Thursday, 12 July 2012

EIOPA's response on the ORSA consultation - get on with it!

In a week so full of heavy reading (EIOPA's response to the Reporting Package consultation and the FSA's second tome on creating their SOLPRU handbook), I was hoping to get to something a bit lighter towards the end of the week (heard great things about 50 Shades of Grey on the grapevine...).

Then appears EIOPA's response to the ORSA consultation paper feedback, which is affixed to the document in a whopping 200 page annex. While I have blogged on the consultation paper itself back in November, the real meat and spuds of the response is condensed into the front 15 pages, from which I would flag the (non-exhaustive) following lobbyists points, along with EIOPA's responses;
  • Lobbyists were still asking for more prescription/examples in areas of the guidelines, regardless of this being Level 3
  • Specific concerns around the "deviation from risk profile" guideline, which may force insurers to adopt internal models
  • Continued concerns around proportionality and materiality definitions
  • Still seeking "ORSA Report" examples
  • Concerns around projecting overall solvency needs over the planning period, so looking for simplifications in that area
  • Range of concerns around Group ORSAs (diversification, Colleges of Supervisors, Third Countries, ORSA scope)
EIOPA's highlights in response are;
  • Re: proportionality and materiality - stop whining and get on with it (p8)!
  • Re: "Record of the ORSA" - a specific document containing all records of ORSA-related activity is NOT required, where existing documentation/records contribute to the assessment as they stand (in such cases "a reference to the relevant data is sufficient") (p9)
  • To supplement this, they note "A record of an individual ORSA will in most cases contain more information than is contained either in the internal ORSA Report or the ORSA Supervisory Report" (p10)
  • No specific approach for captives (so another 'get on with it'!) (p10)
  • All risks are expected to be quantified, regardless of the difficulty (p10)
  • Lobbying on forward looking perspective has clearly paid off, as the requirement to quantify overall solvency needs for each year of the projection period has been dropped (p10)
  • Onus on companies to justify conclusions around the severity of deviations of risk profile (which may lead a Standard Formula firm to start modelling) - a result of sorts for the industry I guess (p11)
  • Confirms that ORSA and SCR calculations cannot be completely divorced, but would allow an ORSA to be performed using an older SCR calculation, providing the risk profile hasn't materially changed in the interim
No reason to think they would radically divert from their proposal (indeed, they didn't on the reporting package as well, so at least the industry is getting the certainty it craves, if not the actual legislation!)

Tuesday, 10 July 2012

Ernst and Young on Solvency II Pillar 3 - a likely story (sadly)

Time for a walk (actually more of a sthaager for a Manxman!) into the less familiar territory of Pillar 3, or "the output" as some traditionalists may label it.

E&Y dropped a Pillar 3 preparations survey out to a relatively small (53 respondents) but nicely spread (8 countries, and roughly split into Life/Non-Life/Composite) sample, and as one might expect, preparations were found to be slightly underdone by the majority.

They note that even for companies who have completed their gaps analysis between BAU and Solvency II demands, there remains some meaty outstanding issues such as reporting granularity; capturing synergies for other requirements (namely ORSA); policy drafting and implementation around data governance, and process redesign. Appreciating that some of these matters are still up for debate, some aspects of this gap list should be closed by now, and I suspect that the regulators will not look favourably at firms who continue to nudge this topic into the 2013 space.

Other aspects which jumped out include;
  • Only a third of respondents have completed a gap analysis of QRTs against capabilities
  • Less than a fifth have mocked up an SFCR/RSR, despite the prescriptive nature of Level 2 on the reports
  • Interestingly, two-thirds have designated their finance functions as primarily responsible for Solvency II reporting - some have parked it with Risk which, while appreciating a three lines of defence model is not compulsory, seems very wrong regardless of the function's skillset.
  • Three quarters expect to achieve reporting compliance only after "significant" or "fundamental" changes to their existing processes
  • Some firms were identified as planning to speed up their existing processes to meet the proposed reporting deadlines under Solvency II, which seems an excellent idea
Pillar 3 is likely to be an even more bountiful smorgasbord after EIOPA released their feedback statement on their consultations around the Solvency II reporting package today. I suspect I don't have the ambition to swallow the 88 pages today (or perhaps any other day!), but Will Coatesworth neatly tweeted the big message earlier which the industry tried to avoid, which is that quarterly balance sheets look like they are here to stay as part of the reporting package.

