Stand-outs for me were;

• Process of recalibrating one's internal model from economic to regulatory capital purposes must be included (difficult if your EC measure is not a straightforward read off a later point on the PDF?)
• National supervisor "cannot act" if actual capital is below EC, and it "cannot be used as an intervention point" - not really sure why they need the information then!
• Sadly don't elaborate on the potential for the ORSA Report to form the basis of the supervisory report - would have been ideal comment
• IMAP does not require ORSA output - I had heard this on the grapevine, but nice to have confirmation
• Confirms the expectation that the ORSA Process must include a process for recalibrating one's internal model to the standard formula SCR

Also has a handy "what you should do now" list - would hate to think anyone has not ostensibly done any of these things by now, but reassure yourselves by having a look! Q&As on the last page may be handy to show your project managers/execs/NEDS, but they are a little light.

The piece on Pillar 3 reporting is more concise, and probably worth running by your execs - however, it is a little 'scattergun' without much opinion, and you may find the summaries from the big consultancies of more use

Finally, The FSA's documents on the legal transposition of Solvency II into their Handbook is probably of little use to anyone outside of the UK (fascinating though it is!), so grab what you can if you're based elsewhere!

CFOs, CROs, conflicting messages and strategy - FERMA paper

A couple of pieces of work caught my eye this week on the subject of risk leadership and participation in strategy, with a distinctly financial twist.

The first, a joint effort between FERMA and Finance Director Europe covers a number of themes leading on from FERMA's conference a month back. Some of this report seemed to fly in the face of best practice ERM (for example, broader strategic ERM has evolved through executives realising they need to manage downside risk better? Does it perhaps represent a little more than that in 2011?).

A FERMA board member is cited as believing risk should be "supporting strategy development" rather than participating (which would leave a CRO where exactly?). The next article indeed directly contradicts this view, quoting a risk executive who actively participated in the GRC strategy formulation for his firm, followed swiftly by the AIRMIC/Cass Business School research which bemoans the 'glass ceiling' which prevents risk managers addressing issues in a company's top echelons!

That article also has the UK "...leading the way in enterprise risk management and corporate governance" (I would probably go US and Ireland respectively with a 2011/12 hat on).

The VP of FERMA is then quoted in day-job mode  noting "risk management...is partly about comforting non-executive directors so that they are less risk-averse" - personally I like a bit of conservatism in my NEDs, and I wouldn't like to think I am employed to teach them how to gamble! This is accompanied by the CFO of the same firm notes "the CFO and CRO may have natural conflict, the former driving growth and the latter controlling risk" - again, are Risk, as the second line of defence, really there to 'control' risk?

Finally, the CFO at Old Mutual is quoted as suggesting the complexity of proposed EU regulation (citing Solvency II specifically) might be contributing to elements of risk it is supposed to be preventing.

Economist Intelligence Unit - Getting new perspective on strategic risk

This out last week from the Economist Intelligence Unit, always a great spot for benchmarking, and at a verty opportune time for anyone working on ORSA or enhancing the visibility of strategic risk in general. Sample size is almost 500, around a month old, and all respondents have responsibility for risk management in their respective firms. The research is also supplemented by interviews with a few big cheeses.

Again, it;s a quality publication, so doesn't need much sifting through, but the salient points for me include;

• Lot of agreement that Risk should challenge management's view of the future (two-thirds)
• Almost three-quarters agree that flexibility is more important that ability to plan for the long-term (indeed a third of respondents don't even plan for events a decade or more into the future)
• "By extending their risk models further into the future, companies must be aware that the data being used to populate them are increasingly unreliable" - interesting in the context of ORSA (i.e where does one stop projecting)
• Main barriers to considering longer term risks are executive management's focus on immediate risks (41% of respondents), and the nature of the business making such work redundant (36%)
• Almost 60% have their Risk functions actually participating in the formulation of strategy
• The risk planning horizon doesn't appear to be aligned with the strategic planning horizon (risk planning being much shorter) - obviously changes with ORSA for insurers, but not sure what the resolution is for other organisations.
• 60% have one of the most important objectives of the risk management function being the identification of new and emerging risks - may actually be the cause of some of the mismatch mentioned above. Despite that, only 40% feel they are doing a better than average job of anticipating and measuring such risks
• Main areas for enhancing risk management practices have been to make risk management more forward looking (50%), and allocating more board and senior management time to long-term risk analysis.
• 40% have their CEOs as being responsible for exploring long-term impact of risk on strategy - very high, considering that boards/committees were alternative responses
• 44% think a bigger commitment to ERM will help align risk and business strategy, while 33% thought that the Risk function presenting themselves more as business enablers would do the same thing.
• Only a third of Risk functions report to the board quarterly - seems very low
• 30% have no plans to use horizon scanning - beyond mad!
• Only around half of respondents have or plan to have a CRO

