Elderfield at the European Insurance Forum - one for the road...

So the European Insurance Forum is in full swing over in Dublin, which from what I have seen to date in the tweetosphere (thanks DIMA and Mike!), sounds more like Alan Partridge's sales conference for Ireland plc.

That aside, Matthew Elderfield, the outgoing Head of Financial Regulation at the Central Bank of Ireland, gave a rousing speech touching on risk-based supervision and the 'prospects' for Solvency II. As a member of EIOPA's management board and head of the second largest internal model assessment body in the EU, his words are very much worth heeding.

Given that he has already addressed this forum a couple of years ago on such matters, as well as being relatively outspoken  recently on the quality of components parts of Irish risk management systems, one might expect a few home truths on his way out of the door to an equally precarious task as Head of Compliance at Lloyds Banking Group.

EIF 2013 - More to Ireland 'dan dis'?

The headline acts for me was his revelation that diversification in internal models remains a bugbear, to the extent that he supports the kind of 'floor' arrangement being given airtime at the PRA. Given he had already made his distaste at the extent of the diversification benefits being sought clear in a speech last year, it is not surprise to see it on his agenda, more that it implies that the expert judgements of those involved in the calculation process may be overridden (due to regulatory prudence?), regardless of how well they are documented or supported. 

In addition, his angle on bridging the LTG issue makes interesting reading for anyone who doesn't receive briefings on EIOPA's inner workings.

Noteworthy points (my emphasis if emboldened) therefore included;

On Solvency II

• Drawn out process has "naturally resulted in a combination of fatigue and exasperation", with the "...high costs of preparation compounding concerns"
• Regardless, "it is unacceptable that the common regulatory framework for insurance in Europe in the 21st century is not risk-based"
• "Urgently need" the framework to reflect asset risks, riskiness of different lines of business, encourage better governance and risk management, and provide better disclosure.
• "Solvency II does indeed have its imperfections", but "...the benefits of moving ahead with Solvency II outweigh the costs..."
• Notes his "long-standing concern" around over-optimism in the calibration of internal models
• "...complexity has clearly gone too far in some areas - and makes implementation very difficult for smaller companies"

On Omnibus II and EIOPA's LTGA

• Omnibus II delay "...is a course of considerable concern to regulators and industry alike", and the "...entire framework is essentially stuck on one issue" which "...will require a political compromise"
• Personally supports a more generous approach to matched premium adjustments on certain lines of business, provided they are (a) only applied to the back-book, (b) companies provide Pillar 3 disclosures both with and without those adjustments, and (c) supervisors can apply capital charges if they are not happy.
• "With European elections looming next year, it is important that this process concludes in the autumn at the latest"

EIOPA - filling gaps
since 2013

On EIOPA's Interim Guidelines

• As justification for supporting them, "Much of the Solvency II framework is already clear", and emphasises that "we will adopt a proportionate approach"
• EIOPA is "helping 'fill the gap' created by the hiatus in the political negotiation"
• "The EIOPA initiative should be strongly welcomed by regulators and industry alike"
• Hopes the system of governance and ORSA interim guidance provide "manageable and useful transitional steps towards full Solvency II adoption"
• For Pillar 3, expecting "best efforts" especially from High Impact insurers, with the use of statutory powers held in reserve "as a last resort.
• For IMAP, can neither sanction an "early conclusion" nor a "hard stop", so will ultimately elongate the administrative burden, hopefully leaving less to do towards the end.

On Diversification benefits

• "...in common with a number of other [unnamed] supervisors", CBoI is concerned to ensure "prudent recognition of diversification effects"
• "Fundamentally, what is needed is a broad agreement on the outer bounds of acceptable levels of diversification in the model approval process", citing one jurisdiction (UK?) looking at hard SCR floors based on proportion of MCR.
• "...the Central Bank's message to Irish firms is to take a conservative approach to the recognition of diversification..."
• Points to the failure to add formal constraints on diversification benefits in the Directive text
• "Supervisory quants are at risk of being outgunned by industry quants in the minutiae of a correlation debate"
• Also has a stab at "overly generous approval" in other member states in the context of regulatory arbitrage - is it that hard to say "no" just because the home regulator says "yes"?

Of less consequence for those outside of Ireland, he goes on to cover the CBoI's bespoke work around VA-specific risks (in light of prolonged low interest rate environment), the failure of Quinn Insurance, and the bedding in of their PRISM risk-based supervisory framework, the latter eliciting the comment that "we are still some way from fully embedding our new approach".

From this, one might reasonably think that, should Mr Elderfield's successor continue in the same vein, that the correlation matrices of Ireland's 30-something IMAP candidates are likely to get a severe working over in the next couple of years. Let's hope the industry gets their documentation in order!