"It's the way I tell them"...
As an industry we should always be happy to hear the regulator on lead vocals, so I gave the pair of speeches released a once-over to see what Irish concerns have justified the recent bounty of public addresses.
Deputy Governor Cyril Roux was very targeted in his speech, delivered to PwC's Annual CEO Dinner. It apparently gave him "great pleasure" to be in PwC's offices, which presumably means they weren't on the meter...
Some of the statistics and comments served to highlight that Ireland is something of a special case in the context of Solvency II, in that two-thirds of Irish gross premiums are to cover 'foreign risks', and that many insurers under their auspices will not have proximity to or oversight of much of their distribution network.
A few messages jumped out from the rest of the speech;
- A lot of positive messages had a caveat implicitly wrapped with them - "...we are in the main satisfied with your engagement with the Central Bank"; "On the whole international firms generally file returns on time..."; "I also commend your general adherence to our Corporate Governance Code..."
- Goes as far as using the IMF's recent review findings to tell firms to stop poaching regulatory staff while simultaneously complaining about turnaround time!
- Nice point about keeping focused on current risks through the PRISM framework, rather than drifting into Solvency II mode before 2016.
- Having recently been complimented by Sr. Bernadino on Ireland's reserving governance (p12), he reinforced that assumptions pertaining to reserves are expected to be "critically debated".
- On ORSA, that the CBoI "...expects to see Boards actively directing the use of risk management tools...such s stress or scenario testing"
- On Internal Modelling, he not only expects Boards to "...have sufficient knowledge and skill to challenge the model outputs", but adds that they "...like to see a Board direct the modellers in their firms to run specific stresses and scenarios prior to an item being discussed at the Board" - a big advance on previous murmurings on use test from supervisory bodies.
- Pulls up firms who are seemingly not tailoring their model's parameters for the Irish-specific business.
- Similarly a message of insisting that cross-border distributors tailor Group-driven materials and processes for the Irish market such as "...group policies and output, such as the ORSA, and internal model...".
- A cute but important distinction that "embedding" Solvency II, rather than complying with it on paper, is still going to take considerable effort.
Sylvia Cronin's speech (well, the Solvency II aspect of it) stayed along the same lines as she pursued at the Industry event in late April, where she was harsh on a number of specific elements in preparatory phase ORSA Reports which had been observed.
In a section of the speech covering "challenges to be overcome", a number of pieces of insistent ORSA direction are given, for example;
- "Your Board must use the ORSA to more fully align business strategy and capital"
- "You also need to use it as a lever to discharge your core responsibility not to take on risks and exposures which the capital base does not support".
- "...there is a lot of work yet to do by firms to get this element of the new regime embedded to the extent we required" - I add here that, given they will have only reviewed 2014's preparatory phase ORSA Reports and Processes, is this not a given, particularly after CBoI sponsored a template-filling approach for the smaller firms?
On the wider world, the speech covers;
- That Solvency II sets out "clear standards and expectations around your internal control and risk management" - agree on the latter, but the former?
- Believes that the "scope for subjective judgement" may open up regulatory arbitrage opportunities, and that "a number of iterations" will be required before EU-wide consistency is achieved, in a sly dig at, errrr, everyone in mainland Europe!
- Similarly, the volume of cross border business HQd in Dublin poses a problem due to the geographical boundary of CBoI's "prudential remit"
- Reinforces the message fro April that Pillar 3 readiness is a growing concern
- A large suite of views on Conduct Risk, where "culture" and "conduct" are hogtied together as the grimmest twins since DeVito and Schwarzenegger - that message won't be changing in a hurry, so I strongly recommend your work in that area caters to the supervisor's tastes.
* PS I know the connection is tenuous as he's a Belfast man, but give me a chance!