KPMG Survey - Solvency II Benchmarking Survey

Decent piece released by the guys at KPMG covering Solvency II benchmarking. No difficulties in picking out the salient points, so just serve yourselves, but I've hauled some out for my own benefit (NB at 18 in the sample, its a tad light).

For my money, the 40% who feel their budgets are not on track feels instinctively light, but then the survey was taken in September before an extra year was stuck on it! The priorities and areas of concern (documentation, ORSA and governance) all seem fair in relation to other media, and the difference between small company projects (two-thirds resourced internally) and larger insurers (over 90%) in their staffing shows where the extra year's project costs may disproportionately fall. Also 56% feel they still have a lot to do on Pillar 3 (bit easier after last week's papers were released by EIOPA).

On the actuarial front, some very varied responses to Risk Margin calculation, and they flagged ORSA as the main area of cross-functional collaboration. They have also flagged Strategic, Liquidity and Reputational Risk as the main non-modelled risks going into ORSA.

The last section on validation is perhaps the real eye-opener - KPMG advise separating validation from production, and even with this small sample, a range of routes being used (on validation responsibility, ownership of the validation team, and responsibility for producing the validation report, including for the first time in my experience, the roping-in of Internal Audit)!

Risk specialists - FSA can't buy your love

Very telling snippet picked out by one of the IFA magazines covering Hector Sants's comments to the Treasury Select Committee that the FSA are struggling to recruit for a 200-strong Risk team, with an agency cited as saying they were around 50% off industry levels. If they can just wait for the Solvency II goldrush to subside, there would be plenty of candidates, but if it keeps getting extended, you'll never get anyone!

Joking aside, the increasing staff turnover, extension to Solvency II, and one eye on the future carve up into FCA and PRA, the case for spending some of this special levy money on some high-end talent must be close at hand - they have certainly priced it in for post-2014!

FSA's Internal Model Page - Q&A, ABI and EIOPA speech

Having already blogged on Julian Adams speech, I had neglected to pick up on the other goodies in the specialist IMAP section on the FSAs website.

There is, for the IMAP enthusiasts out there, a 6 page Q&A on common model application themes. I would highlight;

• "some uncertainly following the release of the text from the Rapporteur [Burkhard Balz]", but currently as confident as they can be on current timelines
• Decent summary of EPIFP problem
• Don't appear to close the window to "significant change" to existing model plans, but dependent on schedule (i.e. 2013 class maybe have room to tinker?)
• FSA materials for model application submissions will only be released in Feb 2012, which I guess is hard luck on those who are first up - however, I suspect the March/April 2012 class will not be short of insider information!
• Allocated application slots have been influenced by outstanding lobbying matters, such as matching premium (i.e. if your book of business is affected by matching premium, EPIFP etc, then you probably gained some advantage here)
• A pretty sketchy answer to how a company can evidence Use Test adherence before having the model signed off (q12) - I can see where they are coming from, but this answer should really have hooked back in to ICA to be useful to the industry, particularly in light of their using ICAS as "quantitative tools"
• Confident that early applicants will not get "two bites at the cherry"
• Some uncertainty as to what approvals, if any, the FSA can actually give firms before Omnibus II is passed.
• And of course the cherry on the cake about using model as an ICA replacement if they have conducted "an appropriate amount of review work" and are minded to approve the model.

Second is Otto Thoresen's speech at the event last week - a kind but firm smack on the back to encourage the FSA to allow ABI members to use their internal models for ICA in 2013.

Finally the presentation from the last minute EIOPA stand in (actually their model committee chair) - interesting bullet point noting that a challenge of the pre-application process  was to stop "undertakings playing with supervisors". Also shows the number of pre-application initiatives being run by EIOPA.

