FSA and Solvency II - speech from Julian Adams today for IMAP firms

Hot off the press, Julian Adams spoke to the great and good today (i.e. I wasn't there!) regarding those who are in IMAP, and dropped the following hot chat:

• "What [any further delay off the back of March's ECON vote] might do instead is merely compress the period between transposition and implementation"
• "...for the time being we remain of the view that we must plan for a 2014 implementation"
• "...it is vitally important that you stick to the submission slots we have already agreed with you"
• "By sticking to your submission slot you will also be considered alongside a peer group of firms" - this is the first I have heard of submission slots being allocated to groups of 'peer' companies, assuming this was not a figure of speech
• "...we are basing our approach to the next phase [of IMAP] on the stable draft text of the Level 2 material which was circulated by the Commission in November" - which is nice if everyone else had access to it [leaks notwithstanding!]
• "[we] will be publishing later today an updated version of the self assessment template based on this" - you may be able to sers toi at this location (ZIP file) 
• "We appreciate that this change will require some additional work for firms" - nicely played down!
• "...the materials we are launching today do not take any account of the Level three text", but promises to do more once the L3's stabilise
• On technical provisions - "Our view is that we would not be able to approve a model under Solvency II without having reasonable assurance as to the accuracy of the underlying balance sheet, and we will therefore be undertaking a review of the technical provisions of IMAP firms as part of our existing activity with the firm before and after its submission slot"
• "...it is unlikely that we will review the calculation of technical provisions until a point in 2013", while the approach used will be assessed earlier, but "which may include the use of external review"
• "It will be necessary for us to gain assurance that all [300+ criteria in the Directive text] of these requirements have been met before we can decide to grant approval for a model’s use

That may take a while to digest, so let's see what tomorrow brings...

Maltese FSA's guide on Pillar II - pourquoi pas?

If you are lagging on the Pillar 2 front, you may find this document from the Maltese FSA on Solvency II system of governance requirements handy (as a little islander myself, it's only fair I look out for those in a similar boat, pardon the pun...).

It is quite a cuddly and accessible document with most sections anchored back to the Directive text for extra comfort, so you may find it useful to purloin aspects of it for NED (or even Executive) training.

Listed Insurers - Solvency sweep on full year results announcements

Having already touched on Axa and St James's Place, I thought it handy to get a few of the others in one place with regards to Solvency detail at 2011 year end, more for my own benefit than anything! Appreciating that the Swiss lads below have  different yet Solvency II-complimentary regulation to worry about on this front.

Zurich
As ever, acres of disclosure (which you can serve yourself at here) but the salient points on Solvency are hard to identify, partly as a by-product of the volume of material, and also due to the Swiss Solvency Test (SST) transitional reporting. Couldn't be too confident of getting any real message other than the analyst presentation drawing out a rise in capital adequacy y-o-y on the Solvency I measure (and SST differences) in page 23, and pages 32-40 touching on a number of elements of economic capital. More text description on capitalisation on p25 of the Operating and Financial report.

Swiss Re
Corking set of results (helped of course by reserve releases!). Main Solvency II point is that they comment on page 15 that the delay in implementation is actually driving demand for Solvency I-style products (always a silver lining...)

Allianz
No detailed disclosure yet, just this, but the Solvency I measure has crept up to 179% y-o-y. Nothing of substance to say on Solvency II.

AEGON
Fair amount of disclosure in both the report and the slides, and Solvency I measure up around 195% at group level. More soberingly on the UK side, their Solvency I surplus was at approx 150% (p6 of report), with the other regions floating the number up.

Should be more to follow, though the meaty disclosure on capital adequacy will no doubt be saved for the Annual Report and Accounts rather than the results releases.

FTSE results and spare capital - St James's Place

More results on the drip here, this time from St James's Place - pretty sterling effort on EV and IFRS front, however I was more interested in their 2012 year-end take on Solvency II. They are retaining their view that not only will there not be an adverse impact on their balance sheet, but there will be a reduction in capital required (p27).

Not sure whether this factors in any shenanighans around contract boundaries and recognition of future profits which still seem to be up in the air - bearing in mind their product base, I'm guessing changes in these would matter, but if the forecast is "less capital requried", good luck to them!

Willis Re, Solvency II and ORSA - "Whatc'hu talkin' bout Willis"

The guys at Willis Re have released a slim guide on ORSA, which aims to decipher the Public Consultation document released by EIOPA in November for the benefit of its friends and neighbours. It doesn't go as far as highlighting differences between pre and post lobbying on the content (as I did back in Nov) but you may find it useful as a generic circular to Board members if they are insufficiently briefed at this point.

