Monday, 29 October 2012

Ernst and Young European Solvency II survey - the storm before the calm...

So Ernst and Young have decided to join the party with one of the more noble attempts to gather EU-wide industry opinion on progress towards Solvency II compliance, and kindly published those findings recently. Yes, I understand that this survey came out over a week ago, but I left my notes in the Isle of Man last Monday, and I'm not so enthusiastic that I fancied another turbo-prop into Ronaldsway Airport to 'go fetch'.

There was naturally plenty of media comment on its content (here, here and here for a start, but I'm sure you can do better), but bearing in mind it was released with a backdrop of 2015/2016 and the moveable feast that is UK IMAP, one could be forgiven for not caring less about the results that point to preparedness 'by 2014'. However, the E&Y guys obviously stayed up all night to do it, so I gave it the once-over and noted the following;

Sample - 160+ respondents from 19 countries, about as volumous as I have come across, though clearly weighted towards medium/large firms (€100m+ premium income per annum), and what we might call "old" Europe.

  • 90% reckoned they could be compliant by 2015 (though E&Y say that is the date proposed by the EC, rather than to it)
  • High level of confidence around Pillar 1 and Pillar 2 preparedness, though shockingly two-thirds of respondents did not use the draft L2 rules when producing their balance sheet, which makes you wonder what constitutes "ready" in some countries! 
  • 80% not meeting Pillar 3 "requirements", with loose use of the expression "all requirements" for (as mentioned for Pillar 1, is this 'Level 1 plus draft Level 2', or 'Level 1 plus EIOPA advice'?). One of the worst affected areas is the development of a Disclosure Policy, which I find as understandable as I do sad.
  • Almost 70% have only met some of the data quality requirements - I'm sure the national regulators, in particular the FSA, would wince at that, even factoring in an extension.
  • Very interesting stat on the number of respondents developing Partial Internal Models (around half), with half of that number again looking for, what was at the time, "Day 1 approval". I wonder if the likely shift of "Day 1" to 2015 or 2016 allows these figures to flex, and if the national regulators are staffed to cope with it?
  • "Range of capital optimisation strategies" will be applied by the majority of respondents in 2013 - curious to know why firms would not optimise their capital deployment as a matter of course!
  • Larger organisations said to be tailing off expenditure during 2013 and have delivered compliance by mid-2014. Will an extension simply elongate existing expenditure plans or require fresh budget, and indeed how many times can one go 'back to the well' on this?
  • ORSA is by some distance the biggest laggard in the Pillar 2 space, with only 30% "mostly" meeting requirements as they stand. Can only imagine the question was asked before EIOPA came back on the L3 public consultation in June, as EIOPA were pretty clear on what to do next.
  • Some pretty flabby words on Data and IT readiness, but easy to get the general picture of "not very good" progress, particularly in the end-user computing space (three-quarters
E&Y angles
  • Clearly lobbying for recalibrating long-duration debt (p5)
  • Bit of scaremongering for smaller companies on their resource estimates (p6) - shake them down all you want, they just can't afford you!
  • Strange bit of touting done around a lack of formal assessment around the effectiveness of one's Risk Management System (p12) - don't believe this is compulsory, only that your Risk Management System is effective.
  • Also fishing hard for what was previously low hanging fruit around documentation, data governance and use test (p20).
Internal Model - specific
  • Two thirds of French and half of German internal model applicants not fishing for "Day 1" approval - not sure if this is due to BAFIN and the ACP playing hardball (already seen an instance of a modeller fleeing Germany), but an extension to 2016 puts them back in the game for "Day 1" surely.
  • Some expected discontent, though not in the majority, around the current SF risk calibrations (Op risk too low, underwriting and market too high). Even number found credit risk too high and too low, perhaps reflecting thought on long duration corporate debt and Eurozone government debt respectively.
  • Nearly 80% of respondents expect the IM SCR to be at least 10% lower than SF SCR.
Worth adding as a footnote that 14% of UK respondents thought they'll be ready for implementation "in the course of 2012" - without Level 2 kiddies, are you sure!

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