EIOPA 1st Annual Conference - additional media comment

Worth adding this to yesterday's post on speeches etc falling out of the back of EIOPA's conference. Nicely depicts the rather prickly atmosphere which must be hovering over the trialogues between EIOPA, EC and and Parliament, in particular emphasising that rapporteur Balz and the Parliament appear to be the fly in the ointment as far as staying on timetable goes.

PS In case you don't follow my twitter feed, EIOPA released a specialist Solvency II page and their own twitter feed today!

EIOPA 1st Annual Conference - Anything of note?

EIOPA had their first annual conference today in Frankfurt (happy birthday!). Looks very heavy on politicos as you might expect, and there has been a few drips of information from it, in particular;

• Sr Bernadino's comments that insurers should not "pretend to play God" by implementing onerous counter-cyclical tools in addition to the facilities already in play to avoid pro-cyclicality
• Mr Barnier's introductory speech where the delay to 2014 is seen as "a plus point, enabling insurers, national supervisors and EIOPA to prepare better"- doubtless all you project managers looking at an additional year of expense will rest easy at that! He also mentions that equivalence is not looking to force countries to adopt a regime identical to Solvency II, as well as emphasising the party line on Group supervision in the context of IAIS ICPs and the ongoing SIFI debate.
• Sr Bernadino's keynote speech - May 2012 scheduled for public consultation on technical standards, which he stresses does not pre-empt the trialogues and Rapporteur Balz's Omnibus II paper going through EU parliament
• Elliot Varnell has had a busy day tweeting, so serve yourself at his feed. Interesting to see that Karel van Hulle thinks there isn't enough cross-border sales going on - having worked in that area, a good helping hand might be to remove local language requirements!

FSA, SOLPRU and Costs

Just when you thought it had gone quiet, the FSA throw out a 200 pager covering the regulator's transposition to Solvency II!

Some important pieces in this on;

Cost

• FSA has budgeted £110m over the 5 years 2008-2013 for Solvency II implementation (which supports their statement back at a June FSA management meeting where they commented that contingency would need to be enacted (p3) if go-live date was extended past 2013). They had said in their business plan for this year that the estimated implementation cost would be £100m-£150m, so they are on the light side of that estimate. 
• Frighteningly, they are budgeting for another £178m of spend between 2014 and 2016 (on nursing internal models through assessments and  improving IT) before reverting to current equivalent levels - for those people who got a special levy refund this year, you might want to cancel the trip to Vegas!
• Estimating cost to the industry (of around 550-600 undertakings) of £1.9bn, with this estimate creeping up due to extra contractor and IT cost.

At 200 pages, some of the detail can wait, but those 2014-16 FSA costs (which will be the PRA by then I guess) are an eye opener, particularly for anyone in IMAP who will (possibly?) be coughing up a special levy for the model assessment-related element.

Julian Adams speech on IMAP and Solvency II delay

The speech from Julian Adams is worth picking apart for crumbs of comfort for any organisation who will be potentially running up bills for another 12 months in light of the extension announced by the FSA at the start of October for their IMAP processing.

Spectacularly, one of EIOPA's guest attendees was, you've guessed it, delayed! As I didn't attend, I cannot confirm if this raised a chuckle in the hall, but more important than the comedy value of an unexpected EIOPA delay are the things put on the table last week, namely;

• That the workload anticipated by the FSA both pre and post Solvency II appears to be higher than anticipated (more entity level ORSAs/SFCRs than expected for a start).
• "...very likely that some form of Solvency II reporting will be required during 2013", regardless of the delay.
• "Submission slots" were allocated primarily after assessment of each applicant's SAT, but alos taken specific Solvency II outstanding issues into account (which must mean preparation on the college of supervisors front is severely lacking to be cited here alongside matching premiums! This is not necessarily a UK failing however)
• No more applicants will be accepted for day one approval just because of the delay, and no changes to model scope will be allowed without express permission.
• More to come "in coming weeks" on the big question about whether ICAS can be jettisoned by the industry for 2013, to be replaced by a provisionally approved model - also doesn't cover if Standard Formula firms will have the same option open to them as, say, the Lloyds syndicates and other lobbyists for a 2013 early start.