Wouldn't say I was enamoured with the definition of risk profile on p3 (which doesn't seem to fit with the Level 1 text definition), and it takes an approach of explaining why overall solvency needs differs from SCR by assuming that the reader is using the standard formula. At the same time, they highlight the onward benefits of demonstrating effective ERM for analysts and ratings agencies

They propose a framework for ORSA provision based on Risk Profile, Prospective Solvency and Governance/ERM, which conceptually won't be alien to anyone in the field, though the way they propose underlying content for each module seems a touch random.

Sloppy reference to RTS rather than RSR at the back aside, this is a useful aide-memoire if you are already deep in your activity, and not the worst starting position if you are starting late!

Axa results and economic capital measures - indication of things to come?

So results season kicked off today with Axa putting the basic full year out (got to love European efficiency on these matters!). This was followed by the EEV Report and Analyst Presentation.

Of particular interest is of course the Solvency I vs Economic Capital measures which most insurers are now kind enough to table up, and the figures were pretty stark. On the Solvency I measure they were a touch up year-on-year, while their Economic Capital measure was massively down (numbers on first page, rationale on third).

Detail on their Economic Capital (and indeed their entire Capital Management Strategy) was fired out in 2010 as part of an investor day. They appear to be using the 1-in-200 stress as their EC measure, which would suggest that (model approval notwithstanding) they have received a 'beasting' on their SCR coverage over 2011.

I blogged in August last year about an FT article which opined on how companies may approach economic capital targets under Solvency II (125-150% of SCR in UK, and perhaps 170% in mainland Europe was their conclusion, for what its worth). While that would have put Generali fractionally out at the time, most of the other big boys were comfortably covered using that yardstick...until now!

The rationale for the drop presented goes to adverse experience on interest rates and spreads "net of changes to the liquidity premium". A smarter man that me will probably be able to read between the lines on that one to find where they are exposed in a way that leads to such a swing in EC, but if one of the major lobbyists is experiencing this volatility, what chance the rest of us?

NB - Generali punted this round today in order to contextualise the recent downgrading activity of insurers by the ratings agencies - surprising to see a company lump all of their competitors onto a press release from their own offices, but I guess there is safety in numbers! Few comments on Solvency on it, but mostly seems to be about negative outlooks on Eurozone default possibilities, new business and economic conditions etc

EIOPA's Bernadino on a "clear timeline" for Solvency II

Picked up on by a number of outlets (here, here and here), Sr Bernadino had some choice words to exchange with the folks at Goethe University (available here) regarding a desire to avoid further Solvency II timeline slippage, citing his earlier "hurry up" letter to Mr Barnier.

From a forthcoming EIOPA output perspective, the paper on Colleges of Supervisors action plans for 2012 should be an interesting read, however, the indeterminate delay in Parliament clearly leaves them stymied regarding the big public consultations that practitioners are waiting for.

Reactions Magazine - CRO Risk Forum pullout (if they fix the link)

Some really nice pieces in January's CRO Risk Forum paper from Reactions magazine (you should be able to grab the paper from the link, but it does appear to be faulty at the time of writing).

A number of major CROs have contributed (Munich Re, Nationwide (US), Zurich, Scor), and they cover some juicy material on the Solvency II front, as well as some generic ERM matters and CRO role development. Pieces that particularly piqued my interest were;

Zurich's Lehmann on the role of the CRO

• Opines that, a decade ago, the CRO role was considered to be covered by the Chief Actuary in insurance undertakings
• Stresses that a CRO needs to have direct access to the CEO - though that did little for Paul Moore of course, or indeed as reported only last week, Michael Roseman at MF Global.
• Speaks supportively of the CRO Forum's Emerging Risk Initiative - strangely, as a subject so fluid and topical, the section of the website dedicated to this is sparser than my hairline!
• States that "...advanced companies have a risk function that defines the risk strategy and clearly sets risk appetite limits" - this is a pretty breathtaking thing to say, which I can only assume has lost something in interpretation, as the question it responds to relates to underwriting. In the context of my last post on Risk Appetite, I would never see myself as a second line function setting the limits of risk appetite.
• States that "[A company's ERM Framework] defines its risk culture" - hate to go all 'chicken and egg', but would a company's risk culture not determine their ERM Framework requirements?
• Tries to associate the Insurance industry's relatively safe passage through 2008-2011 on ERM advances, where I would be more inclined to attribute much of it to the 'unique features' of the industry that the CEA like to bandy around when lobbying for SIFI exemptions".

Nationwide's Mahaffey on the USA's new CRO Council

• Emphasises that the US-version of Europe's CRO Forum is not just dedicated to Solvency issues ("at the cost of engaging with other issues"), citing ratings agencies, emerging risks and federal/international developments as other agenda items. I suspect the European guys may find that snipe slightly harsh, regardless of Solvency II being the big fish right now.

