PRA's Countdown to Solvency II Implementation Event - When I Need U(SPs)

PRA Implementation countdown
- "Feel like dancing" now?

So along with the entire UK Solvency II sticky-beak brigade, I had the unbridled pleasure of attending the PRA's 'Leo Sayer' on Friday, confidently titled Countdown to Implementation, despite going on to list a range of matters which have probably given both Internal Model and Standard Formula firms plenty of enthusiasm to try and turn the clock backwards rapidly!

Paul Fisher, Julian Adams' replacement as Executive Director of Insurance at the PRA, kicked off with a set of Solvency II vox-pops;

• Solvency II is the "main game in town"
• "The end is in sight"
• The PRA are "not gold-plating the Directive"

A nice bit of reassurance at kick-off time then - unfortunately, the clarity which was to follow from the technical specialists on a range of topics was probably not what everyone wanted to hear, given the tone of some of the audience questioning that followed! In particular (and with everything in full quotation marks below having been said by a PRA rep on the day);

• That the PRA will "have to prioritise" if everyone in the IMAP queue for 'from 2016' approval drops their applications in at the end of June, and that applicants should be "striving to submit" sooner. Suggests to me that the smaller firms in IMAP may get bumped to squeeze in the big boys.
• The reinforcement of Mark Carney's message from the other week that they will have no problem refusing permission to use models, though this was couched by Fisher in the more appropriate context of failure to meet any of the TSIMs simply "cannot be allowed".
• That, although over 90% of the UK industry was down for using Standard Formula, the PRA will be equally aggressive when challenging their preparedness as they will for IM firms.

I didn't hang around for the afternoon sessions as I had a hot date with BA, so pull whatever you can out of the Other Approvals and Regulatory Reporting slideshows. However, I would draw attention to the following from the earlier sessions:

Implementation and Policy overview

• The Old Lady of Threadneedle Street protested through multiple speakers about how they recognise that bank and insurance internal models are different, and how Insurance Supervision is now "embedded into the Bank" - I would assume to justify the credit crunch-influenced aggression now being taken by the PRA on assessing capital models (visible from Adams's speech around the time of BOE/FSA merger right through to Bailey's speech at Mansion House on Thursday night).
• An interesting slide 3 about how much more work Solvency II will generate for the PRA from go-live!
• Referred to FLAOR only once before switching to ORSA, suggesting that this disposable acronym is as much of a pain in the neck for the supervisor as it is for firms!
• Highlight what "Good" and "Bad" ORSAs have contained to-date. Clearly some firms are box-ticking, leaving an unusable report which is only skin-deep compliant as output. They were particularly scathing on Stress and Scenario Testing efforts, and implored that Reports should not be written for the PRA's benefit (though naturally must cover what the DAs and EIOPA have already set out).
• A nice piece was discussed around the expected depth of director-level knowledge of their internal models. Andrew Bulley made a useful distinction between "conceptual" and "technical" knowledge, where your dithering 80 year-old INED from the fishing industry might not be expected to understand correlation matrices, but should probably know their significance, and alternatives to them.
• For model applications to date, far too big ("encyclopedic" in cases), with too much process description, and not enough on assumptions and expert judgements.
• That it is a firm's responsibility to "ensure compliance" with the Delegated Acts, and given their lessening proximity to the legislators, the PRA flag in advance that they will not be able to give "concrete advice" to firms in future.

Standard Formula

A particularly good ground-setter, given the dearth of work published previously on Standard Formula firms and the PRA's expectations. Calendar included on the slide pack, which will be of massive use to your PM/PMO staff!

• PRA will review ALL firms ahead of 2016 for SF appropriateness - "priority" firms assessed by Q1 2015, everyone else by end of 2015.
• While SF SCR is apparently close to current ICG numbers for GENERAL insurers in the UK, it is noticeably larger in LIFE firms 
• PRA is "not promoting" SF ahead of internal models
• Vigorously directed all attendees to EIOPA's Underlying Assumptions of SF Paper - expectation that some firms won't read it, and just expect SF plus any add-ons?
• Very vocal on the "significance of the deviation" between SF SCR and one's own Risk Profile - as we know, the Delegated Acts quantify what 'significant' is in the context of capital add-ons
• An expectation that ORSAs will be used in the assessment of SF appropriateness - qualitative for sure, possibly quant elements as well?
• Range of examples of where significant divergences are being found, by Risk Category, and by Life vs General Insurer.
• A lot of emphasis on Capital Add-ons being used "only as a temporary measure", which will ultimately allow firms to PIM/IM or de-risk. They are however "patient and realistic" on how quickly that change can be done, so it sounds on the face of it like 2016 and 2017 will be targeted for Capital Add-on elimination.
• In the following session on models, a piece came up on Capital Add-ons, where the PRA confirmed that their process for handling these in future is "still developing", though they expect them to be "a lot, lot rarer" than the existing regime of ICG.

Internal Models

Calendar also provided for IM firms (slide 4), showing how tight their schedule is, and explaining why they threw the earlier curveball about all firms expecting to drop their applications in on 30th June 2015. They also touched on the following:

• Highlighting weak areas identified to-date such as over-optimistic (new?) business plans being used in capital calculations; ENIDs; omission of certain "Key Risks", and suspiciously low correlations
• That Use Test is "fundamentally important", and is an opportunity for firms to "put their money where their mouth is". They do not expect to see either end of the use spectrum i.e. no use, or blind use!
• Too much technical actuarial validation seen. Usefully suggested that validation questions may be better posed as "where might this model be inadequate", rather than "why is it OK".
• Confirmed that the PRA's SAT has now been replaced by EIOPA's CAT, which won't arrive until the back end of this year - surprisingly, no-one laughed when they said this "might create some work" for existing IMAP programmes!
• Importantly, they stressed that their powers are to Approve or Reject applications, with no "conditional" powers whatsoever. Attendees were therefore encouraged to delay applications which were thought to be unlikely to succeed, both now and in future.

Though they instinctively feel like they could have been supplied sooner, the clarifications provided in the presentations I witnesses will be hugely welcome by programme directors and PM's alike. I would venture a guess that they will be less welcome by executive committees, who may have hoped for more flexibility on the risk quantification front post-2016.