Governance Matters...on Solvency II

FSA and Solvency II - speech from Julian Adams today for IMAP firms

2012-02-27T18:05:00.000Z

Hot off the press, Julian Adams spoke to the great and good today (i.e. I wasn't there!) regarding those who are in IMAP, and dropped the following hot chat:

"What [any further delay off the back of March's ECON vote] might do instead is merely compress the period between transposition and implementation"
"...for the time being we remain of the view that we must plan for a 2014 implementation"
"...it is vitally important that you stick to the submission slots we have already agreed with you"
"By sticking to your submission slot you will also be considered alongside a peer group of firms" - this is the first I have heard of submission slots being allocated to groups of 'peer' companies, assuming this was not a figure of speech
"...we are basing our approach to the next phase [of IMAP] on the stable draft text of the Level 2 material which was circulated by the Commission in November" - which is nice if everyone else had access to it [leaks notwithstanding!]
"[we] will be publishing later today an updated version of the self assessment template based on this" - you may be able to sers toi at this location (ZIP file)
"We appreciate that this change will require some additional work for firms" - nicely played down!
"...the materials we are launching today do not take any account of the Level three text", but promises to do more once the L3's stabilise
On technical provisions - "Our view is that we would not be able to approve a model under Solvency II without having reasonable assurance as to the accuracy of the underlying balance sheet, and we will therefore be undertaking a review of the technical provisions of IMAP firms as part of our existing activity with the firm before and after its submission slot"
"...it is unlikely that we will review the calculation of technical provisions until a point in 2013", while the approach used will be assessed earlier, but "which may include the use of external review"
"It will be necessary for us to gain assurance that all [300+ criteria in the Directive text] of these requirements have been met before we can decide to grant approval for a model’s use

That may take a while to digest, so let's see what tomorrow brings...

Maltese FSA's guide on Pillar II - pourquoi pas?

2012-02-24T13:59:00.000Z

If you are lagging on the Pillar 2 front, you may find this document from the Maltese FSA on Solvency II system of governance requirements handy (as a little islander myself, it's only fair I look out for those in a similar boat, pardon the pun...).

It is quite a cuddly and accessible document with most sections anchored back to the Directive text for extra comfort, so you may find it useful to purloin aspects of it for NED (or even Executive) training.

Listed Insurers - Solvency sweep on full year results announcements

2012-02-24T13:48:00.000Z

Having already touched on Axa and St James's Place, I thought it handy to get a few of the others in one place with regards to Solvency detail at 2011 year end, more for my own benefit than anything! Appreciating that the Swiss lads below have different yet Solvency II-complimentary regulation to worry about on this front.

Zurich
As ever, acres of disclosure (which you can serve yourself at here) but the salient points on Solvency are hard to identify, partly as a by-product of the volume of material, and also due to the Swiss Solvency Test (SST) transitional reporting. Couldn't be too confident of getting any real message other than the analyst presentation drawing out a rise in capital adequacy y-o-y on the Solvency I measure (and SST differences) in page 23, and pages 32-40 touching on a number of elements of economic capital. More text description on capitalisation on p25 of the Operating and Financial report.

Swiss Re
Corking set of results (helped of course by reserve releases!). Main Solvency II point is that they comment on page 15 that the delay in implementation is actually driving demand for Solvency I-style products (always a silver lining...)

Allianz
No detailed disclosure yet, just this, but the Solvency I measure has crept up to 179% y-o-y. Nothing of substance to say on Solvency II.

AEGON
Fair amount of disclosure in both the report and the slides, and Solvency I measure up around 195% at group level. More soberingly on the UK side, their Solvency I surplus was at approx 150% (p6 of report), with the other regions floating the number up.

Should be more to follow, though the meaty disclosure on capital adequacy will no doubt be saved for the Annual Report and Accounts rather than the results releases.

FTSE results and spare capital - St James's Place

2012-02-22T13:43:00.000Z

More results on the drip here, this time from St James's Place - pretty sterling effort on EV and IFRS front, however I was more interested in their 2012 year-end take on Solvency II. They are retaining their view that not only will there not be an adverse impact on their balance sheet, but there will be a reduction in capital required (p27).

Not sure whether this factors in any shenanighans around contract boundaries and recognition of future profits which still seem to be up in the air - bearing in mind their product base, I'm guessing changes in these would matter, but if the forecast is "less capital requried", good luck to them!

Willis Re, Solvency II and ORSA - "Whatc'hu talkin' bout Willis"

2012-02-22T13:38:00.000Z

The guys at Willis Re have released a slim guide on ORSA, which aims to decipher the Public Consultation document released by EIOPA in November for the benefit of its friends and neighbours. It doesn't go as far as highlighting differences between pre and post lobbying on the content (as I did back in Nov) but you may find it useful as a generic circular to Board members if they are insufficiently briefed at this point.

Wouldn't say I was enamoured with the definition of risk profile on p3 (which doesn't seem to fit with the Level 1 text definition), and it takes an approach of explaining why overall solvency needs differs from SCR by assuming that the reader is using the standard formula. At the same time, they highlight the onward benefits of demonstrating effective ERM for analysts and ratings agencies

They propose a framework for ORSA provision based on Risk Profile, Prospective Solvency and Governance/ERM, which conceptually won't be alien to anyone in the field, though the way they propose underlying content for each module seems a touch random.

Sloppy reference to RTS rather than RSR at the back aside, this is a useful aide-memoire if you are already deep in your activity, and not the worst starting position if you are starting late!

Axa results and economic capital measures - indication of things to come?

2012-02-16T18:08:00.000Z

So results season kicked off today with Axa putting the basic full year out (got to love European efficiency on these matters!).

Of particular interest is of course the Solvency I vs Economic Capital measures which most insurers are now kind enough to table up, and the figures were pretty stark. On the Solvency I measure they were a touch up year-on-year, while their Economic Capital measure was massively down (numbers on first page, rationale on third).

Detail on their Economic Capital (and indeed their entire Capital Management Strategy) was fired out in 2010 as part of an investor day. They appear to be using the 1-in-200 stress as their EC measure, which would suggest that (model approval notwithstanding) they have received a 'beasting' on their SCR coverage over 2011.

I blogged in August last year about an FT article which opined on how companies may approach economic capital targets under Solvency II (125-150% of SCR in UK, and perhaps 170% in mainland Europe was their conclusion, for what its worth). While that would have put Generali fractionally out at the time, most of the other big boys were comfortably covered using that yardstick...until now!

The rationale for the drop presented goes to adverse experience on interest rates and spreads "net of changes to the liquidity premium". A smarter man that me will probably be able to read between the lines on that one to find where they are exposed in a way that leads to such a swing in EC, but if one of the major lobbyists is experiencing this volatility, what chance the rest of us?

NB - Generali punted this round today in order to contextualise the recent downgrading activity of insurers by the ratings agencies - surprising to see a company lump all of their competitors onto a press release from their own offices, but I guess there is safety in numbers! Few comments on Solvency on it, but mostly seems to be about negative outlooks on Eurozone default possibilities, new business and economic conditions etc

EIOPA's Bernadino on a "clear timeline" for Solvency II

2012-02-10T13:49:00.000Z

Picked up on by a number of outlets (here, here and here), Sr Bernadino had some choice words to exchange with the folks at Goethe University (available here) regarding a desire to avoid further Solvency II timeline slippage, citing his earlier "hurry up" letter to Mr Barnier.

From a forthcoming EIOPA output perspective, the paper on Colleges of Supervisors action plans for 2012 should be an interesting read, however, the indeterminate delay in Parliament clearly leaves them stymied regarding the big public consultations that practitioners are waiting for.

Reactions Magazine - CRO Risk Forum pullout (if they fix the link)

2012-02-05T21:55:00.001Z

Some really nice pieces in January's CRO Risk Forum paper from Reactions magazine (you should be able to grab the paper from the link, but it does appear to be faulty at the time of writing).

