Morgan Stanley and Oliver Wyman - Solvency II "The Long and Winding Road"

I came across a very high quality thought paper from the double team of Morgan Stanley and Oliver Wyman (you will need to sign up, but nothing intrusive), regarding the expected impact of Solvency II implementation on the industry as a whole, looking from an investors perspective in the main.

At 60 pages, it touches on just about everything you might want for Board/Exec and even personal briefing. I particularly liked:

• Unlikely that Solvency II will become a global blueprint for insurance regulation
• Cost of capital is likely to increase for insurers
• Winners and losers will ultimately take longer to emerge, due to grandfathering having less of an effect on strategies in medium term
• Non Life and Reinsurers are likely to be amongst the winners, with traditional life companies losing out.
• Suggesting product pressures will lead to more back-book consolidators and unit-linke/VA products
• The "weak insurers" will take on more reinsurance
• Matching premiums may encourage investment in illiquid classes
• More pragmatism expected around equivalence (for our US pals)
• Nice piece on p6 on attractiveness of different asset allocations
• "...in some jurisdictions the model approval process is proving to be very cumbersome" - Well spotted Sherlock!
• Nice table of Key Debates on p8, and throrough coverage of each of those debates follows, with liability measurement given a lot of airtime in particular (for obvious reasons)
• Good section on the Euro-cracy side of things p28-33, covering Omnibus II, prospective calendars etc
• Nice comment that, while sovereign debt risk may not necessarily be picked up in the regulations, Internal Models and ORSA would certainly be expected to reflect it. In addition, the phenomenon of "domestication" of balance sheets by EU insurers is also touched upon, along with the rationale (p36-37)
• Exploration of the potential for diversification benefits for insurance groups without the provision for Group support (p44-45)
• Decent section on Internal Model vs Standard Formula, and comment on how investors may struggle to compare like with like (p46-47)
• Expectation that local supervisory differences will continue despite increased co-operation required for Group supervision (highlighting IM approval as one particular area where the wheels may be greased better in some countries than others)

As for their choice of Beatles song in the document title, I would have personally gone with "When I'm 64" (which is when it feels like the trialogues will have finished!), or maybe "Help" (no explanation required!)...

KPMG - Solvency II and Insurance Groups thought paper

One for all you "groupies" out there, released by KPMG on how the group supervisory regime is likely to work out ('with lots of international bickering' was my immediate thought!).

I suspect anyone who is knee-deep in the minutiae of the matter may find this a touch specious, particularly around the transformational effects of Solvency II, but on the whole this is a decent introduction to the practical requirements for Groups over and above solo entities (p16 in particular) and remaining sticking points around the supervision of groups (Solvency II Balance Sheet issues on p28, group ORSA on p30, and restructuring options on p38).

Deloitte and economist intelligence unit - where are insurers heading on Solvency II

Always nice to see a benchmarking piece at a time when the legislative process has conceded that Eurocracy has led us to Solvency one and a half and we are no nearer to hearing whether the trialogue discussions are going to keep the new timetable on track.

This one comes from our old friends the EIU, with Deloitte riding shotgun. 60 firms, mostly UK domiciled and a good mix of Life/Non-Life, polled in what is a follow-up to last year's survey from the same authors. Already covered as highlights in a few articles (here for example), but I found the following salient:

• Change in emphasis from restructuring and introducing new risk mitigation techniques to repricing and/or redesigning new products.
• 20% of respondents noting they will need to "significantly change investment strategy" - perhaps as a result of the firming up of lobbying positions on the sticking points of Omnibus II?
• ORSA a key area of focus for the majority of respondents over the next 6 months - strange in light of model applicants use test obligations that it is only an area of focus now. Fascinatingly, data quality was only 4th on the priority list, with model embedding/use and risk appetite naturally high up the list.
• Even-ish split between those who are confident of timely implementation of the Directive by the industry and those who are concerned
• Majority have seen their project costs hiked due to the delay to 2014 - not especially new news, though the scale of increase seems relatively modest, with only 5% saying they have ponied up more than 10% over budget
• Only 45% worried about dual running ICA and SCR next year, weighted much more heavily towards the larger companies.
• Big changes in the profile of firms modelling habits year-on-year, the movements strangely towards more complexity (standard formula to partial internal model, or partial to full). A likely link to the earlier stats on radical changes in investment strategy and repricing becoming higher priority? Regardless, it's more work for our pals in Canary Wharf!
• A quarter of eligible respondents are in the FSA landing windows of 2013 (lucky devils!), with a suprisingly large number pencilled in for this year. Bearing in mind the scathing summary of IMAP materials issued to date by Julian Adams last week, should we expect these candidates to one-by-one ask for more time (and potentially get chucked out, as previously indicated?) Seemingly not too many respondents interested in the suggestion that there will be sugnificant tangile business benefits off the back of their Solvency II Programmes.

UK-centric as a piece of research for sure, but certainly some ideas to be gleaned by EU internal model candidates off the back of it, as well as some comfort for anyone lagging on ORSA.

FSA Speech - Adams at Insurance Day Summit on Internal Model Progress (or lack of...)

Another day, another bum-kicking for the IMAP candidate firms, who have been the recipients of some public words of 'encouragement' from the FSA's Julian Adams in a speech to the Insurance Day Summit yesterday, coupled with a "Dear Firm" letter which went to all internal model applicants this week.

