Friday, 26 April 2013

Lloyds directors briefing and Solvency II update - looking well

With Solvency II news and comment pretty thin on the ground this month as the guys at EIOPA count their LTGA beans, it was nice to see the trailblazers at Lloyds release their director briefing slides from last week, an event one may assume is relatively frosty after the money spent in preparation and the distinctly agitated tone on the matter from their CEO recently!

Bling - things Lloyds could have
bought with £300m
As Lloyds are already well down the road of internal model development (having almost kept to their original IMAP deadline they were able to get materials down to the FSA prior to the implementation deadline shifting), the slides are very revealing as to where the group remain lacking when attempting to meet the Tests and Standards for Internal Model approval (TSIMs). With 84% of the market 'by materiality' meeting the principles of the TSIMs, they are clearly in good nick, although by stressing 'materiality', it implies that a relatively large number of smaller members are perhaps still lagging.

The list of "common issues" found will neither surprise nor delight anyone else in IMAP, given that the same themes have been festering for a good 18 months now, and the legislative paralysis on the continent has clearly done nothing to aid the industry (in particular, the FSA letter from this time last year touches on most of these!). Specifically, they observe problems in the following areas;

  • ORSA - looking far enough forward (i.e. past year 1), and using stress and scenario testing effectively
  • Validation - evidencing validation work done, and following up on test failures
  • Model Change - justifying the thresholds for minor/major changes, and agreeing an approach for aggregating minor changes so that they can be considered as minor/major in aggregate
  • Use Test - using the model for something other than spewing out an SCR, and it would appear also that when interviewed, the effectiveness of board training and their understanding of the model is being found wanting
  • Documentation - documents are either not checking off against the TSIMs, or the content is contrary to the revised controls and processes which have been developed for Solvency II
As Julian Adams made clear at the turn of the year, full compliance with TSIMs is not part of the ICAS+ agenda down at the PRA, however they will expect firms to be fully aware of where they are currently light, and what they plan to do about it. Certainly looks like the Lloyds application won't struggle in this regard, and I wish them well.

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