A number of major CROs have contributed (Munich Re, Nationwide (US), Zurich, Scor), and they cover some juicy material on the Solvency II front, as well as some generic ERM matters and CRO role development. Pieces that particularly piqued my interest were;

Zurich's Lehmann on the role of the CRO

Opines that, a decade ago, the CRO role was considered to be covered by the Chief Actuary in insurance undertakings
Stresses that a CRO needs to have direct access to the CEO - though that did little for Paul Moore of course, or indeed as reported only last week, Michael Roseman at MF Global.
Speaks supportively of the CRO Forum's Emerging Risk Initiative - strangely, as a subject so fluid and topical, the section of the website dedicated to this is sparser than my hairline!
States that "...advanced companies have a risk function that defines the risk strategy and clearly sets risk appetite limits" - this is a pretty breathtaking thing to say, which I can only assume has lost something in interpretation, as the question it responds to relates to underwriting. In the context of my last post on Risk Appetite, I would never see myself as a second line function setting the limits of risk appetite.
States that "[A company's ERM Framework] defines its risk culture" - hate to go all 'chicken and egg', but would a company's risk culture not determine their ERM Framework requirements?
Tries to associate the Insurance industry's relatively safe passage through 2008-2011 on ERM advances, where I would be more inclined to attribute much of it to the 'unique features' of the industry that the CEA like to bandy around when lobbying for SIFI exemptions".

Nationwide's Mahaffey on the USA's new CRO Council

Emphasises that the US-version of Europe's CRO Forum is not just dedicated to Solvency issues ("at the cost of engaging with other issues"), citing ratings agencies, emerging risks and federal/international developments as other agenda items. I suspect the European guys may find that snipe slightly harsh, regardless of Solvency II being the big fish right now.

RSA's MacDonald on ORSA

Talks throughout interchangeably about ORSA process and ORSA report. Doesn't help when he goes on to state "Identifying who owns the ORSA is of primary importance" - Articles 44 (4) and 45 (1) would tend to identify the process owner, but the unconcentrated chatter in the Level 3 doesn't uncontrovertably assign document ownership (or indeed what the significance of "owning" the ORSA Report may be).
Piece on alignment with internal strategic or operational planning process very sensible - no point in shifting dates which are probably carved in stone, if you can fit the ORSA process around them
Identifies most of the company bar the tea lady as 'stakeholders' for engagement - I suspect there are that many customers/end users of the output, but frankly most could make themselves scarce during process construction and not be missed.

Scor's Trainar on Solvency II progress

Suggests that Solvency II in its entirety should "...bring enterprise risk management in the industry up to standard" - doesn't quite tally with his CRO Forum colleague above, who seemed to think the standard helped keep it afloat during the crisis!
Worried about the size of the Solvency II challenge should it be served up "...with a heavy and indigestible bureaucratic sauce" - truly sparkling wordsmithery!
States that "Solvency II is an excellent micro-economic reform but a mediocre macro-economic one" - hence the delay mon ami!

Towards the back are a couple of nice case study/example pieces which you might enjoy from a benchmarking perspective.

COSO - understanding and communicating Risk Appetite

2012-02-05T18:56:00.000Z

Hot on the heels of materials pushed out on the Irish front from both the regulator and the consultancies, as well as the IRM's efforts in autumn of last year, COSO have stepped up to the plate with their take on understanding and communicating Risk Appetite, a topic which will be spectacularly relevant to insurers over 2012 for ORSA purposes, and indeed for anyone in and around the Irish Sea for corporate governance compliance reasons.

Having had a good sniff through, I struggled to find anything controversial in COSO's take on things, and, whether by accident or by design, it treads the same path as Richard Anderson's paper from the IRM.

The following quotes provide some of the more salient points made by the authors;

"Risk appetite is the amount of risk, on a broad level, an organisation is willing to accept in pursuit of value" - not a bad way to think of it for an insurer (i.e. embedded value), though the 'broad level' add-on is unnecessarily and disconcertingly vague. This incidentally runs against one of the IRM's key principles, namely that risk appetite must be measurable (p7).
Authors believe that "...when properly communicated, risk appetite provides a boundary around the amount of risk an organisation might pursue" - without splitting hairs, the definition of risk appetite above isn't especially black and white!
The three risk appetite steps of "Develop-Communicate-Monitor and update" are spot on, however, one might think that the "develop" piece is already done in most organisations (or why would the owners get up in the mornings?), and communicating it is the big issue.
Should create a Risk Appetite Statement which is "broad enough yet descriptive enough for organisational units to manage risks consistently within it" - good point, as of course some departments of a business would struggle without such breadth in their appetite statement (business continuity and marketing spring to mind)
Similarly, that statement should "balance brevity with the need for clarity"
Confidently states that "we all know the costs of failing to manage risk", but dished out some pretty generic examples, bearing in mind the zingers which have pitched up over the last three years
Exhibit 1 on considerations affecting risk appetite is a very smart schematic for provoking thought at executive level
Box on p5 has a rather definitive statement around there being a lack of risk appetite articulation which contributed to the current financial crisis - certainly wasn't a problem at Lehman's, more that it was a moveable feast!
Handy box on p7 which covers the tie-in between what rates as an "adequate" ERM Framework in the context of S&P's ratings methodology, and what management must be able to articulate on the Risk Appetite front.
Some very nice examples (p8-10) of risk appetite statements from different industries, and of risk tolerance statements anchored to associated risk appetite statements (p13-14).
The big one - differentiating Risk Appetite and Risk Tolerance - is on p11. Whether you agree with the COSO conclusion (i.e. that Risk Tolerances implement Risk Appetite within each operating unit's sphere of influence), it does at least try to square the circle, and the clarity should benefit practitioners. However, the statement "While Risk Appetite is broad, Risk Tolerance is tactical and operational" is poor - I'm guessing one could substitute "broad" for "strategic", or "tactical and operational" for "specific", and it makes sense.
Interesting list on p16 of questions to facilitate Board-level discussions on Risk Appetite which I suspect is probably too wordy for many Boards to throw themselves into wholeheartedly.
Starts to peter out towards the end, which is normally the case with such guidance materials (once you start descending into 'performance models', communications strategies and risk culture, the ability to prescribe content and form to disparate organisations diminishes substantially).

Ultimately, while the document is of considerable use for anyone who needs a reputable crutch on the topic (and is perhaps outside of financial services), it is probably too generic to be of great use as an aide-memoire to any Solvency II-covered insurers, and I would stick with the IRM's take ("those risks that [an organisation] actively wants to engage with" when scripting a Risk Appetite Statement.

Chapeau for the good parts nevertheless...

Solvency II - Another year (or two) later?

2012-01-26T14:02:00.001Z

As flagged by Reuters earlier, the German FT has cited an "industry insider" as having whispered that a move to 2015, or even 2016, is a possibility.

While the general chatter in the FT article covers some supportibng argument on the quant front, the legislative timetable argument is a lot more compelling. Bearing in mind that the ECON vote has moved, but the plenary vote currently remains unchanged, should any delays or differences of opinion hold up Omnibus II clearance above and beyond the summer recess, the knock on effects would perhaps support this (i.e. bifurcation or not, Jan 2014 would not be achievable).

As ever, I guess the parliamentary vote date is the one to look out for!

Late post script - Reuters ponied up with another article today which touches on the story but brings in Peter Skinner's explanation of the delay

ERM Speciality papers - Harvard Business Review and Zurich

2012-01-24T13:43:00.000Z

As with the previous post, another document which may make Insurance industry readers feel like the proverbial grandmother being taught to suck eggs was pushed out by Zurich, in conjunction with the Harvard Business Review. Heavily themed around ERM programs and CRO tactics used in deployment.

This contains some generic examples of current CRO risk management practices, obtained from the horses' mouths. I hasten to add that these are not all "best practice", and indeed some might not even be considered "good", but they are across all industries, which does help benchmark any progress you might be making on infant ERM programmes forced by Solvency II or Corporate Governance code changes.

In its entirety it feels 10 pages longer than it ought to be, purely due to the number of quotations and practice examples it includes. It does however include a decent sample size (1,419), so the response percentages are a better representation than a lot of benchmarking/best practice materials.

