Thursday, 16 January 2014

PRA - Q&A from December's Industry Briefing

Following on from the PRA's Industry Briefing on Solvency II prior to Christmas, they have released a set of Questions and Answers, which appear to have prompted by questions asked on the day as opposed to being more generic. A useful document to push around your programmes in the UK in particular, even if you are not part of ICAS+/IMAP.

I was particularly interested to see if they had rowed back on any topics where they have previously expressed an opinion, as well as any new insights which aren't necessarily made public as a matter of course. The Q&A is broken out into topics, so I have grouped my thoughts accordingly.

  • For ICAS+, the PRA are "...focusing in on those areas which move the dial the most", referring specifically to the ICA calculations.
  • They will therefore apply "a relatively higher view" in some areas than others (later referred to in terms of their intensity of focus).
  • They use their IMAP approach as an example of this, where they have grouped the 300+ requirements into 15 categories.
  • My common-sense read of this is, to be proportionate in the above context, the first 7 consecutive categories on the IMAP template would receive less time and attention than the following 8, all of which have the potential to numerically "move the dial".
  • They are already looking prospectively at firm's risk profiles during planning sessions, in advance of ORSA, so that they work and plan proportionally, but with the future in mind.
  • They suggest that firms provide their own opinions on materiality if they wish for the favourable application of the proportionality principle (though they don't guarantee it!).
Documentation-specific proportionality
  • Confirm that "...there is definitely a need for an improvement in the quality of documentation".
  • Seem to specifically align the calibration requirements of Solvency II with the need for additional documentation, therefore a good area to be elaborate in your work.
  • On expert judgement, they suggest that documenting why a judgement was made, and what were the alternatives will help firms currently falling short.
  • " aspiration" to revisit documentation review work already conducted and concluded.
PRA's Supervisory Statement
  • They confirm that letters confirming whether a firm is covered by the reporting guidelines will be sent this month. They suggest categories 1-3 (p20) will be the bulk of participants
  • There are national-specific reporting templates to come, currently under consideration. While they are not certain on submission format for those, they reiterate that xBRL is required for QRT submission.
  • QRTs can be submitted incomplete, but they reserve the right to intervene if you take too many liberties!
  • Acknowledge that, due to most firms' ORSA Processes operating around year-end balance sheets, that they expect to receive a flood of ORSA Supervisory Reports, and that this will delay feedback (presumably worse in 2015 than this year?).
  • A question regarding 'who is the ORSA for' was answered rather dismissively. However, bearing in mind the content of their "good and bad documentation" letter (which constantly refers to "the reader", which for me meant "the PRA"), it felt like a reasonable question. Clearly if the PRA do not like your style, it will add to your review time.
  • They seem to indicate that the amount of time one's Board should spend on reviewing/using their ORSA is not subject to any periodic expectations. That means if you are planning for annual intensive interaction, or something more regular and fluid, you should get a fair hearing from the PRA.
Standard Formula
  • Without much subtlety, they seem to be encouraging firms to look at the appropriateness of Standard Formula asap, encouraging further by stressing "...that internal models do not need to be overly complex". This feels like early positioning for their planned SF work with the industry, where no doubt they will find a few firms ripe for USPs/PIMs during the next 18 months. 
Early Warning Indicators (EWIs)
  • Following on from a post in October, they are evidently still stuggling to calibrate them!
  • They confirm that the purpose of automatic capital add-ons (in the event of a future EWI breach) is to freeze the modelled capital figure to prevent distribution
  • Question 29 is a good example of the PRA showing where their hands are now tied, and where EIOPA will be the provider of guidance.
  • Interesting confirmation that the Commission has apparently asked that as little as possible of the Draft Implementing Measures be changed. Those of us working on non-mathematical areas can perhaps take some comfort from that!

No comments:

Post a Comment