Tuesday, 28 May 2013

EIOPA and PRA - model appropriateness, expanding remits and early warnings

Another short flurry of activity recently on the Solvency II front ahead of the day (well, 'month') of reckoning for the Long Term Guarantees assessment. The industry media is certainly very chipper around the prospects of a deal being done off the back of the LTGA (here and here), highlighting that some German products may be the beneficiaries of this new found camaraderie (here).

German products - carved out from 
LTG requirements?
EIOPA themselves have been vocal on power extension this week, with Sr Bernadino making a few waves in his submission to a public hearing on Financial Supervision in the EU. Apart from his Partridge-esque diatribe about 'evolution, not revolution', he also highlighted what he considers enhancements to the existing supervisory structure in the EU, namely:
  1. Strengthening EIOPA's operational independence - effectively through a change in its funding arrangements, going as far a potentially levying the industry direct, and also by having more money in any case (referred to cheekily as 'budgetary flexibility'!).
  2. Reinforcing its existing 'independent challenge' role - by securing access to national supervisors' QRT data and allowing EIOPA to conduct EU-wide investigations of conduct-related issues (effectively an FCA for Europe!)
  3. Enhancing both its mandate and powers - perhaps most controversially, fishing for centralised oversight of internal models, as well as powers to ban or restrict activities in member states.
One might say to EIOPA 'don't walk before you can toddle', but I guess if we are serious about operating a single market, the UK's consumers shouldn't need to rely on generally being in the vanguard on these matters (both producing nefarious financial products, then banning them and recouping the profits for compensation!)

Back to the UK's national regulator, the PRA dropped a few pearls of administrative agony for the insurance industry this week, with a couple of 'dear CEO' letters which were part-briefing and part-data request, ultimately driven by the UK's aggressive take on assessing internal model adequacy (i.e the same activity which EIOPA wishes to expropriate from national hands!). 

The purpose of the letters is nicely summarised by Chris Finney here, so I only need to highlight a couple of elements for my own interest;

  • "Unlikely to be any certainty" on timetable before autumn
  • "Just under half" of IMAP candidates have applied to participate in ICAS+
  • They are hoping to share learnings from ICAS+, "particularly developments used by firms in their modelling techniques" - danger here of the early birds determining what's hot and what's not in the world of assumptions/calibration/expert judgement/documentation for those not participating in ICAS+?
  • Highlight pension risk as one area where the standard formula is potentially not suitable
  • Next industry briefing forecast for late November (post-Omnibus II ratification?) - that's what I call 'scaling back' on costs!
Early Warning Indicators letter - remember here that the PRA's plans are potentially at odds with EIOPA's, to the extent that the PRA are already braced for some kind of legal challenge
  • EWI's aim to test calibrations of internal models as well as "monitor any downward drift in capital" - presumably just quantity for the latter?
  • Ratios being monitored are of pre-corridor MCRs (as illustrated in firm's LTGA submissions earlier this year) against current Individual Capital Guidance - once we go live, this is likely to be replaced by modelled SCR
  • Special treatment for With-profits business to account for the fineries of that sector (cost of guarantees, level of free assets and the proportion of non-profits written in the book)
  • Ratios are deliberately set so that 10% of affected firms will fall below
  • Information required to conduct this work is covered by the data collection exercise below
  • Fishing for data from all internal model applicants using YE2012 balance sheets (unless you can excuse using earlier data) which covers standard formula SCR, Internal Model SCR and ICAS by end of July.
  • Also asking Life firms for key percentiles from distributions for 'risk variables' - one assumes this means each one of the risk drivers in one's SCR calculation.
  • Conducting what seems to be peer review work around credit stresses and stochastic simulation files (for anyone using them).
With EIOPA and the PRA both seemingly interested in being top dog in the world of assessing model appropriateness, it looks like we might need a walk-off...

Judging model appropriateness - EIOPA or PRA?

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