Omnibus II moves again - accelerating the inevitable?

No sooner has the holiday season drawn to a close (and by that I mean everyone else's holiday season, as we don't 'do holidays' at Governance Matters...) than our good friend Omnibus II has jogged down the road another month - the procedure file has just been updated to show it will be hitting the November parliamentary Plenary (by my count, the 5th postponement since 2011).

Not entirely sure of the rather abrupt nature of this movement, bearing in mind the main players are probably still wearing their 'budgie smugglers' in the Med at the moment, but Gideon over on the Wire picked up on an issue which may have led to an early concession that October was simply too early, with an impact assessment on LTGs likely to roll off the back of the next trialogue.

We are also close enough to the finish line (don't laugh) to be getting into the national political cesspits, so a whiff of sabotage and national interest may also be coming to bear. Not only have the UK political opposition decided that Solvency II is controversial enough to start point scoring on, but last month Sharon Bowles (current Chair of ECON) gave an astonishingly frank interview to Risk.net (subscription only I'm afraid) where Das Küchenspüle was thrown at the German contingent. Quotes included;

• "...certain leading German MEPs have publicly said that Solvency II is never going to happen anyway" and
• "...I think there is a subtext here that the Germans - and I think this is well known - are trying to jettison the whole of Solvency II"

Well if Der Wahnsinn really is eine schmale brücke like the song says, its probably best not to cross it!

KMPG - Economic Capital Modelling in the Insurance Industry survey

Just when you think things will be quiet while the normal world goes to the beach for a month, KPMG chip in with a survey on EC modelling, polling 43 of the world's largest global insurers, with a nice spread of continents and insurer-types represented. Over 90% of respondents were Chief Actuary/CCO/CRO etc level.

With this subject being a hotter potato right now than a Jersey Royal locked in a sauna, in a tank top, in Bangkok, I've had a trawl through and found the following highlights:

• Most reasonable business uses of EC metrics appear to be applied or planned by respondents (pricing/underwriting decisions being the straggler)
• 40% of respondents said management understanding of EC is still limited - schematic on p9 showing the differences between 'sophisticated' Europe and 'savage' RoW hints at some kind of Solvency II dividend, though the results are not flattering across the board.
• Interesting schematic on implementation difficulties (p12), broken down by continent - data quality seems to have topped the list of implementation problems, which is no surprise I guess, but they neatly connect it with potential for over-reliance on expert judgement, simplifications and approximations to fill the gaps (all of which are to the detriment of a pure EC approach, at least in theory).
• Curve fitting is the majority-used approach (58%) to deliver model outputs quicker (i.e. 'lite' modelling), with replicating portfolios and LSMC less favoured
• Understanding around fungibility and dependency higlighted as areas for improvement
• Two-thirds still not allowing for sovereign debt risk in their EC calcs - I admire the persistency!
• Very interesting bit towards the back on effectively projecting EC, the holy grail for anyone in the ORSA space right now. While they loosely refer to the business planning horizon as "typically 3 years" (I've seen longer than that before breakfast, lads!), the point made is perfectly valid, namely that methodologies for this kind of projection are in their infancy.
• Finally, a nugget on Operational Risk Modelling (which I only touched on yesterday!), by some distance the least effective part of respondent's EC frameworks. They do note that 60% of EU respondents have moved to stochastic-based Op risk models with all bar one using expert judgement to calibrate them! They also bemoan the lack of credible data and subjectivity around cause/effect/latency of op risk events.

I guess the most surprising element of the document is how cagily it is written, as if EC modelling of risk profiles still has something to prove against, say, arbitrary and aimlessly prudent margins - the authors acknowledge that, if done badly, EC modelling is an accident waiting to happen, which supports the "rigour" being applied by the FSA when pre-assessing the UK insurance industry's model applications.

Also surprised that more reference to ratings agency demands wasn't made, particularly with that element seemingly influencing EC calibration points in the EU right now (hands up if you're at 1-in-2,000!)

Operational Risk - Scenario analysis and best practice

Short and sweet - couple of interesting papers in the Op Risk space which should help anyone working on operational risk scenarios or indeed brushing up on best practices.

Milliman start off with this scene setter on approaches being adopted in order to bypass the rather broad brush (and I suspect in some cases, financially onerous) standard formula approach to calculating the Op Risk SCR element. They of course touch on the old-but-legitimate complaint around imput data quality if one wants to model their capital requirement rather than sketch it on the back of EIOPA's fag packet.

While they take the opportunity to applaud the efforts of those creating a database of scenarios, or indeed using the ORIC database, they ultimately come down on the Bayesian side of the debate, which I suspect is a touch too rich for most people's blood, but those of us with deep pockets (and large Op Risk SCR totals!) may give that a stab.