Good news for regulators, consumers, and anyone who is punting round Pillar 3 software solutions I guess!

Friday, 6 July 2012

ORSA guidance from Accenture - good, bad and ugly?

In the same week as the FSA told the industry to "go fish" for additional guidance around ORSA, the guys at Accenture have pushed out a bite-sized piece on extracting added value (i.e. above and beyond "compliance") from one's ORSA processes.

There are clearly a number of consultancies who fancy themselves in this space (click the ORSA link in the tag cloud at the bottom of this webpage for my review history of them), so having cast an eye over it, I noted the following;
  • Leads with the rather hackneyed soundbite around ORSA helping insurers "extract additional value" from what is ostensibly a compliance investment
  • Note that "...many companies have just begun to implement their ORSA projects, or are still considering how to do so" - if that's the case, it is good for my business, but it sounds like a lazy justification for publishing this pamphlet (how can anyone only be as far as "considering" in mid 2012?)
  • Recommend that operational specifications should derive from the C-suite - easier said than done, but I totally agree if one wants to extract value from the ORSA process rather than tick the box.
  • Suggest that ORSA "...may become a source of competitive advantage" - clearly the assessment does not do this, rather the consideration of it by the AMSB and the application of management actions off the back of it.
They then go on to split the doc into sections as below;

Compliance requirements
  • Neat enough as a beginner's guide to ORSA compliance 101, though they introduce a rather naughty term in "ORSA Capital" as the amount over and above SCR - the concept of ORSA is difficult enough to transpose into BAU for smaller organisations who perhaps haven't had to consider economic capital measures before, so this term is one I would consign to the "nice try" bin.
  • Some nice schematics in the section as well around the process side of ORSA.
Creating an operating model
  • Suggest that preliminary input should be obtained from the C-suite to create one's target operating model. As above, I agree with their participation in the design phase, but with BAU pressures around ICA/FCR etc, it should be weighted much more towards approval of recommended models, rather than dialogue, as there simply isn't enough time when dual running.
  • Recommend designing the process with people already familiar with existing performance management framework, which is good advice.
  • Also allude to the significant crossover synergies between Pillar 3 requirements (as documented in the draft implementing measures) and ORSA as it stands.
Develop risk-adjusted performance management
  • Relatively bland section which won't tell you anything new on the topic if you are building/refining an ORSA process off the back of a reasonable ERM Framework
Make the most of these releases - you can be sure that your friendly national regulator will be!

PS - In case you viewed this on Friday looking rather bare, I was supposed to save it as a draft, and accidentally published it!

Thursday, 5 July 2012

FSA on Technical Provisions - "The question bank" part 1

The FSA have already publicly stated (about halfway down) that internal model applications will not get a final decision before applicants have the tyres kicked on their Technical Provision calculations, though like one of a hundred Solvency II-related Damoclesean swords, the precise nature of that kicking was beautifully unclear.

Happily, they have released a technical provisions question bank which, while not necessarily departing much from the line of questioning that an EV auditor might take, at least brings some clarity to the level of granularity required to commence this work (appreciating that Julian Adams also stressed in that speech that he wants to review based on the YE 2012 balance sheet).

As you will see, it is GI-related only at this point, with a Life version to follow next week. Neatly, they are already aligned to the L1 and L2 text, which should make any compliance checking aspects of the work more robust for firms.

Luckily I am too handsome to be an TP Actuary (?), but at first glance, the lines of questioning are extremely flabby to say the least (lots of "How do you do x", and references to "materiality", "proportionality" and "significance"), all of which point towards a rather subjective and painful administrative exercise for the first line to go on top of a similar "tell us what you think" exercise when populating the internal model application template.

Is it feasible to expect the regulator to consume this level of subjectivity around how one arrives at their technical provisions when, in their own words (p10), "proportionality" means focusing IMAP activity around the 300-or-so regulatory requirements (of which the TP-related L1 articles do not feature)? Not convinced that this method of condensing data is a bad idea as such, more that I'm not certain what the guys at the Wharf can do with it!

Interestingly, they note that they are "aligning" their TP review work with Lloyds of London - not sure entirely what this means, but would guess it means the syndicates are guinea pigging on behalf of the rest of the applicants, which probably suits the industry just fine!

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!