I took from it the following;

Huge growth in number of CROs at large companies since 2008 (11% to 42%)
Two-thirds felt they were not doing well at the 6 risk management capabilities cited in the report as critical to organisational performance - all of these capaibilities are very much embedded in the ORSA world for insurers
Only 1-in-10 felt they had a "Strong risk-aware culture" - I know this is a topic for debate on the IRM's LinkedIn page, so worth a look if you feel you are lacking in this area
Note a "broad agreement on the increased importance of ERM" - the PwC paper referenced in the last post argues the opposite!
"Big risks" flagged as currently being the zeitgeist were; Nat Cat, Economic Crisis, Talent Retention and Reputation - this definitely shows how the CRO can pull themselves away from operational activity to focus attention on less visceral matters.
Reference to "sequential risks" which to all intents and purposes is describing scenario analysis - is there a case for trying to enforce a common risk language on this matter as a profession?
Reference to "proactively managing risk, rather than simply mitigating it in a reactive way" - is it not possible to proactively mitigate risk?
Half of companies surveyed have a single identifiable individual reponsible for ERM, "a key factor in driving success in this area" - can't make up my mind if this is a good or a bad thing, but I guess it is dependent on how vigorously the three lines of defence are established.
Aggregation of risk types and proactively identifying current/emerging risks were deemed by the sample to be less important than "embedding a risk-aware culture at all levels" - this seems very odd, and perhaps borrows on the vagaries of the term to enhance its importance to CROs
Piece quoting from COSO on page 11 which contradicts the view mentioned above that individual ownership of ERM is something to aspire to.
Some strange numbers on the relationship between Risk and Internal Audit - over a quarter of respondents said they either didn't work closely with IA at all, or didn't know. Goes on to describe an example of IA using ERM-identified risks as the basis of the Audit plan, which in my view is ideal, and a great example of knowledge and intelligence sharing.
Strangely for something with heavy US input, no references to ratings agencies as a driver for ERM
Primary barriers to implementing ERM all seem logical, though the failure of key staff to acquire new skills features around halfway down the list, and in my experience this would probably be top.
Finally, one CRO talks of his "small, lean staff" - no need for a punchline there...

Overall good benchmarking questions, but perhaps too much in the way of "at one firm..." examples.

ERM Speciality papers - PwC on "Black Swans"

2012-01-24T13:00:00.001Z

A couple of speciality ERM benchmarking papers were released in the last week which are worthy of comment.

The first, from PwC, touches on the well trodden path of Black Swans, as well as giving the concept of ERM as a whole a bit of a black eye, suggesting that alignment of risk and strategy is infrequenctly achieved. I can certainly sympathise with the comments relating to the inflexibility of ERM frameworks and the onerous nature of running them in a way that contributes to wider boardroom debate. There is also some salient comment on how malfunctioning ERM can blur the lines of responsibility in an organisation, as well as the old "risk appetite is not explicitly defined" chestnut.

It does however lean heavily on the AIRMIC research from last year for content, and contains some startling generalisations (from an insurer's perspective at least);

"In most organisations" risk is grouped into three main categories - operational, strategic and financial?
"Under current risk management thinking, a risk that cannot be identified cannot be managed"?
Audit committees cited as complaining that they receive too much risk information (as opposed to their job of financial statement scutiny and internal controls adequacy)?
ERM "currently used by most major corporations" and has "a focus on providing stronger control over operational and financial risks"?
Some critics claim that ERM "can encourage a box-ticking, process-led approach to managing risk"?

It goes on to descend into some schematic craziness before coming back to reference reverse stress testing (close to insurer and banking hearts already, but this paper is targeted across industries). The concluding recommendations for enhancing ERM frameworks into "ERM plus" all scream "ORSA". All in all one for the non-insurers to consume, as a lot of the Solvency-II world will feel they have this covered.

Next up Harvard Business Review and Zurich!

IRM Solvency II SIG Presentations from January - Stress Testing

2012-01-18T13:48:00.000Z

For anyone who is working on firming up their approach to stress testing and its cousins for Solvency II purposes, I would recommend taking a look at the outputs from this month's IRM Solvency II Special Interest Group.

The presentation has some worth, although I guess you needed to be there to get the full gist. The survey however is of much more use for justifying any approaches you currently have in play (who is responsible for what, and indeed what varieties of stress testing are actually used). Small sample as you might expect for a SIG at 28 respondents, but worthy nonetheless.

Solvency II updates from Freshfields and Clifford Chance

2012-01-17T21:47:00.000Z

A couple of extremely useful Solvency II legislative updates from Clifford Chance and Freshfields Bruckhaus Deringer which cover the state of play up to but not including the delay announced at the end of last week.

Both cover the transition between pre and post-Lisbon treaty legislative frameworks, the post-Lisbon Lamfalussy process and the drivers behind the current sticking points - if you are struggling to convey the uncertainty to your project sponsors, I would recommend giving both a once-over.

Omnibus II delay - ECON moves, Plenary stays still?

2012-01-16T12:22:00.002Z

No doubt you all enjoyed Gideon's reportage from Friday (leapt upon by the other outlets shortly afterwards) that the sign-off on Omnibus II from the specialist EU parliamentary committee ECON, scheduled for this month before moving on to a full plenary (i.e. all of the EU Parliament) vote in April, had been yet again postponed. For you Brits, the FSA have commented on this development as well.

Easy to speculate on the causes of this (indeed the recent snub by David Cameron on the bail-out front is cited here as perhaps having weakened the UK's lobbying power at a time where they perhaps have the most to lose), but fair to assume it is still on the numbers front as opposed to Pillar II or III.

Worth flagging here that, while the ECON vote has now been changed to end of March on the Europarl website, the full plenary vote is still as it stood previously (mid-April). This could be the reason why most public comment since Gideon broke the story has been reluctant to say that this delay might shift the go-live date.

Good news then I guess...

Risk Appetite Statements - Central Bank of Ireland not impressed

2012-01-11T22:13:00.000Z

Good spot from Mike Claffey, flagging an finance industry-wide rollicking from the Central Bank of Ireland on the quality of Risk Appetite Statements, now of course a regulatory requirement.

Some extraordinary findings appear to have emerged, judging by the recommendations, for example;

Board not signing off the appetite statement (never mind just signing off, how about formulating!)
Non-coverage of material risks
Statement not being communicated to relevant staff

With the advent of PRISM in 2012, there is clearly a desire to get ducks in a line on the Emerald Isle, and of course there is plenty of Risk Appetite guidance out there (some from Mr. Claffey himself at Milliman here, the IRM's take here, the Society of Actuaries in Ireland had a good stab here, but strangely nothing extensive on the FAQ front from the CBoI). Fair to say that excuses should be hard to come by then?

However, as I have mentioned earlier, having some paper perfect statements doesn't necessarily deliver the right outcome, as UBS will attest to!

All the best from Governance Matters!

2011-12-23T09:26:00.000Z

Enjoy the festive period all - I'm off for a few days in freezing France, but will be back to the day job next week. As we say on the Isle of Man, Nollick Ghennal as Blein Vie Noa, and I hope to be of some use to you over 2012, which promises to be a busy one!

All the very best,
Allan

Financial Reporting Council - Developments in corporate governance 2011

2011-12-14T14:02:00.000Z

The FRC pushed this out today on progress in implementing the UK Corporate Governance Code (and of less interest to me, the Stewardship Code. Outside of the news of what is to come (more consultation in 2012 on Audit Committees, Risk Management and Internal Control elements of the code) some interesting trends are reported;

Code requirements on board and board committee composition all above 80% on the "comply" front - strangely the requirement for having at least half NEDS on the board was the worst area of compliance for FTSE 350 firms.
Still having "diversity" and "gender diversity" spoken of in the same breath - more to come on that subject from me another time
FRC are attributing some of the gripes from the industry on independence criteria and difficulty in recruiting good quality NEDs on their inability to look beyond "the usual suspects", and by doing so, they will enhance diversity.
80% of boards put themselves up for re-election annually in their entirety (one of the more controversial elements of the last set of Code revisions).
Discussions regarding the expanded nature of the Board's responsibility for Risk (to essentially include consideration and setting of Risk Appetite) has led the FRC to schedule a revision to the old Turnbull guidance in 2012.
Still griping about "boiler plate" annual report text.
Some of the "explanations" given for non-compliance still said to be lacking
Chairman's Statement suggestions made by the FRC appear to be bearing fruit
Lack of consistency around the application and reporting of Board evaluations
Disclosure on business model, strategy and risk (massive for Solvency II disclosure policy/SFCR purposes) is, because of a lack of guidance, allowing companies to determine their own levels of disclosure. However, the FRC are expecting more from companies in this regard.
Very critical of the extent of reporting from the Audit Committee, hence the consultation due in early 2012. Also goes on to be untopically lightly critical of remuneration committee reporting in the same regard!

Additional delay to EU Parliament vote on Omnibus II - change in priorities?

2011-12-13T20:39:00.003Z

Having blogged late last week on the reasons for the EU Parliament being a notable no-show at the ABI Solvency II conference last week, I was pretty shocked today to see that the delay on voting on Omnibus II (mooted by Sr. Montalvo only last week by the same publication to be a delay until the end of Jan 2012), has now apparently been moved back to April 2012.

