Friday, 31 May 2013

More from EIOPA and PRA on internal models - anything you can do...

Certainly looks like there is a bit more mileage in this back-and-forth around internal models and the assessing of their appropriateness. As I posted recently, the UK's PRA have come out fighting on the subject of 'Early Warning Indicators' (EWIs) to highlight where a company's internal model, for fair reasons or foul, may be measuring the Solvency Capital Requirement in a way which does not meet the required calibration standard of the 1-year VaR at 99.5th percentile.

Early Warnings - time well spent?
EIOPA, through the words of their Chairman, have already made a pitch for assessing internal models on behalf of our overworked national supervisors, at least at some point in the medium-term future. It would now appear they have also piggy-backed the PRA's work around developing and monitoring EWIs as well!

That article is on, so for non-subscribers, EIOPAs work is specifically looking at (in the author's words, not EIOPA's) "...threats to a firms solvency that are not picked up by the company's internal model". These will include qualitative and quantitative measures, and are due to be discussed (by their internal models committee) in the Autumn -  you know, that relatively quiet point in the Solvency II implementation calendar...

The EWI article was published at the same time as an interview with Sr. Bernadino and Insurance Risk magazine was released, where the tone of the interview is particularly aggressive around EIOPA's inability to compel national supervisors to "comply" with their recently-issued preparatory guidance. Whilst it is hard not to admire his optimism ("we are moving closer to the date of implementation"), he is quite fixated with "some countries" who, without EIOPA's guiding hand, he feels would end up divergent from the rest of the market.

I certainly am not familiar enough with continental Europe's positions as it stands, but it certainly reads like a not-too-subtle finger point at Royaume-Uni at the very least. He also goes on to mention that, while 'full Board support' was received at EIOPA to issue the preparatory guidance, not all participants were 'completely happy'. One would certainly feel aggrieved at the smaller end of insurance supervisors to comply-or-explain on preparations for a new regime which doesn't have a kick-off date, while still having to administrate the existing one!

An interesting side-issue around potential discord amongst the states is this recent request (which I have procured through the magic of Google!) from most of the Member States for a second "quick-fix" Directive, based on the fact that some of the implementation countdown dates that feature in the first one are next month (good spot Gideon)! According to the letter, the Commission already appear to have singularly ruled out the need for another quick-fix,

Four countries didn't make it onto the list of senders (Ireland, Netherlands, Malta and Lithuania) - not concerned, or not consulted?

Also worth highlighting the recent spectacularly ill-timed London press strafing of the internal modelling world - an strange development, particularly at the same time that the UK Independence Party has been lifting up its dress for London's financial sector to have a gander underneath. With some of the UK's bigger beasts such as L&G and Pru already openly hostile to Solvency II (and Resolution being an early faller in the IMAP stakes), is there potential for the rinsed-out UK insurance sector to throw its weight behind a political force such as UKIP, who would happily make an EU Directive bonfire, using Solvency II for kindling?

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