RSA's MacDonald on ORSA

• Talks throughout interchangeably about ORSA process and ORSA report. Doesn't help when he goes on to state "Identifying who owns the ORSA is of primary importance" - Articles 44 (4) and 45 (1) would tend to identify the process owner, but the unconcentrated chatter in the Level 3 doesn't uncontrovertably assign document ownership (or indeed what the significance of "owning" the ORSA Report may be). 
• Piece on alignment with internal strategic or operational planning process very sensible - no point in shifting dates which are probably carved in stone, if you can fit the ORSA process around them
• Identifies most of the company bar the tea lady as 'stakeholders' for engagement - I suspect there are that many customers/end users of the output, but frankly most could make themselves scarce during process construction and not be missed.

Scor's Trainar on Solvency II progress

• Suggests that Solvency II in its entirety should "...bring enterprise risk management in the industry up to standard" - doesn't quite tally with his CRO Forum colleague above, who seemed to think the standard helped keep it afloat during the crisis!
• Worried about the size of the Solvency II challenge should it be served up "...with a heavy and indigestible bureaucratic sauce" - truly sparkling wordsmithery!
• States that "Solvency II is an excellent micro-economic reform but a mediocre macro-economic one" - hence the delay mon ami!

Towards the back are a couple of nice case study/example pieces which you might enjoy from a benchmarking perspective.

COSO - understanding and communicating Risk Appetite

Hot on the heels of materials pushed out on the Irish front from both the regulator and the consultancies, as well as the IRM's efforts in autumn of last year, COSO have stepped up to the plate with their take on understanding and communicating Risk Appetite, a topic which will be spectacularly relevant to insurers over 2012 for ORSA purposes, and indeed for anyone in and around the Irish Sea for corporate governance compliance reasons.

Having had a good sniff through, I struggled to find anything controversial in COSO's take on things, and, whether by accident or by design, it treads the same path as Richard Anderson's paper from the IRM.

The following quotes provide some of the more salient points made by the authors;

• "Risk appetite is the amount of risk, on a broad level, an organisation is willing to accept in pursuit of value" - not a bad way to think of it for an insurer (i.e. embedded value), though the 'broad level' add-on is unnecessarily and disconcertingly vague. This incidentally  runs against one of the IRM's key principles, namely that risk appetite must be measurable (p7).
• Authors believe that "...when properly communicated, risk appetite provides a boundary around the amount of risk an organisation might pursue" - without splitting hairs, the definition of risk appetite above isn't especially black and white!
• The three risk appetite steps of "Develop-Communicate-Monitor and update" are spot on, however, one might think that the "develop" piece is already done in most organisations (or why would the owners get up in the mornings?), and communicating it is the big issue.
• Should create a Risk Appetite Statement which is "broad enough yet descriptive enough for organisational units to manage risks consistently within it" - good point, as of course some departments of a business would struggle without such breadth in their appetite statement (business continuity and marketing spring to mind)
• Similarly, that statement should "balance brevity with the need for clarity"
• Confidently states that "we all know the costs of failing to manage risk", but dished out some pretty generic examples, bearing in mind the zingers which have pitched up over the last three years
• Exhibit 1 on considerations affecting risk appetite is a very smart schematic for provoking thought at executive level
• Box on p5 has a rather definitive statement around there being a lack of risk appetite articulation which contributed to the current financial crisis - certainly wasn't a problem at Lehman's, more that it was a moveable feast!
• Handy box on p7 which covers the tie-in between what rates as an "adequate" ERM Framework in the context of S&P's ratings methodology, and what management must be able to articulate on the Risk Appetite front.
• Some very nice examples (p8-10) of risk appetite statements from different industries, and of risk tolerance statements anchored to associated risk appetite statements (p13-14).
• The big one - differentiating Risk Appetite and Risk Tolerance - is on p11. Whether you agree with the COSO conclusion (i.e. that Risk Tolerances implement Risk Appetite within each operating unit's sphere of influence), it does at least try to square the circle, and the clarity should benefit practitioners. However, the statement "While Risk Appetite is broad, Risk Tolerance is tactical and operational" is poor - I'm guessing one could substitute "broad" for "strategic", or "tactical and operational" for "specific", and it makes sense.
•  Interesting list on p16 of questions to facilitate Board-level discussions on Risk Appetite which I suspect is probably too wordy for many Boards to throw themselves into wholeheartedly.
• Starts to peter out towards the end, which is normally the case with such guidance materials (once you start descending into 'performance models', communications strategies and risk culture, the ability to prescribe content and form to disparate organisations diminishes substantially).

Ultimately, while the document is of considerable use for anyone who needs a reputable crutch on the topic (and is perhaps outside of financial services), it is probably too generic to be of great use as an aide-memoire to any Solvency II-covered insurers, and I would stick with the IRM's take ("those risks that [an organisation] actively wants to engage with" when scripting a Risk Appetite Statement. 


Chapeau for the good parts nevertheless...