This would clearly be a dreadful result for both the industry (on the uncertainty front) and EIOPA (on producing technical standards), and bearing in mind the disdain and petulance currently being displayed by the Parliament and head of the Commission towards the UK, might we expect to see some last minute shenanighans from the Parliament to the detriment of the UK industry regarding, say, transitional measures or the illiquidity premium?

Look forward to hearing what the other institutions themselves have to say about it - delaying the parliamentary vote to January is one thing, April is surely stretching their patience, regardless of the competing priorities at present.

Post script - proof of the pudding is in the eating

ABI Conference - FSA's Adams speaks on Internal Model Applications

2011-12-09T13:44:00.000Z

The FSA have just published Julian Adams' speech on Internal Models from yesterday at the ABI Conference.

Worth noting;

On the potential to replace ICA with SCR for 2013 (which Lloyds et al have been lobbying hard on);

“What we are in a position to do, however, is to invite firms to consider how they think their work on their Solvency II model could be used to meet those current rules, thereby removing the need for parallel running of two different models”

“As the current requirements will remain in force, it will be incumbent on firms to satisfy themselves that the Solvency II model, alongside their wider system of risk management and governance, meets the existing requirements in our Handbook. By approaching the issue in this way, we intend to avoid the need for firms to apply for a complicated series of waivers or to seek specific permission from us to make the transition early. We believe this is both proportionate and appropriate, given the amount of review work we will have done with firms following submission of their Solvency II model application to us”

On the basis to be used for internal model applications (the original guidance, or EIOPA's L2 on Tests and Standards for internal model approval)

“It is clear that the Level 2 text – and, in due course, the Level 3 text which will supplement it – is more appropriate to use as a matter of principle, since this sets out much more clearly the basis on which we are expected to assess firms’ applications, and it is the standard against which you and we will ultimately be judged”

“On balance, we feel that basing our application approach on the Level 2 text is the most sensible way to proceed, and we propose to do this is by cross-referencing the Level 2 text in the guidance materials we will be making available to firms in February of next year”

“I am aware that this will mean that some firms may feel that their efforts in following the Contents of Application approach will have been wasted, and I would like to reassure you that this is not the case. We will expect you to submit documentary evidence that you meet the requirements set out in the Directive, and completion of the Contents of Application is likely to go a long way towards demonstrating compliance with the Level 2 requirements, but it is those Level 2 requirements which will be definitive”

Looks like anyone who is going to get pre-approval to use their model to meet existing FSA handbook requirements is going to have to jump through a lot of hoops, and even then may fall short

ABI Conference today - reason why the EU Parliament stayed away?

2011-12-08T19:49:00.000Z

Still very early after the ABI conference today (I wasn't there, so relied on some heavy duty tweeting from Elliot Varnell and Insurance ERM).

All the great and good were there (van Hulle, Montalvo, ABI, FSA, and all the CROs in the UK who blagged a day off!), however there was no representation from the EU Parliament which, bearing in mind we are in trialogue season and there is plenty of debate still to be had, is conspicuous to say the least. A Burkhard Balz or a Peter Skinner would surely have been a good attendee to get the right balance.

However, Insurance Times flagged this from Sr. Montalvo at the conference today - looks like the EU Parliament have missed the pre-Christmas window for discussion Omnibus II, and, looking at a late January debate now, have left almost no wriggle room between debate and the Omnibus II vote.

Who this compromises the most out of the troika is unclear (EIOPA I suspect, being the unelected body), but Parliament's absence surely saved the event from a seasonably frosty atmosphere!

PRISM and Central Bank of Ireland - ORSA come early?

2011-12-06T00:34:00.000Z

Towards the end of last week, Matthew Elderfield launched the Probability Risk and Impact SysteM (PRISM, summary here and detail here), which aims to usher in a new age of supervisory challenge to the Irish financial sector, well documented as having had an easy time of it before credit started to get crunchy.

One big challenge for the CBoI will be to get everything up and running before June 2012 (hopefully the recruitment drive wasas good for quality as it seemingly was for quantity!), so all the best to them for that. More pointedly, the acknowledgement that the ramping up of staff numbers will start to be felt in the industry levies asap, coupled with future income streams referenced in their planned aggresive enforcement and fining of non-compliant firms must have any of the stragglers still living in 2006 quaking in their boots.

Very interesting to see the take on Risk Appetite, Risk Tolerance, Risk Assessment Criteria etc applied by a regulator to its industry, rather than my normal vantage point of a risk consultant, either advising on or benchmarking the same facets of individual ERM frameworks within an insurance undertaking. I would have thought the way in which these things are described in Mr. Elderfield's speech should be good guidance for corporate governance code adherence over there (let's face it, it doesn't get better than from the horse's mouth!).

One thing that would make me very uncomfortable as an Insurance consultant is the extent of the crossover between ORSA, QRTs, SFCR and RSR and what is being proposed under PRISM. I would not be keen on, for example, defining 'Risk Profile' for my client in line with Solvency II definitions, only to be contradicted by the regulator's PRISM definition of 'Risk Profile', which is overall solvency needs by any other name.

If I get some spare time, I may run a cross-check between ORSA and PRISM obligations, and work out whether the CBoI is trying to tell the insurance industry how to do an ORSA via subliminal messages - for the life of me, I can't quite work out what this does for the industry that an ORSA run with "appropriate" frequency doesn't.

ABI Conference this week - who's off the Christmas card list?

2011-12-05T23:43:00.000Z

I had a look through the ABI agenda for their meeting later this week (sadly won't be going). I may be missing something, but it appears that everyone got an invite except for someone from the EU Parliament.

A deliberate snub, or was rapporteur Balz or one of his lieutenants not available to ensure that at least one representative from each of the trialogue parties was present?

UK Treasury - Consultation on Solvency II

2011-12-05T22:52:00.000Z

I have had a look through the UK Treasury's transposition of Solvency II consultation paper today (the purpose of this is to ultimately confirm which UK law and statute changes will need to be made to accommodate it, rather than the FSA's consultation, which was focused on replacing the existing handbooks with SOLPRU).

Strangely, at 100 pages, it is a pretty good read, and you should not be shy in purloining some of their idiot's guide material at the start for board presentations and staff briefings. However, the really meaty stuff comes in around halfway through, where they get to cost/benefit analyses (much of which leans heavily of the E&Y research referenced by the FSA numerous times already).

A few things jumped out, namely;

£1.53bn as ongoing cost to UK industry (NPV over 10 years) - that's to go alongside the £1.9bn of transition costs!
Sat alongside £3.52bn of "key monetised benefits", NPVd over 10 years - I'm no mathematician, but I guess that means it's a winner for the industry!
Between 550 and 600 UK firms expected to be covered (Lloyds syndicates included) - this seems much lighter than the CEA figures from the other week, which had over 1,000 UK insurance entities. Are there relly that many below the de minimus level?
No "gold plating" of Solvency II - bare minimum "copy-out" approach confirmed.
Table included which shows the scale of the changes for firms with comparable data between Solvency I, ICAS and Solvency II.
Still includes an estimate of 100 model candidates who will "ultimately" use an internal model, though it states that only a third of these will look for day-one approval. I'm struggling to reconcile this [100 in IMAP at outset, now down to 77, but only 33 will be approved on day 1!]
Shows all the detail of how the FSA came to £110m as the cost between 09/10 and 13/14 (based on timesheets!) and the ongoing costs post-2014, broken down by FSA business area. Important note here is that half of the ongoing costs from 2014-2016 are for actuarial resource to assess internal models. Nice to know the logic behind the special project levies for those years

Plenty of flannel towards the back, which you are probably familiar with, but if not, knock yourself out!

Should the CRO carry the can?

2011-12-01T23:26:00.002Z

Normally after a high profile operational risk materialises, the end cost normally determines how high up the food chain the sackings go,but they generally would stay in the first line of defence.

This one therefore stood out for me as a bit of a outlier. I'm all for individual and collective responsibility, and would personally have fallen on my sword if I was within a square mile of this abomination regardless of my job spec. However, is it correct to dismiss the CRO because of an internal control failing (albeit a whopper!)?

Solvency II Forum in Dublin - Central Bank of Ireland

2011-12-01T23:13:00.000Z

All manner of fun no doubt had over on the Emerald Isle today at the CBoI's Solvency II forum. Would love to have been a fly on the wall, however consultants don't get the luxury of days off! Five presentations were seemingly put on the table, and if any of you guys reading in Ireland have anything to add, I'd love to hear it!

