Monday, 10 September 2012

Clear Path Analysis - Solvency II "The Global Dimension"

This piece of research from the guys at Clear Path Analysis (sign up required) has been in the offing for a while, and as I covered their last impressive release on this blog (and I don't have a life :-( ), I've been looking forward to it...

There is certainly plenty in here to keep those of every persuasion entertained (with the sponsors as omnipresent as their funding permits!), but I've sectioned out highlights for my own benefit;

  • Solvency II "...clearly a step in the right direction" - oddly, not followed by a punchline...
  • On the likelihood of Sol II remaining ahead of the IAIS approach to solvency regulation - "Asia no longer looks to the west for regulatory best practice", going on to cheekily recommend a cherry-picking approach
Barbara Ridpath - think tank CEO, on short-termism and regulation
  • Highlights one (widely acknowledged) consequence of Solvency II being a disincentive to invest in long term and/or non-Sovereign debt instruments, which is not in the mandate of the regulations, or indeed the regulators.
Roundtable on un-level playing fields between EU and non-EU insurers - includes Standard Life Sol II lead
  • Solvency II likely to weed out companies who can't handle the ongoing compliance cost from running EU operations
  • Large piece on Canadian equivalence (of particular importance to Standard Life of course) and the practicalities of equivalence being neither sought nor at this point offered for a non-EEA wing of a EEA HQd insurer.
  • Standard Life not happy with equivalence assessments running concurrently with IMAP, due (rightly) to the significance of a "yay" or a "nay" to the strategic thinking around non-EEA arms.
  • Suggestion that Asia is looking harder at the IAIS approach as opposed to Solvency II for future direction
Data and Risk Reporting Interview - Dan Wilkinson, ERM head at Liberty Syndicates
  • Increased formality around Data and Risk reporting, using both controls-focused and risk-focused approaches. Makes reference to a monthly management committee which takes reporting on data deficiency matters, which I have heard reference to on the circuit before, and certainly demonstrates that data inputs, whether for internal modelling or for strategic decision making, feature as a high priority, rather than taken as read.
  • Notes that his employer is moving risk reporting away from the 1-in-200 VaR to "...more foreseeable points in the distribution", which we definitely like to hear in the ORSA world!
  • Alludes to concerns around disclosing ORSA-related information to the outside world, which is an area yet to be adequately chewed over by regulators and industry quite yet, let alone ratings agencies, analysts etc
  • "Sensible amount of proportionality" should be adopted when deciding what should be disclosed - is that a contradiction in terms, an oxymoron, or some other expression I can't quite lift off of Google!
  • Sensibly stresses that an effective emerging risk policy should allow input and challenge at all levels of an organisation, when asked about internal models evolving with the risk profile of the business.
  • "...biggest deliverable is cultural" - i.e. stripping back your long-since-gone consultancy friends' technical documentation (where required) in order to make it more accessible and free BAU staff to use the new facilities, be it a spruced up RMF or a full Internal Model - appreciate I may be doing myself a disservice by highlighting it!
  • Didn't agree one bit with the comment that ORSA could "...inflate regulatory capital, based on rather speculative assumptions" - FSA have been pretty clear that ORSA has no bearing on required capital, appreciating the nuances around what they say and what actually transpires!
  • Also wasn't massively sold on the comment that the ORSA "...should bring together information that is used within the business to allow analysis of medium term trends", unless of course he was cut off mid-sentence!
"Challenges of Pillar III" roundtable, focused seemingly on getting asset managers to pull their fingers out! Includes a CRO from an Italian insurer
  • "Asset managers who are not willing or able to invest in appropriate data management and reporting systems will find it hard, if not impossible, to attract or retain insurance clients" - so there!
  • Suggestion that "parts of the industry will have to get up to speed on" underlying assets which they are currently invested in for the look-through basis - I suspect that there are plenty of horror-stories to emerge once some CIOs and CFOs get a proper butchers at what some of their collectives are actually invested in, particularly with the advent of outsourcing investment management or just administration over the last decade or so...
  • Note that ratings agency priorities over the near-term may focus more on differences between SF and IM-calculated SCRs and the impact of transitionals, rather than purely on SCR outcomes.
  • Note that "Solvency II is effectively a lead in this area [transparency]", so no pre-conditions should be expected from ratings agencies
  • Even bring up the old gripe that EEV/MCEV is still not understood well enough by agencies/analysts, so by implication there should be few worries about additional disclosures!
Considerations for Building a Diversified Investment Portfolio - Charles Pears from Insight Investment

Really accessible and well structured two-pager on portfolio diversification, of particular use to non-experts which covers
  • Rationale for insurance companies looking for low risk returns;
  • Risk drivers which make that difficult in today's environment, even if accepting minimal risk
  • Why companies may look to seek excess returns, and the constraints around that
  • Why decisions to accept more risk for enhanced rewards should be (but perhaps aren't always) knowledge based
  • Basic options for enhancing portfolio returns without breaking the bank from a capital perspective.
Interesting is wrapped up with a comment that "...we expect insurers who adopt a Liability Driven Investment approach will secure a meaningful competitive advantage" - hard sell perhaps, but the rationale for it is well documented here.

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