The same themes which have pitched up in recent presentations (here and here for example) are still for all to see - model change, model scope, validation and expert judgement/rationale all feature heavily in the speech - but perhaps the elaboration on both assumption/dependency setting and documenting and Use Test embedding are breakout features from those already tabled as being insufficient.

Useful for those outside of the UK to see exactly what is twisting the FSA's tail at the moment, while for all you UK readers, the letter is clearly a laundry list which will require immediate attention and prioritisation in your work plans. Good luck...

Barnett Waddingham Solvency II Survey - IMAP, ORSA and Pillar 3 progress

Bit late blogging on this (released last week), but Barnett Waddingham's short but perfectly formed survey on a sample of 38 insurers' progress on Solvence II programmes is worth a read (link to the PDF is at the bottom of the landing page). Not clear whether all respondents are IMAP candidates, but it appears to be a given.

It is a pretty diverse sample, weighted more towards small/medium life companies, but the results seem to be as the FSA suggests is par for the course right now, namely that Validation work is way behind where it ought to be (almost half of respondents are behind schedule on validation or indeed haven't started!). This despite the fact that three quarters of respondents flag validation as one of the most challenging aspects of IMAP, which one would hope would ensure it is given sufficient resource and management time. Only 7% are using external resource to validate for IMAP, which is surprising bearing in mind the size of the companies polled.

In addition, documentation is also flagged by a majority of respondents as a challenging IMAP issue, which surprises me to some extent, as the FSA have been particularly critical of this aspect.

Despite these issues, three quarters are confident/very confident that their applications will be approved - I'm guessing this may have lowered after the robust speech delivered by Julian Adams a couple of weeks back!

On the ORSA front, there was a bit of a mixed bag with regards to respondents opinion of the suitability of EIOPA's level 3 guidance (I personally thought it was pretty good, but not everyone agrees, particularly around documentation and group elements). With regards to where respondents were up to with the mechanics of the ORSA Process, every element appears to be underdone at this point, most worryingly around elements requiring model interaction such as S&ST, risk profile assessment and deviations between SF SCR and assumptions underlying the organisation's risk profile. As this would only be supporting evidence for model applications, you can perhaps cut a little slack here, but this is a big ticket item for Use Test, and to have so much work in progress at this stage does not lend itself to demonstrating embedded use!

Not entirely convinced by the most challenging aspect of ORSA being the daily monitoring of SCR - this is not a requirement by my reading, but even if it is (and accounting for all the proxies and assumptions that one would have to carry on the liability side of the balance sheet in particular), it shouldn't be a problem for model users unless you don't have someone to push the button.

On the Pillar 3 front, nothing especially new - difficulty in populating various aspects of the required templates/submissions are being experienced, most notably the 30% stating that they still have problems with quarterly balance sheet reporting, and an almost 50-50 split of respondents feeling they do not have the required data available to satisfy the requirements.

Worth a benchmark against your own progress at the very least, particularly if you are one of the little guys still hanging on in IMAP.
 

EIOPA on external models as part of IMAP

Nice of EIOPA to wait for a UK bank holiday to publish their news on External Models and Data and how one should anticipate vigour from their friendly local regulator around obtaining details on their integration into internal model applications.

Post-lobbying, EIOPA have come out fighting on a couple of corners in the context of External Models and Data:

• That by not supplying the "specific information or documentation required" by your regulator, EIOPA expect applications to be rejected
• Compliance with "all the requirements for internal model approval...including those related to tests and standards and model changes" - second bit is my emphasis, as I suspect some companies may have tried to scope their model change policies with a caveat for external model changes (which certainly makes life easier).
• "Proper adaptation" of external models and data to both the risk profile and an undertaking's specificities to demonstrate requirement compliance - sounds likely to entail high quality documentation and/or evidence retention.
• That vendors and applicants should/should have dealt with the details around provision of data to supervisors in their contractual arrangements - too late to revisit this with existing relationships without ultimately introducing non-contracted expenses to at least one party?
• That external data providers (whether they be asset, liability or ESG-type input/tool providers) cannot play the secrecy card when it comes to providing applicants with whatever is required to approve the application, as it is covered in both Solvency I and Solvency II! 

Clarity appreciated, but feels instinctively like some strained customer/provider relationships will emerge once the FSA come knocking!

Late Post Script - Hyperlink was wrong yesterday, apologies

KPMG - Solvency II paper, "Beyond compliance towards optimisation"

Another titbit from the Big 4, this time covering the benefits that are available off the back off the legislative delays, specifically around optimising the Finance and Risk functions. If you are one of the Tier 1 companies, this comes across as a bit of a "Where's Wally" paper (or 'Waldo' for my American pals!), as it borrows of their extensive 'experience' on site with clients over the last few years. Despite that extensive experience, this is pretty light at a fistful of pages.

I would struggle to distinguish between 'capital minimisation' and 'capital optimisation', which they start off with, but they go on to describe a world of risk and finance "centres of excellence, which utilise the good work currently being done on the data warehousing front by Data teams to populate the various regulatory reporting requirements as well as management information needs, and that all sounds plausible.

The Risk section is naturally a little flannel-y, but suggests the best functions will be able to predict cash flows better, ultimately improving risk, capital and business planning and as a by-product, RAROC comprehension and enhancement.

Not a lot else, but some ideas around communicating future value of today's expenditure at the very least.