First presentation features a nice calendar for 2012, but more importantly the results of a "preparedness for Solvency II" survey issued in September. The following seemed pertinent;

Around 15% didn't bother replying to and of those who did, over 10% said they were 'not preparing' at all!
Only 40% into the "implementation and execution" phase
Very high number of 'other' responses to questions on sponsorship and rollout responsibility, where the options provided were the obvious suspects (CEO, CFO, CRO, COO) - Appointed Actuary the missing link?
Three quarters were "quite confident" that they will be ready from end of 2012
Almost 90% think their boards (including NEDs) have "satisfactory" Solvency II knowledge - seems generous to say the least, however these were responses to the Central Bank, so one would be unlikely to say different!
Top ranked aim of Solvency II programmes was regulatory compliance - that's the spirit, no flannel about business benefits and policyholder protection, just comply!
6% not very confident that the CBoI will be ready to conduct supervisory reviews "effectively and appropriately"
Over 20% "not very confident" that their governance structures are Solvency II compliant (odd, as the requirements of the corporate governance code mirror or indeed surpass Solvency II requirements, and they ought to be complying with those now!)
50% haven't defined their ORSA Process yet!

In addition, some other CBoI preparation detail was laid down, most notably;

Looking to build processes in order to formally accept internal model applications from 1st June 2013 which instinctively feels very late
Liaising with the industry on the ORSA Supervisory Reporting requirement (which might lead to some element of prescribing content, bearing in mind the ORSA Consultation paper opens up the possibility of using one's ORSA Report to meet that requirement)
Details on what the CBoI expectes in the "transition year" of 2013 yet to be finalised

Interestingly, in the Internal Models presentation, they are very explicit that Validation must cover all aspects of the models inputs, processes and outputs, not just the internal model itself - this "narrow vs wide" validation scope is something which I haven't seen the FSA be this specific about.

CERA and the challenge to the Risk Profession

2011-11-25T00:11:00.000Z

Very reassuring article in the Actuary magazine regarding one aspect of the inevitable land grab between risk and actuarial professionals (which I have blogged on several times), this one covering the thoughts of a few CERA students as to whether this qualification was likely to enhance their career prospects.

Judging by the responses of those students likely to be CERA-qualified in the near future, I suspect that the Risk profession will still be gainfully employed for some years to come - particularly liked the reponse about selling the qualification in one sentence "It counts as verifiable CPD!"

PS The score on CRO hires moved to 4-0 to the Actuaries this month with Aviva UK's new guy - however, the hunter has become the hunted, with the new top man at the Institute and Faculty of Actuaries being a chartered accountant!

FSA interpretations and Q&A on ORSA, Supervisory Reporting and transposition

2011-11-23T14:06:00.000Z

Couple of very nice Q&As out today from the FSA (well spotted by Gideon on the Solvency II Wire) which cover last week's releases from EIOPA on ORSA and Supervisory Reporting.

The ORSA Q&A gives a detailed interpretation of what the regulator thinks the processes and reporting entail. Stand-outs for me were;

Process of recalibrating one's internal model from economic to regulatory capital purposes must be included (difficult if your EC measure is not a straightforward read off a later point on the PDF?)
National supervisor "cannot act" if actual capital is below EC, and it "cannot be used as an intervention point" - not really sure why they need the information then!
Sadly don't elaborate on the potential for the ORSA Report to form the basis of the supervisory report - would have been ideal comment
IMAP does not require ORSA output - I had heard this on the grapevine, but nice to have confirmation
Confirms the expectation that the ORSA Process must include a process for recalibrating one's internal model to the standard formula SCR

Also has a handy "what you should do now" list - would hate to think anyone has not ostensibly done any of these things by now, but reassure yourselves by having a look! Q&As on the last page may be handy to show your project managers/execs/NEDS, but they are a little light.

The piece on Pillar 3 reporting is more concise, and probably worth running by your execs - however, it is a little 'scattergun' without much opinion, and you may find the summaries from the big consultancies of more use

Finally, The FSA's documents on the legal transposition of Solvency II into their Handbook is probably of little use to anyone outside of the UK (fascinating though it is!), so grab what you can if you're based elsewhere!

CFOs, CROs, conflicting messages and strategy - FERMA paper

2011-11-23T00:25:00.000Z

A couple of pieces of work caught my eye this week on the subject of risk leadership and participation in strategy, with a distinctly financial twist.

The first, a joint effort between FERMA and Finance Director Europe covers a number of themes leading on from FERMA's conference a month back. Some of this report seemed to fly in the face of best practice ERM (for example, broader strategic ERM has evolved through executives realising they need to manage downside risk better? Does it perhaps represent a little more than that in 2011?).

A FERMA board member is cited as believing risk should be "supporting strategy development" rather than participating (which would leave a CRO where exactly?). The next article indeed directly contradicts this view, quoting a risk executive who actively participated in the GRC strategy formulation for his firm, followed swiftly by the AIRMIC/Cass Business School research which bemoans the 'glass ceiling' which prevents risk managers addressing issues in a company's top echelons!

That article also has the UK "...leading the way in enterprise risk management and corporate governance" (I would probably go US and Ireland respectively with a 2011/12 hat on).

The VP of FERMA is then quoted in day-job mode noting "risk management...is partly about comforting non-executive directors so that they are less risk-averse" - personally I like a bit of conservatism in my NEDs, and I wouldn't like to think I am employed to teach them how to gamble! This is accompanied by the CFO of the same firm notes "the CFO and CRO may have natural conflict, the former driving growth and the latter controlling risk" - again, are Risk, as the second line of defence, really there to 'control' risk?

Finally, the CFO at Old Mutual is quoted as suggesting the complexity of proposed EU regulation (citing Solvency II specifically) might be contributing to elements of risk it is supposed to be preventing.

Economist Intelligence Unit - Getting new perspective on strategic risk

2011-11-22T01:36:00.000Z

This out last week from the Economist Intelligence Unit, always a great spot for benchmarking, and at a verty opportune time for anyone working on ORSA or enhancing the visibility of strategic risk in general. Sample size is almost 500, around a month old, and all respondents have responsibility for risk management in their respective firms. The research is also supplemented by interviews with a few big cheeses.

Again, it;s a quality publication, so doesn't need much sifting through, but the salient points for me include;

Lot of agreement that Risk should challenge management's view of the future (two-thirds)
Almost three-quarters agree that flexibility is more important that ability to plan for the long-term (indeed a third of respondents don't even plan for events a decade or more into the future)
"By extending their risk models further into the future, companies must be aware that the data being used to populate them are increasingly unreliable" - interesting in the context of ORSA (i.e where does one stop projecting)
Main barriers to considering longer term risks are executive management's focus on immediate risks (41% of respondents), and the nature of the business making such work redundant (36%)
Almost 60% have their Risk functions actually participating in the formulation of strategy
The risk planning horizon doesn't appear to be aligned with the strategic planning horizon (risk planning being much shorter) - obviously changes with ORSA for insurers, but not sure what the resolution is for other organisations.
60% have one of the most important objectives of the risk management function being the identification of new and emerging risks - may actually be the cause of some of the mismatch mentioned above. Despite that, only 40% feel they are doing a better than average job of anticipating and measuring such risks
Main areas for enhancing risk management practices have been to make risk management more forward looking (50%), and allocating more board and senior management time to long-term risk analysis.
40% have their CEOs as being responsible for exploring long-term impact of risk on strategy - very high, considering that boards/committees were alternative responses
44% think a bigger commitment to ERM will help align risk and business strategy, while 33% thought that the Risk function presenting themselves more as business enablers would do the same thing.
Only a third of Risk functions report to the board quarterly - seems very low
30% have no plans to use horizon scanning - beyond mad!
Only around half of respondents have or plan to have a CRO

KPMG Survey - Solvency II Benchmarking Survey

2011-11-22T00:41:00.000Z

Decent piece released by the guys at KPMG covering Solvency II benchmarking. No difficulties in picking out the salient points, so just serve yourselves, but I've hauled some out for my own benefit (NB at 18 in the sample, its a tad light).

For my money, the 40% who feel their budgets are not on track feels instinctively light, but then the survey was taken in September before an extra year was stuck on it! The priorities and areas of concern (documentation, ORSA and governance) all seem fair in relation to other media, and the difference between small company projects (two-thirds resourced internally) and larger insurers (over 90%) in their staffing shows where the extra year's project costs may disproportionately fall. Also 56% feel they still have a lot to do on Pillar 3 (bit easier after last week's papers were released by EIOPA).