More to come soon apparently, so let's keep our eyes peeled!

ORSA - Stateside view from NAIC's "ORSA manual"

Having already dropped a few words down on EIOPA's new ORSA consultation for us Solvency II folk, I also spotted that the guys in the States have also made a few moves with regards to their ORSA Manual (from p12 of this NAIC bundle from their meet up the other day).

What had jumped out at me earlier last week was this article quoting AIA's assistant general counsel which very much framed the US ORSA as a periodic filing requirement with which he had "privacy concerns", voiced that it “should not be compulsively adopted”, and was very much a poor cousin to the existing framework.

This of course flies in the face of the ambitions of the Solvency II ORSA which, while clearly creates a regulatory filing requirement, is intended to demonstrably drive the decision making of the undertaking.

Having had a leaf through the ORSA Manual, a few things jumped out;

• Primary goals are different to the Solvency II version (though both drink from the IAIS ERM ICP cup, the US ORSA stays on message with ERM effectiveness).
• Not compulsory, rather a requirement to be subjected to (subject to minimum premium income limit of $0.5bn as entity, or $1bn as a group)
• Can also be imposed on entities who would be considered on the "ladder of intervention" in Solvency II-speak
• Allows for cross-referencing documents, rather than summarising within an ORSA report (which gives it the look of a Pillar 3 document on Solvency II side)
• Potential option to satisfy US regulatory demands for ORSA by using any which are produced for "non-US jurisdictions" - see, Solvency II preparation is not a waste of energy for any groups with subsidiaries over there after all!
• Great comment that, wishing to use IAIS ICPs to assess the quality of non-US ORSAs, that "one of the NAIC's goals is to avoid creating duplicative regulatory requirements for internationally active insurers".
• Very concise prescriptive summaries of content - agin, they veer towards Pillar 3 requirements over here (SFCR in particular, though I haven't been through today's Pillar 3 consultations yet, so they may have changed!), but these are still very useful for people on both sides of the Atlantic.
• They go with Credit, Liquidity, Operational, Market and Underwriting risks as main "material risk categories". I'll come on to the fantastic paper on risk classification I recently attended the public rollout of later, but it has a lot of relevance to how one might approach this aspect of the proposed ORSA, including avoiding any double coverage.
• No prescribed suite of stresses, such as for the SCR standard formula - this seems to imply that "internal models" are either obligatory, or are considered to be whatever is in place currently (i.e don't need a phenomenal amount of resource to validate to the authorities). The regulators therefore are able to "provide input" into model component calibration if they don't like what is presented via ORSA.

Would love to hear from anyone over in the States to see how this is going down industry-wide, as I can't quite gauge how much of an additional imposition this is to business as usual!

ORSA Consultation Paper from EIOPA - bon effort!

As I don't expect everyone had the time, inclination or even the document to see how the pre-consultation team of CEA/AMICE/CRO Forum/CFO Forum etc got on with the ORSA document, I had a cross-cast of the two to see if any substantive changes were made. The following caught my eye in the public consultation paper released yesterday;

• Almost complete removal of the participation of the supervisory authorities in ORSA - this is now being left to Supervisory Review Process guidelines (it was shoehorned in to the pre-consultation in a way that made its removal inevitable sadly).
• ORSA Policy content trimmed down in one respect (removing some actuarial-themed material, which will inevitably end up in the ORSA Report), but added in a section on data quality.
• Made the section on checking SCR assumptions to make sure they fit one's Risk Profile much more confusing by neglecting to state whether "SCR Calculation" in the paper means "Yours" or "Theirs" - it does eventually come out in the wash that they are talking about any mismatch in reality between the assumptions one uses to generate their SCR (whether internal model, partial model, some USPs or full standard formula) and those which would actually fit the business, but it is a poor piece of drafting.
• More rigorous on being able to justify frequency of regular ORSAs
• New section on applying the proportionality principle for methodological complexity, frequency and granularity of ORSA
• Finally had the courage to write the words "ORSA" and "Report" in the same sentence! This was skilfully avoided in the pre-consultation, I guess to enforce the (still legitimate) fact that ORSA is a process, not a boiler-plate report production job
• Having removed the pieces on supervisory participation, they naturally had to lose a piece on how the ORSA output would make its way to the regulator. It was planned to put it in with RSR (and was very convoluted), but now there will seemingly be an opportunity (not guaranteed) to put forward the internal ORSA Report to satisfy regulatory obligations
• More explicit on covering less-than-easily quantifiable risks, and allows for mitigants other than capital to be used in their regard over the business planning period, provided they are not material. I hasten to add here that they have changed the language on reputational and strategic risk from being "less quantifiable" to "non-quantifiable", which is a bit of a cop-out.
• Much more explicit on capital management, both planning and execution over the business planning period - I guess this is a result of pressure from both the SIFI angle as well as Eurozone/Credit Crunch
• Leaves an open ended question on whether the ORSA Process includes or uses the outputs of tests which are associated with ongoing compliance with Articles 120-125, but the option is there for both
• Spectacular typo on page 25 - looks like one of the bullet points has not made the cut, as we jump from A to C!
• Late Psot Script - missed the omission of the requirement to independently assess the ORSA Process - no doubt everyone's internal audit functions are breathing a sigh of relief!