The second piece came from Corven around best Op Risk practices from other industries, and how they could be adopted by the Financial Services industry. Not much of the research is actually published yet (and the main meat of their published findings is hidden behind FT's paywall), but I found it particularly interesting to see which industries were cited as areas where Financial Services could learn from.

Some good interim stats (full report to follow in October), including;

• All respondents to date trying to tie in op risk performance with compensation
• Regulatory hounding appears to have inspired 64% of respondents to inprove Op Risk management
• Full root cause analysis only conducted by 38% of respondents upon a "major risk failure" - woolly words aside, that is not impressive at all.
• Responses to major risk incidents overwhelmingly look to amend processes and systems, not the people and capabilities that inevitably led to them!

The example of air crews being compelled to point out senior staff members' inadequacies is a particularly powerful example of bottom-up op risk mitigation, though I struggle to see its application in financial services. However, it was also strange to see the Oil industry also cited as a best practitioner - the major risk events in that industry surely draw parallels with financial services at their most grasping over recent years.

Deloitte and Forbes - the new world of Risk Management

This Deloitte/Forbes paper is sub-titled "Aftershock", which makes anyone of my age immediately recoil at the though of the world's most repulsive bar shooter - it is in fact a pretty decent stab at running on from the kinds of financial services-specific research which came off the back of the 2006-2008 mega-turbulence (these were mostly titled "We've broken the World, what are we going to do" :-( )

At 192 respondents it is a decent sample size, though is US-centric and non-Finance organisations, so not a great all-rounder for you global readers. However, the central message that risk management programmes and frameworks remain in a state of flux (hence the aftershock motif) is a worrying one when one examines the stats behind it:

• 91% are reorganising and reprioritising approach to risk management in next 3 years, citing continued market volatility.
• Only 37% had plans to provide additional training in that respect
• Centralisation cited as more efficent way of bubbling risks to the top - interested to know if that is everyone's experience?
• Around 50% retain primary responsibility for the "risk management approach" with CEO or CFO, with the CRO in third at 20% - should we be expecting that percentage to be moving up or down at this juncture (in particular, does a CRO need a seat at the top table to be responsible for ERM approach?).
• Example cited of ERM being managed in the corporate strategy department, which I thought was an interesting development.
• Biggest challenges included; 26% stating that incentives are not rewarding 'risk based decisions'; 22% struggling with the misalignment of the business operating model and the ERM model, and 23% suffering a lack of information to make risk based decisions. These three (there are of course more in the list!) struck me as common issues when preparing for Solvency II, so handy stats in that respect.
• Staggeringly, Social Media is equal fourth on the list of "most important risk sources over the next 5 years" - equal with Financial Risk! Not to underplay the emergence of social media and its multiplier effect on reputational risk, but seriously?
• Most "risk types" are monitored either periodically or continuously, though strategic and reputational risks seem to be most likely to be measured on an ad-hoc basis (something which you ORSA consultants out there will sympathise with!)
   

I say "worrying" at the top here from a professional perspective - is it reasonable after events as seismic as those experienced in the last 5 years for the risk profession to still be sliding in a mass of new parts into the ERM machine, as opposed to tinkering under the bonnet?

Bearing in mind this doesn't include the financial services industry, maybe the timelag is rational, as the other industries have had plenty of time to learn what not to do!

Society of Actuaries in Ireland Newsletter - ORSA, Solvency II and Cocktails

Always a riveting read, the Irish Society of Actuaries fired out their newsletter for August, which as ever is a treasure trove for any diet-mathematicians like me who need to have things spelled out for them on all matters actuarial.

Of particular note was their report from the ORSA Working Party (p7), which covers a presentation and paper delivered earlier in the year - to show what a fantastic bunch the SAI are, you can access both the full working party paper (all 52 pages of it) and the presentation slides on their website. I picked out the following from the newsletter (I'll read the working party paper in more detail separately);

• "Compilation of the ORSA Document is quite a significant undertaking" - emphasising the difficulty in selling ORSA in purely process terms
• "ORSA is a risk management exercise, not a compliance exercise" - I would prefer to sell it as both, as it is unfair to undersell the compliance angle, particularly to smaller firms who may not have gone to the nth degree on projecting capital adequacy before.
• "ORSA needs to be readable..." - again, almost impossible not to talk about it as a report, rather than the report being the output of a process
• "ORSA would be of great interest to the Board" - I would hope that the Board would be queueing up next to the printer to get their hands on ORSA reporting output!
• Projecting the business planning period "...likely to be 3-5 years into the future" - interesting to see what the general consensus is on this (I feel this will fit most insurers, but if you are shooting for longer, would love to hear how you're doing it!)
• Some discussion over how prescriptive the Central Bank of Ireland may be on the ORSA documentation front (bearing in mind how liberal the FSA have been on this matter) - seems to suggest that a similar approach will be taken i.e. justify what you have.