On the actuarial front, some very varied responses to Risk Margin calculation, and they flagged ORSA as the main area of cross-functional collaboration. They have also flagged Strategic, Liquidity and Reputational Risk as the main non-modelled risks going into ORSA.

The last section on validation is perhaps the real eye-opener - KPMG advise separating validation from production, and even with this small sample, a range of routes being used (on validation responsibility, ownership of the validation team, and responsibility for producing the validation report, including for the first time in my experience, the roping-in of Internal Audit)!

Risk specialists - FSA can't buy your love

2011-11-18T01:01:00.000Z

Very telling snippet picked out by one of the IFA magazines covering Hector Sants's comments to the Treasury Select Committee that the FSA are struggling to recruit for a 200-strong Risk team, with an agency cited as saying they were around 50% off industry levels. If they can just wait for the Solvency II goldrush to subside, there would be plenty of candidates, but if it keeps getting extended, you'll never get anyone!

Joking aside, the increasing staff turnover, extension to Solvency II, and one eye on the future carve up into FCA and PRA, the case for spending some of this special levy money on some high-end talent must be close at hand - they have certainly priced it in for post-2014!

FSA's Internal Model Page - Q&A, ABI and EIOPA speech

2011-11-18T00:44:00.000Z

Having already blogged on Julian Adams speech, I had neglected to pick up on the other goodies in the specialist IMAP section on the FSAs website.

There is, for the IMAP enthusiasts out there, a 6 page Q&A on common model application themes. I would highlight;

"some uncertainly following the release of the text from the Rapporteur [Burkhard Balz]", but currently as confident as they can be on current timelines
Decent summary of EPIFP problem
Don't appear to close the window to "significant change" to existing model plans, but dependent on schedule (i.e. 2013 class maybe have room to tinker?)
FSA materials for model application submissions will only be released in Feb 2012, which I guess is hard luck on those who are first up - however, I suspect the March/April 2012 class will not be short of insider information!
Allocated application slots have been influenced by outstanding lobbying matters, such as matching premium (i.e. if your book of business is affected by matching premium, EPIFP etc, then you probably gained some advantage here)
A pretty sketchy answer to how a company can evidence Use Test adherence before having the model signed off (q12) - I can see where they are coming from, but this answer should really have hooked back in to ICA to be useful to the industry, particularly in light of their using ICAS as "quantitative tools"
Confident that early applicants will not get "two bites at the cherry"
Some uncertainty as to what approvals, if any, the FSA can actually give firms before Omnibus II is passed.
And of course the cherry on the cake about using model as an ICA replacement if they have conducted "an appropriate amount of review work" and are minded to approve the model.

Second is Otto Thoresen's speech at the event last week - a kind but firm smack on the back to encourage the FSA to allow ABI members to use their internal models for ICA in 2013.

Finally the presentation from the last minute EIOPA stand in (actually their model committee chair) - interesting bullet point noting that a challenge of the pre-application process was to stop "undertakings playing with supervisors". Also shows the number of pre-application initiatives being run by EIOPA.

EIOPA 1st Annual Conference - additional media comment

2011-11-17T23:56:00.000Z

Worth adding this to yesterday's post on speeches etc falling out of the back of EIOPA's conference. Nicely depicts the rather prickly atmosphere which must be hovering over the trialogues between EIOPA, EC and and Parliament, in particular emphasising that rapporteur Balz and the Parliament appear to be the fly in the ointment as far as staying on timetable goes.

PS In case you don't follow my twitter feed, EIOPA released a specialist Solvency II page and their own twitter feed today!

EIOPA 1st Annual Conference - Anything of note?

2011-11-17T00:33:00.000Z

EIOPA had their first annual conference today in Frankfurt (happy birthday!). Looks very heavy on politicos as you might expect, and there has been a few drips of information from it, in particular;

Sr Bernadino's comments that insurers should not "pretend to play God" by implementing onerous counter-cyclical tools in addition to the facilities already in play to avoid pro-cyclicality
Mr Barnier's introductory speech where the delay to 2014 is seen as "a plus point, enabling insurers, national supervisors and EIOPA to prepare better"- doubtless all you project managers looking at an additional year of expense will rest easy at that! He also mentions that equivalence is not looking to force countries to adopt a regime identical to Solvency II, as well as emphasising the party line on Group supervision in the context of IAIS ICPs and the ongoing SIFI debate.
Sr Bernadino's keynote speech - May 2012 scheduled for public consultation on technical standards, which he stresses does not pre-empt the trialogues and Rapporteur Balz's Omnibus II paper going through EU parliament
Elliot Varnell has had a busy day tweeting, so serve yourself at his feed. Interesting to see that Karel van Hulle thinks there isn't enough cross-border sales going on - having worked in that area, a good helping hand might be to remove local language requirements!

FSA, SOLPRU and Costs

2011-11-10T18:35:00.001Z

Just when you thought it had gone quiet, the FSA throw out a 200 pager covering the regulator's transposition to Solvency II!

Some important pieces in this on;

Cost

FSA has budgeted £110m over the 5 years 2008-2013 for Solvency II implementation (which supports their statement back at a June FSA management meeting where they commented that contingency would need to be enacted (p3) if go-live date was extended past 2013). They had said in their business plan for this year that the estimated implementation cost would be £100m-£150m, so they are on the light side of that estimate.
Frighteningly, they are budgeting for another £178m of spend between 2014 and 2016 (on nursing internal models through assessments and improving IT) before reverting to current equivalent levels - for those people who got a special levy refund this year, you might want to cancel the trip to Vegas!
Estimating cost to the industry (of around 550-600 undertakings) of £1.9bn, with this estimate creeping up due to extra contractor and IT cost.

At 200 pages, some of the detail can wait, but those 2014-16 FSA costs (which will be the PRA by then I guess) are an eye opener, particularly for anyone in IMAP who will (possibly?) be coughing up a special levy for the model assessment-related element.

Julian Adams speech on IMAP and Solvency II delay

2011-11-09T00:54:00.000Z

The speech from Julian Adams is worth picking apart for crumbs of comfort for any organisation who will be potentially running up bills for another 12 months in light of the extension announced by the FSA at the start of October for their IMAP processing.

Spectacularly, one of EIOPA's guest attendees was, you've guessed it, delayed! As I didn't attend, I cannot confirm if this raised a chuckle in the hall, but more important than the comedy value of an unexpected EIOPA delay are the things put on the table last week, namely;

That the workload anticipated by the FSA both pre and post Solvency II appears to be higher than anticipated (more entity level ORSAs/SFCRs than expected for a start).
"...very likely that some form of Solvency II reporting will be required during 2013", regardless of the delay.
"Submission slots" were allocated primarily after assessment of each applicant's SAT, but alos taken specific Solvency II outstanding issues into account (which must mean preparation on the college of supervisors front is severely lacking to be cited here alongside matching premiums! This is not necessarily a UK failing however)
No more applicants will be accepted for day one approval just because of the delay, and no changes to model scope will be allowed without express permission.
More to come "in coming weeks" on the big question about whether ICAS can be jettisoned by the industry for 2013, to be replaced by a provisionally approved model - also doesn't cover if Standard Formula firms will have the same option open to them as, say, the Lloyds syndicates and other lobbyists for a 2013 early start.

More to come soon apparently, so let's keep our eyes peeled!

ORSA - Stateside view from NAIC's "ORSA manual"

2011-11-09T00:11:00.000Z

Having already dropped a few words down on EIOPA's new ORSA consultation for us Solvency II folk, I also spotted that the guys in the States have also made a few moves with regards to their ORSA Manual (from p12 of this NAIC bundle from their meet up the other day).

What had jumped out at me earlier last week was this article quoting AIA's assistant general counsel which very much framed the US ORSA as a periodic filing requirement with which he had "privacy concerns", voiced that it “should not be compulsively adopted”, and was very much a poor cousin to the existing framework.

This of course flies in the face of the ambitions of the Solvency II ORSA which, while clearly creates a regulatory filing requirement, is intended to demonstrably drive the decision making of the undertaking.

