Tuesday, 22 October 2013

The PRA Consultation on EIOPA's Preparatory Guidance - priorities for 2014 and 2015

After 10 years, it's finally getting interesting - the PRA today have dropped out a consultation paper on applying EIOPA's preparatory guidelines to PRA-authorised firms (CP 9/13). You can get at the EIOPA materials through this post for convenience.

The content will, subject to any intense lobbying by industry, be adopted as a supervisory statement (section 233) to cover the 2014 and 2015 calendar years, with the expectation remaining that 2016 is our "go-live" date. It covers the following aspects of the preparatory phase;
  • The PRA's expectations of firms as they prepare for Solvency II;
  • The PRA's approach to implementing the guidelines; and
  • The PRA's interpretation of aspects of the guidelines.
They are at pains to highlight that these are "preparatory" guidelines, and provide the traditional spiel on "nature, scale and complexity", so incremental progress is to be expected during the period in question. What that means in practice is perhaps another thing - can you show measurable 'incremental progress' for materials which are only on an annual review cycle, for example? - but that aside, it's worth picking the bones out for your respective programmes, and perhaps most importantly, getting your feedback in by November 15th if you don't like it!

Perhaps the most noteworthy aspect of this CP is that in no way is it suggestive of the PRA rejecting any of EIOPA's guidance (remember, they have until the end of November to voice any protest). That of course makes preparatory work much easier to plan for, as the UK will seemingly be doing it all!

My thoughts on the specifics were as follows;

System of Governance (SOG)
  • Emphasise that the SFCR requirements around SOG are also catered for in EIOPA's work (3.7), so a smart move would be to factor that into your drafting plans during 2014
  • General governance requirements "largely consistent with SYSC", though individuals holding key functions might expect a personal visit in the next two years (3.10)
  • Similar position for Risk Management Systems (3.12), stressing the commonality of requirements with existing PRA obligations, but stressing in particular that firms should be "...including suitable mechanisms and methodology for connecting to their ORSAs and for carrying out regular stress and scenario tests" during the preparatory phase.
  • That Prudent Person Principle is not a new concept to the PRA, but firms would be expected to review investment strategies in line with PPP over the next couple of years. A concession is seemingly made regarding the provision and review of third-party data by investment functions for smaller firms. 
  • On the (new) requirement for a Capital Management Policy/Medium Term Capital Plan (3.16), they are not moving, despite the howls of protestation - "The PRA regards the development and implementation of such policies and plans as an integral part of sound risk and capital management for all firms, especially as their management and Boards assess the implications of the forthcoming Solvency II own funds and capital requirements"
  • On internal controls, they appear to be fishing for firms to analyse whether their existing framework is Solvency-II ready, and then piggy-back of that self-assessment (3.17)
  • Same for Internal Audit function readiness! (3.18)
  • Actuarial function get a more bespoke treatment (3.19), with all firms asked to "carefully consider" the functional structure to avoid conflicts of interest. They also reserve the right to "...review firms’ analysis of the areas required for improvement, and understand the actions the firm is taking to resolve these".
  • Outsourcing similarly gets additional treatment by the PRA (3.22), who are "particularly interested" in changes made specifically with Solvency II readiness in mind
Useful quotes
...the PRA articulates its expectations of firms in the preparatory period, including that firms should read, assess and implement the substantive provisions of the guidelines in order to achieve the intended outcomes (2.5)
The guidelines and this statement are designed to work towards a consistent and convergent approach in preparations for Solvency II and not its early implementation (2.6)
 The PRA expects firms, when asked, to be able to explain what governance changes they need to make to satisfy the guidelines, how they plan to make those changes, what progress there has been to date and any particular difficulties they face (3.4)
The PRA expects firms to be able to document their overall approach to outsourcing, including contingency plans in the event of a service provider failure, to ensure that the efficiency of the service remains unimpaired and uninterrupted. (3.22)
During the preparatory period, the work of the actuarial function will now focus on co-ordinating the calculation of technical provisions, providing an opinion on the underwriting policy and reinsurance arrangements and contributing to the development and performance of the internal model in the pre-application stage where relevant (3.19)
During the preparatory period, the PRA encourages firms to consider how to manage the transition to the new regime and to assess the impact on existing asset portfolios of Solvency II requirements. This need not necessarily mean that changes have to be made to firms’ investment strategies or portfolios but firms are encouraged to work on an incremental basis towards demonstrating that they meet the requirements of the PPP (3.14)
During the preparatory period firms should review their existing policy for assessing fitness and propriety and whether it needs updating in advance of Solvency II (3.11)

  • PRA only planning to review assessments "...on a proportionate basis" during preparatory phase - they elaborate further by stating "Due to the high number of ORSAs which will be submitted, the PRA expects that it may have to stagger its review of these during the preparatory period in a way that is risk based and proportionate". Does that mean "Top Ten & Lloyds & IMAP" get the works, with everyone else getting a lite-touch?
  • Expectation that improvements are identifiable between the 2014 and 2015 FLAORs - the PRA will contact firms individually if they are within the threshold limits which enact guidelines 14-16.
  • On ORSA documentation, "...firms should recognise the need for effective documentation and record keeping", for both Policy and Report (4.7)
  • Note that the Board's involvement in ORSA is "...far more extensive than setting risk appetites and tolerances", and leave an open threat to go through Board packs/agendas to ensure this is the case (4.8)
  • Smaller firms get permission to use their internal ORSA Report as the ORSA Supervisory Report, provided it has enough detail. Larger/riskier firms may conversely be asked to supplement whatever they submit. (4.10)
  • PRA actually considering issuing a "summary sheet" to firms in order to help gather information consistently (4.11). Here comes the ORSA Template!
  • Expectation that 2014 projection work is done on existing basis, and 2015 (ideally) on Solvency II basis (4.15)
Useful quotes
The preparatory period is a time of development for firms in designing, compiling and trialling these assessments (4.3)
To help capture [ORSA] data and information in a consistent way from firms and facilitate review the PRA is considering whether it may be beneficial to provide a summary sheet to firms (4.11)
The PRA does not intend to prescribe when firms should submit their ORSA...Firms should inform the PRA when their ORSA will be submitted well in advance of the submission date (4.19)
The PRA expects the Board to play an active part at various stages, providing initial steering on how the ORSA should be designed and documented, challenging on risk identification and mitigation along the way and culminating in the Board approving and communicating the finished product. (4.8)
The PRA expects all firms to develop a qualitative process to develop an ORSA which can be documented and reviewed by the PRA in line with its overall proportionate approach.(4.6)

Submission of Information
  • Confirms that XBRL is required prior to 2016 as submission format for QRTs (5.7)
  • Suggest that policies and procedures around reporting in firms may need "potentially significant revision" in light of Solvency II. (5.15)
  • Rather obscurely, they write, "The PRA does not expect that preparatory reporting will be subject to a requirement for external audit but it may draw upon audited inputs" - as I recall the participation of external auditors in QRT-type reporting has been a massive bone of contention in Brussels (indicated within these IRSG comments from last year, but I'm sure there's a more recent story), but potentially not a welcome development.

Internal Model Pre-Application
  • They isolate the Model Change policy as an example of something which should already be tested for its appropriateness (6.5)
  • Still expect firms to come forward and brief them on "significant" changes during pre-application.
  • Surprisingly, very little else,
Useful quotes
...it is important that where models are sufficiently stable, firms are beginning to demonstrate their use and continue to refine their models with the benefits of experience (6.5)
I may fire some feedback in, but ultimately I suspect this lady is not for changing...

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