There are a couple of nice pieces towards the back on unintended consequences of Solvency II and Basel III (on cost of capital and funding patterns), as well as some nice real world examples of why one should be wary of actuaries who manage to change internal model parameters in a way that magically reduces capital requirements each year!

The less said about the actuarial cocktail making class on the back page (complete with bottle of Kia-ora in centre shot) the better I suspect...

FTSE Insurers and IMAP - Resolution are out!

Shock news announced today (unless you actually listen to the grapevine I guess) that Resolution have dropped out of the FSA's internal model application process, citing the decreasing likelihood of go-live on Jan 1st 2014.

Unlike the other big-hitter candidates who appear, despite their concerns on go-live date, to hunger for approval at outset, Resolution seem happy to take their chances (at least in year 1) with a standard formula approach.

They note the following;

• "Looking forward, the Group believes there is heightened uncertainty around the future requirements of Solvency II both as regards its structure and timing of implementation. The implementation date for Solvency II has been delayed to 1 January 2014 and the Group expects that it will be delayed further" - p48
• "In line with this it has concluded that it is in the Group’s best interests to delay its internal model application to allow time for any further changes in the Solvency II implementation timetable and to help smooth the Group’s overall change agenda. Accordingly FLG has withdrawn from FSA’s internal model pre-application process and is now targeting obtaining internal model approval in January 2015" - p56
• "If the Directive is implemented in 2014, FLG will be ready to comply with its requirements through the use of the Standard Formula. Use of the Standard Formula, pending obtaining internal model approval is not expected to lead to any significant disadvantage in terms of capital requirements" - p56

I would hasten to add that this decision cannot reverse the whopping £48m of transformation costs for the 6 months booked predominantly to Solvency II (they were less than £60m for all of 2011!).

Whose next for dropping out...

KPMG on the Solvency II Reporting package

You can always rely on one of the big 4 to do the admin around EIOPA's releases, formatting and paginating it into a handy A4 slice of pure Gauguin - KPMG to the rescue this time, breaking out EIOPA's work on the Pillar 3 reporting and disclosure package into something slightly more edible for Boards and senior management.

Really one for the specialists on reporting templates content, rationale for why thing dropped out or emerged pre and post-consultation, and outstanding issues from a practical perspective - I am slightly divorced from this element at the moment, but have certainly heard the rumblings around look-through requirements, quarterly balance sheets and detailed asset lists etc on various grapevines, and with time ticking on, these kinds of materials can only help to aid prioritisation of the required BAU activity to populate the things!

The introduction of data requirements for EIOPA around financial stability (particularly Lapse information) seems very controversial - I have always found it the most closely guarded, and indeed requested information from interested third parties (analysts in particular!).

You should enjoy the sectioned material towards the back, which includes some free KPMG comment - if that is the house line, you may be able to save yourself a few quid!

FTSE Insurers and Solvency II at interim-time - 'Oops I spent it again'

While the politicians and eurocrats are having a well earned soak in the August sun before they pick up their Omnibus II cudgels again, the rest of the Solvency II world has to continue with the more mundane tasks of counting beans and predicting the future.

On that basis, the great and good of UK Insurance plc have been comparing abs this week on both cost and go-live date, with the following revelations;

Legal and General

• "...expect implementation [of Solvency II] could be later than 2014"
• On track to submit IMAP by end 2012 - guessing this means a large amount of tedious rolling forward of balance sheets, SCR etc for the guys in 2013 in order to meet FSA application requirements
• £23m spent on "Investment Projects" for the half year, predominantly related to Solvency II - pro-rated, this is down slightly on 2011's total spend of £56m.

Old Mutual

• Bermuda's new capital regime (fishing for equivalence of course) has obliged the Group to send capital to Bermuda itself, reducing their FGD surplus.
• Seem confident that the overhanging Omnibus arguments (equivalence, discount rate methodology, contract boundaries) will affect its SCR surplus
• "...increasing risk of delay in the Solvency II timetable beyond January 2014"
• "...currently on track to deliver all requirements for Solvency II compliance"
• No word on project costs as such

Aviva

• Costs associated with preparing the businesses for Solvency II for the half year of (eeeekk!) £72m (as opposed to just under £100m for all of 2011)
• Note that a draft of the Level 2 implementing measures were "published in 2011" - I wouldn't call unofficial circulation via national trade organisations "publication" as such!
• Implementation date "...continues to be discussed"

RSA

• Content that go-live is still scheduled for 2014
• Interesting, calibrating their EC model to 1-in-1,250, which doesn't copy the vogue of 1-in-2,000 which appears to have landed with larger firms, I guess to save the ratings agencies having to work a bit harder!
• £16m of Solvency II costs for the half year 

Prudential

• "...currently anticipated to be implemented from 1 January 2014"
• "...continue to evaluate actions, including continuing consideration of the group's domicile"
• Total of £27m spent on Solvency II implementation costs in the half year

Resolution

• £48m at half year - their bigger news on exiting IMAP until 2015 is covered on this blog post.