Having had a leaf through the ORSA Manual, a few things jumped out;

Primary goals are different to the Solvency II version (though both drink from the IAIS ERM ICP cup, the US ORSA stays on message with ERM effectiveness).
Not compulsory, rather a requirement to be subjected to (subject to minimum premium income limit of $0.5bn as entity, or $1bn as a group)
Can also be imposed on entities who would be considered on the "ladder of intervention" in Solvency II-speak
Allows for cross-referencing documents, rather than summarising within an ORSA report (which gives it the look of a Pillar 3 document on Solvency II side)
Potential option to satisfy US regulatory demands for ORSA by using any which are produced for "non-US jurisdictions" - see, Solvency II preparation is not a waste of energy for any groups with subsidiaries over there after all!
Great comment that, wishing to use IAIS ICPs to assess the quality of non-US ORSAs, that "one of the NAIC's goals is to avoid creating duplicative regulatory requirements for internationally active insurers".
Very concise prescriptive summaries of content - agin, they veer towards Pillar 3 requirements over here (SFCR in particular, though I haven't been through today's Pillar 3 consultations yet, so they may have changed!), but these are still very useful for people on both sides of the Atlantic.
They go with Credit, Liquidity, Operational, Market and Underwriting risks as main "material risk categories". I'll come on to the fantastic paper on risk classification I recently attended the public rollout of later, but it has a lot of relevance to how one might approach this aspect of the proposed ORSA, including avoiding any double coverage.
No prescribed suite of stresses, such as for the SCR standard formula - this seems to imply that "internal models" are either obligatory, or are considered to be whatever is in place currently (i.e don't need a phenomenal amount of resource to validate to the authorities). The regulators therefore are able to "provide input" into model component calibration if they don't like what is presented via ORSA.

Would love to hear from anyone over in the States to see how this is going down industry-wide, as I can't quite gauge how much of an additional imposition this is to business as usual!

ORSA Consultation Paper from EIOPA - bon effort!

2011-11-08T18:29:00.001Z

As I don't expect everyone had the time, inclination or even the document to see how the pre-consultation team of CEA/AMICE/CRO Forum/CFO Forum etc got on with the ORSA document, I had a cross-cast of the two to see if any substantive changes were made. The following caught my eye in the public consultation paper released yesterday;

Almost complete removal of the participation of the supervisory authorities in ORSA - this is now being left to Supervisory Review Process guidelines (it was shoehorned in to the pre-consultation in a way that made its removal inevitable sadly).
ORSA Policy content trimmed down in one respect (removing some actuarial-themed material, which will inevitably end up in the ORSA Report), but added in a section on data quality.
Made the section on checking SCR assumptions to make sure they fit one's Risk Profile much more confusing by neglecting to state whether "SCR Calculation" in the paper means "Yours" or "Theirs" - it does eventually come out in the wash that they are talking about any mismatch in reality between the assumptions one uses to generate their SCR (whether internal model, partial model, some USPs or full standard formula) and those which would actually fit the business, but it is a poor piece of drafting.
More rigorous on being able to justify frequency of regular ORSAs
New section on applying the proportionality principle for methodological complexity, frequency and granularity of ORSA
Finally had the courage to write the words "ORSA" and "Report" in the same sentence! This was skilfully avoided in the pre-consultation, I guess to enforce the (still legitimate) fact that ORSA is a process, not a boiler-plate report production job
Having removed the pieces on supervisory participation, they naturally had to lose a piece on how the ORSA output would make its way to the regulator. It was planned to put it in with RSR (and was very convoluted), but now there will seemingly be an opportunity (not guaranteed) to put forward the internal ORSA Report to satisfy regulatory obligations
More explicit on covering less-than-easily quantifiable risks, and allows for mitigants other than capital to be used in their regard over the business planning period, provided they are not material. I hasten to add here that they have changed the language on reputational and strategic risk from being "less quantifiable" to "non-quantifiable", which is a bit of a cop-out.
Much more explicit on capital management, both planning and execution over the business planning period - I guess this is a result of pressure from both the SIFI angle as well as Eurozone/Credit Crunch
Leaves an open ended question on whether the ORSA Process includes or uses the outputs of tests which are associated with ongoing compliance with Articles 120-125, but the option is there for both
Spectacular typo on page 25 - looks like one of the bullet points has not made the cut, as we jump from A to C!
Late Psot Script - missed the omission of the requirement to independently assess the ORSA Process - no doubt everyone's internal audit functions are breathing a sigh of relief!

All in all, a good attempt and I feel more than prescriptive enough for the public consultation to drive it further forward. Perhaps a missed opportunity on the regulatory requirements front to iron out what they ought to get out of the industry's ORSA reports from a wide range of stakeholders, but hey, you can't have everything...

ORSA Consultation - out now!

2011-11-07T13:39:00.000Z

Short and sweet - get your EIOPA ORSA Consultation paper here, and your template for comments here - let's get to work!

FTSE Insurers - Q3 results and a Solvency II whisper...

2011-11-03T17:19:00.000Z

Busy week on the IMS front for all the UK Q3 guys - Standard Life, L&G, St James Place and Royal London all coughed up with some pretty underwhelming stuff (though it was nice to see the Isle of Man-based 360 keeping the Royal London numbers honest!).

Normally Solvency II stays low on the agenda in the odd quarters, however Aviva threw a Christmas bonus in with their news on the legal restructure of Aviva UK's general insurance business, which is freeing up a whopping £200m in IGD surplus, halves the number of entities and will reduce in a "significant reduction" of Solvency II capital required.

Hub and spoke - its the way to go

Irish Corporate Governance Code - updated FAQs

2011-11-03T14:11:00.000Z

I'm guessing the "video conferencing" absentee-landlord insurance company directors have lobbied hard over in Ireland in the last few months, as the very extensive FAQs already issued have had to be supplemented.

Lexology do a nice summary of the main additions to the FAQ doc, which other than a couple of more genuine clarifications centre around the very important topic of attendance at meetings. Video and teleconferencing are now permissible, provided directors attend "wherever possible".

Troubling in some respects, particularly with Ireland likely to be used for hub and spoke purposes under Solvency II - I would ready myself for a series of "family issues", "plane delays" and "medical emergencies" that prevent a decent number of directors from fulfilling their physical attendance duties over 2012, followed by a themed inspection from the Central Bank!

Beware the Risk Manager - part of the problem or the solution?

2011-11-02T13:29:00.000Z

Piece in Risk Management Professional today about the pitfalls of reliance on risk managers, from a presentation given by Psychological Consulting a couple of days ago.

While of course they have a product to flog, and so benefit from this particular angle, I certainly wouldn't agree that "[Risk managers] are the people who decide where the net is, how tight it is, and how big the holes are" (we facilitate that decision, and my god we'll police it), but his point on groupthink amongst like-minded risk professionals probably have some grounding.

Never thought of myself as part of the problem before though - does that make a maverick executive part of the solution?

Sessional Event at the Staple Inn Actuarial Society - Common Risk Classification system for insurers

2011-11-01T20:22:00.000Z

I will blog on this in extensive detail once I replace my broken laptop - for now, please find the paper presented at Staple Inn yesterday from Patrick Kelleher and Paul Klumpes (et al) here.

I have blogged positively on the abstract of this paper in the past, as it seemed to be the panacea to a number of categorisation issues for ERM practitioners in insurance companies, and having attended last night's presentation of this in person, I am no more disinclined to think this has genuine ERM merit for anyone in the insurance sphere. The age-old problem of checking off the easily quantifiable "Big 5" categories then wondering how to pick off the scraps is addressed here in no uncertain terms, so I implore you to have a read.

More extensive coverage of the sessional event will follow, I just need a quick trip to PC World*...

*Other electrical retail outlets are also available - we don't do product placement at Governance Matters!

Capital Management in the new regulatory environment - Towers Watson

2011-10-25T20:09:00.000+01:00

A cracking piece from TW on capital management in Solvency II context, highlighting a number of critical areas for consideration as we approach ORSA public consultation. I noted;

Experience of the Swiss Solvency Test on capital, which TW suggest caused such an immediate shift in capital strategies to accomodate (i.e de-risking Asset/Liability mismatches and purchasing additional reinsurance), that one's current capital plans should be revisited for future-state appropriateness , and not just taken as read.
A suite of 7 key questions on capital management - all of these worth asking at any juncture, but even more so now.
The capital management toolbox depicted is worth considering in the context of potential management actions in the ORSA
Big section of branching and redomiciling, in the context of (publicly commented on by the head of the Irish regulator) "hub and spoke" approaches to reducing capital requirements, in the absence of the Group Support elements of early Solvency II drafts. The Central Bank is having to think specifically about the practicalities of supervising such arrangements, I guess on the premise that, with 12.5% corporation tax, they might be the main landing area for such schemes!

