Wednesday, 4 July 2012

FSA - Solvency II speeches this week from the great (and greater!)

A couple of topical speeches delivered this week by Canary Wharf's finest, both of which are relevant to the Solvency II world.

First, a speech at the 2012 Risk and Investment conference run through The Actuarial Profession and featuring some multidisciplinary heavy hitters from TV and print as well as some C-suite presence from the UK's largest multinationals. The FSA's Kathryn Morgan delivered a speech which covered Pillar 2 and 3 trends in particular, which is covered in this subscription only article at For those who don't have the budget for that, a pruned down version of that content is available here.

Ostensibly, the following points were made;
  • Don't expect any more FSA guidance on conducting an ORSA - fair point at this juncture, if you don't know your onions by now, there's probably no hope for you!
  • Approaching implementation consecutively in 3 pillars is a "worry" - I suspect that worry, misplaced or not, is applicable to most undertakings at this juncture
  • "Risk management is the best mitigant of risk, not capital" - I would argue an effective Risk function rather than risk management per se is the best mitigant, but it is slightly more ethereal than a big bundle of cash!
  • Perception that "...Risk and Capital are not talking to each other" - true out of necessity at this juncture perhaps (BAU for the balance sheet guys, model applicants or not, and the administrative burden of refreshing documentation suites has impeded comms for some time I would argue, but this will improve in the very near future).
  • Number of references to Boards, centred around NEDs participating fully in decisions rather than counting the hours till their taxi arrives, as well as not relying on SMEs to make decisions for them (i.e. Actuarially-minded board members are not left to perform all balance sheet related challenge on their own!)
  • With regards to the empire built on sand which is the legislative timeline, reiterates that while some key balance sheet-related issues are yet to flesh out, "...their is a lot of certainty in Pillar 2" - something I have banged on about since the draft Level 2 implementing measures were leaked in November.
While that speech has good insights for you Pillar 2 folk out there, a lecture from Julian Adams on "the impact of changing regulation on the insurance industry" is equally fascinating, if perhaps treading over some Solvency II ground already covered over the last couple of weeks - as a History graduate, I always like a cheeky overview, and the lecture covers legislative developments back to Victorian times.

That aside, a few Solvency II-relevant snippets were also included (or reiterated from prior speeches) such as;
  • A definition of what "risk sensitive" regulation actually means (insurers' solvency positions matching their idiosyncratic risk profiles) - something as succinct as that is actually extremely useful for board training purposes at the very least, and I am glad he has communicated it in this manner.
  • Also defines "proportionate" from the FSA's perspective on internal model approval - namely, if it is in the Directive or the Implementing measures, it is not negotiable.
  • Notes that Solvency II is "influencing" the global regulatory framework - I would argue that strong-arming (in the case of first/second wave countries) and bickering (in the case of the States) is far from influencing, though with the IAIS Comframe draft now open for review, we may see something more resembling dialogue from our pals in Brussels
  • Rather worrying comment that, in the context of reporting financial positions, that Solvency II reporting sits in the succession path of EEV and MCEV as "...if perhaps not the final, then the latest step" towards a more transparent and market consistent reporting regime. Anyone for SFCR 2.0?
  • A rather ominous note that the standard formula calculation "...would certainly have a distorting effect when considering, say, the London Market subscription business or with-profits businesses" - I hope all you tiny mutuals have got your IMs, PIMs or USPs ready, as it sounds like the FSA may already think SF is not suitable for you!
  • Acknowledges that Solvency II is about "maximum harmonisation", and therefore EIOPA will call more of the shots in future (just as soon as Omnibus II gets through...)
  • Highlights that the academic modelling around (a lack of) correlation drove many of the banks models' into stupidity in 2006-2008 - an area I would expect fervent challenge around from both the regulator and indeed internal governance structures (and one which Matthew Elderfield at the Central Bank of Ireland has already picked up on as a main area of focus)
Useful stuff from both sources, so keep it up Wharfers!

PS I suspect I won't be posting tomorrow, so I will wish you shoh slaynt and a happy Tynwald Day one day early!

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