Standard Life

• £42m at half year for Solvency II and RDR "restructuring programmes" - RDR is a beast in itself, so may be difficult to attribute a portion of that cost, though the guys were in the £50m+ bracket for all of 2011.
• Little in the way of additional Solvency II comment

Royal London

• £9m in "corporate costs", which includes Solvency II, but doesn't cover all by any stretch
• No additional comment

Some big money getting laid down right now, which was no doubt budgeted as tapering-off by now in previous budgets, alongside (no doubt well briefed) messages of uncertainty on go-live date - let's hope we get it right kids!

FSA's Pillar 2 site - updates on ORSA

So the Wharfsiders have released some material to their Pillar 2 microsite around ORSA, rolling off the back of EIOPA's releases earlier in July. Bearing in mind the ORSA training stats assembled by KPMG on my previous post, I dare say any guidance is good guidance, so I haven't been too precious when making notes on it!

In the Q&A section, they throw few punches (and pull most of those anyway!) when answering on subjective elements such as proportionality, ORSA Report length, Group ORSA scopes and potential use of ORSA report content by the fledgeling FCA. They are however clear that they will expect to see evidence of ORSA Processes in working order in the IMAP package, and that ORSA's are not expected to be generic across the industry.

Meanwhile in the Expert Group presentation (my invite clearly lost in the post!), the slides reiterate the fundamentals (i.e. it's a process that happens to produce a report, not a reporting process), but doesn't shed much more light - I guess you had to be there!

KMPG survey on Solvency II Board Training - "Do more!"

Been slack the last couple of weeks while doing my final preparations for the Isle of Man half marathon, which I "tore up" last Sunday in, errr, 1h 36m, coming in just ahead of Brian the Snail and Albert Steptoe.

On the basis that I'm now safe from potential Olympic requirements, I am left with plenty of time to blog while my multiple friction-related injuries heal...

Starting with KPMG's latest diatribe on Solvency II Board Training, an admirable attempt to put one of the darkest sheep into the spotlight - anyone who has dragged a Policy, Solvency II briefing note, draft ORSA Report or internal model justification paper through a Board or Board sub-committee will know that getting the membership to take Solvency II seriously is not a walk in the park (particularly when you have to also explain once a quarter why the go-live date keeps moving!).

There is therefore a "comfort in numbers" which one can draw from KPMG's survey (sadly no details on sample size), with an overriding message of "do more, immediately", in particular;

• 80% of boards have received 15 hours or less of Solvency II training - I dare say in many cases this would be accumulated by tacking on Solvency II-related matters to the end of existing Board agendas over a 12-24 month period.
• 57% have covered ORSA in their training
• 30% have covered Use Test
• 44% will be embedding training objectives into their director's PDPs

Outside of those "big hitters", some interesting gaps emerge;

• 10% have not commenced training
• Half have performed 1-on-1 training with execs (perversely, more have done 1-on-1's with NEDs at 56%!). My experience would say they are equally and entirely in need of bespoke training!
• 35% have delivered training on IMAP itself, a pretty sobering number bearing in mind where we are in pre-application
• Over 20% of respondents have nothing currently planned for training around Pillar 3 reporting (22% on the QRT/SFCR side, and 26% on the RSR/ORSA supervisory report) - to have not at least briefed on these matters at this juncture is remiss, bearing in mind the consults were put out last year!
• Only a third have instigated a company-wide training programme

The section around training on the Internal Model however (p7) felt instinctively wobbly to me, with the FSA said to be "likely" to expect all directors to have a "good" understanding of the IM.

While KPMG have purloined the best bits of Article 120 (and 213 in the Level 2 draft) for the purposes of what good might look like, I would still argue that a "good" understanding is not even close to being defined from a national regulatory perspective in a manner that lends itself to effective training planning.
No doubt anyone in the IMAP space will find this useful, but you might want to check the sample size with KPMG in order to put any weight behind the conclusions if it prompts you to change programme priorities/budgets etc. Certainly an eye-opener regardless.