All in all, a good attempt and I feel more than prescriptive enough for the public consultation to drive it further forward. Perhaps a missed opportunity on the regulatory requirements front to iron out what they ought to get out of the industry's ORSA reports from a wide range of stakeholders, but hey, you can't have everything...

ORSA Consultation - out now!

Short and sweet - get your EIOPA ORSA Consultation paper here,  and your template for comments here - let's get to work!

FTSE Insurers - Q3 results and a Solvency II whisper...

Busy week on the IMS front for all the UK Q3 guys - Standard Life, L&G, St James Place and Royal London all coughed up with some pretty underwhelming stuff (though it was nice to see the Isle of Man-based 360 keeping the Royal London numbers honest!).

Normally Solvency II stays low on the agenda in the odd quarters, however Aviva threw a Christmas bonus in with their news on the legal restructure of Aviva UK's general insurance business, which is freeing up a whopping £200m in IGD surplus, halves the number of entities and will reduce in a "significant reduction" of Solvency II capital required.

Hub and spoke - its the way to go

Irish Corporate Governance Code - updated FAQs

I'm guessing the "video conferencing" absentee-landlord insurance company directors have lobbied hard over in Ireland in the last few months, as the very extensive FAQs already issued have had to be supplemented.

Lexology do a nice summary of the main additions to the FAQ doc, which other than a couple of more genuine clarifications centre around the very important topic of attendance at meetings. Video and teleconferencing are now permissible, provided directors attend "wherever possible".

Troubling in some respects, particularly with Ireland likely to be used for hub and spoke purposes under Solvency II - I would ready myself for a series of "family issues", "plane delays" and "medical emergencies" that prevent a decent number of directors from fulfilling their physical attendance duties over 2012, followed by a themed inspection from the Central Bank!

Beware the Risk Manager - part of the problem or the solution?

Piece in Risk Management Professional today about the pitfalls of reliance on risk managers, from a presentation given by Psychological Consulting a couple of days ago.

While of course they have a product to flog, and so benefit from this particular angle, I certainly wouldn't agree that "[Risk managers] are the people who decide where the net is, how tight it is, and how big the holes are" (we facilitate that decision, and my god we'll police it), but his point on groupthink amongst like-minded risk professionals probably have some grounding.

Never thought of myself as part of the problem before though - does that make a maverick executive part of the solution?

Sessional Event at the Staple Inn Actuarial Society - Common Risk Classification system for insurers

I will blog on this in extensive detail once I replace my broken laptop - for now, please find the paper presented at Staple Inn yesterday from Patrick Kelleher and Paul Klumpes (et al) here.

I have blogged positively on the abstract of this paper in the past, as it seemed to be the panacea to a number of categorisation issues for ERM practitioners in insurance companies, and having attended last night's presentation of this in person, I am no more disinclined to think this has genuine ERM merit for anyone in the insurance sphere. The age-old problem of checking off the easily quantifiable "Big 5" categories then wondering how to pick off the scraps is addressed here in no uncertain terms, so I implore you to have a read.

More extensive coverage of the sessional event will follow, I just need a quick trip to PC World*...


*Other electrical retail outlets are also available - we don't do product placement at Governance Matters!