All in all a very good, and very timely effort

PwC, Central Bank of Ireland - ORSA Briefing

2011-10-25T19:52:00.000+01:00

For anyone who just cant wait for the ORSA public consultation next month, PwC and the Central Bank of Ireland have clubbed together to publish this presentation on ORSA (given last week).

From the CBoI section I would flag;

Firms already have "some" of the components of ORSA in place - in a country where the Financial Condition Report is alive and kicking, you might expect more confidence than that!
Most of the rest of CBoI's presentation very plain vanilla - concerning if you are looking for firm guidance.
Not sure how the Q&A went - if anyone attended, I'd love to know!

From the altogether more monied PwC, I would flag;

Nice process maps that should visualise the suite of work that will ultimately comprise of an end-to-end ORSA process, including the reporting which spews out of the back end.
A decent attempt at prescribing an ORSA Report structure (of course, if you have seen one punt from the consultancy firms at an "ORSA Report", you have seen them all, buit this does elaborate on each section).

Useful for anything you can extract from it, most concerning perhaps is the divergence in certainty and standard of presentation between the big 4 consultant and the regulator.

AON research paper - Solvency II revealed

2011-10-25T19:35:00.000+01:00

AON have fired out another worthy paper regarding the changing landscape for insurers during Solvency II implementation, as well as what an "optimal" insurer will look like post-Solvency II.

I enjoy reading anything that looks at post-Solvency II implementation, as well as anything which touches on the reinsurance potential on the capital requirements front, so this was right up my street. I particularly liked;

Their process for optimising insurance risk and asset strategy in tandem (rather than the two, being the preserve of the actuarial and investment functions respectively, being operated in isolation)
Articulation of "risk appetite" as a percentage of own funds surplus volatility above and beyond SCR (interesting way to communicate it)
Table on capital changes for market risk and implications for insurers by sub-module - easy to digest
Good sections on Catastrophe risk (if that is your cup of tea!)
Ratings agency drivers, which stress the importance of transitional measures (for orderly transitions to preferred Tier 1 capital vehicles), the likelihood of ORSA-related criteria on future solvency sliding into their assessments.

Nice sales pitch for ReMetrica at the end as well - for all your ORSA needs...

Towers Watson paper on Extreme Risks - useful for Reverse Stress Testing

2011-10-25T18:53:00.000+01:00

For anyone who has reverse stress testing on their agenda, this release from Towers Watson should help you on the "unlikely but extreme" events front.

They categorise these events into three types - Financial, Economic and "Other" (being environmental and political), and provide 15 solid risk events, some ideas on ranking, hedging and parameterising impact and likelihood., all of which are valid in the face of a lack of guidance from EIOPA on the subject at this juncture (remember ORSA requirements!).

Certainly worth using in your next FSA-driven reverse stress testing exercise if you are UK-based, and considering in the context of the forthcoming public consultation on ORSA for the rest of you Euro-landers.

ABI - Solvency II Bulletin for October 2011

2011-10-21T13:48:00.000+01:00

The ABI have put their Solvency II Bulletin out today (link is to the pdf version, as there is something weird going on with their HTML version!).

Plenty of goodies in here, in particular;

Omnibus II update - confirms that the trialogues are in the offing, but also that Parliament will not have its text for bringing to the negotiation table until late November. Any danger this is a bit late, and that February 2012 might be a push for Parliament to sign off on the negotiated text with their plenary vote?
Also confirms that the 'outsourcing' of drafting Level 2 measures by the Commission to EIOPA via ITS or RTS also needs to be agreed with Parliament (who would of course lose the right to reply on some of the content subsequently produced.
Decent timeline diagram for anyone who needs one (p3)
Reporting templates consultation coming in November - also mentions that their will need to be national-specific templates (highlighting importance of with-profits business in the UK, but same for other countries and their favoured savings vessels).
Confirms that the ORSA consultation is also about to kick off with the Level 3 guidance paper soon to be released (most of the industry has of course seen the early draft of this, so it will be interesting to see what has changed).

PwC Annual Corporate Director survey 2011 - more time for Risk?

2011-10-19T18:23:00.000+01:00

PwC kindly fired out the findings from their (US-centric) poll of corporate directors. Decent sample at 834 respondents, and two-thirds were sitting on boards with $1bn+ in revenue, so worth heeding. Both RM Professional and Norman Marks have taken it to task, so I won't dwell on the findings other than the following;

72% would reconsider pay awards in the face of "significant shareholder dissatisfaction" - just wondering what "significant" is.
Relatively little planned change in reaction to clawback legislation embedded in Dodd-Frank
Almost 60% of boards wanted to spend more time on Risk Management, putting it third behind Strategic and Succession planning
Less than 10% plan further than 5 years ahead
Almost half discuss strategy viability no more frequently than annually
Amusingly, both racial and gender diversity is referred to as a "Skillset/Attribute" - 23% find it very difficult to obtain directors with the racial "attribute", while 15% struggle to get the "gender" one!

Handy in its own way for the Europeans amongst us as a proxy, a more pertinent document for the statesiders.

Solvency II Internal Model Validation slides - from the US!

2011-10-19T18:05:00.000+01:00

Of use to anyone working on internal model validation, I clocked this presentation from one of Ernst and Young's finest across the pond. Some useful context within it, particularly showing where the E&Y guys have come across gaps in validation policies, methodologies, documentation.

This is all in the context of the States' own preparations for ORSA under the guise of the NAIC (indeed I touched on it the other day), but is of course very handy on our side of the Atlantic!

Institute of Risk Management - presentations on Risk Culture and embedding risk management

2011-10-19T18:00:00.000+01:00

Delivered last week at the Solvency II Special Interest Group were a couple of presentations regarding embedding risk management and "risk culture". I generally think that "culture" is something you find in a yoghurt pot, but to be fair there is some good stuff in the materials below;

IRM Chair's presentation - some nice elements in this, such as

Risk culture being "at its simplest...how 'risk management' is factored into decision making" - I would go further and make this the most complex definition, rather than elaborate
Nice transposed diagrams of how certain risk cultures need to implement ERM in certain ways

Survey on risk culture and embedding risk management - remember at 28 participants it is a small sample, but flags the following;

Around half are lumping "risk culture" and "embedding risk management" into their (Risk?) Solvency II Workstream (i.e weren't planning for it otherwise)
Quarter had no sponsor for risk culture work
Around 30% cited "lack of access to management time" as a challenge
No real favoured technique for assessing risk cultures or embedding risk management - number of options cited
None of the 9 relevant participants had received a "poor" rating from S&P for their ERM structure
Not many outliers on the questions regarding risk governance, risk resources, risk transparency and responding to bad news - most were 2/3 out of 4
Few more outliers in questions on risk competence, making risk decisions and rewarding risk taking - suggests that, while companies are relatively competent at 'playing at doing risk', at the sharp end the relevant skills and attributes are by no means compulsory

Not exactly my cup of tea this subject, but this is still useful stuff.

Van Hulle, Bernadino, SIFIs and Solvency II "chafing"

2011-10-17T20:11:00.000+01:00

It was raining comment on the Thomson ILS news today (may need to subscribe, but it's free and worth it). Both van Hulle and Bernadino are quoted as playing down the significance of any decisions made on SIFIs, or "too big to fail" insurance institutions (as I recall there is some kind of decision pending, or may indeed have been released, on SIFI criteria).

Sr. Bernadino (our EIOPA big-hitter) is more concerned with low investment return and high inflation than the threat of SIFI classification on the insurers under his watch, while the thought of additional capital burdens for any EU insurers that qualify as SIFIs is "complete nonsence" to van Hulle, the Commission's Solvency II scribe.

This all despite KBW claiming that only a couple of insurers will fall inside the net (though I think this may have been US-HQd only).

Finally, AM Best got in on the act after the delays announced to Solvency II implementation last week - as well as highlighting the benefits of preparedness from a mergers and acquisitions angle (which may now also be put back a year), they also add that, while smaller companies are probably happy to receive an additional year of prep-time, the larger companies "may chafe" at the delay.

I have a nice cream for that...

Solvency II and CRO jobs - speech from president elect of the Institute and Faculty of Actuaries

2011-10-17T19:52:00.001+01:00

Some very intriguing words spoken by the incoming president of the IFA regarding the challenges and opportunities for the Actuarial profession in Asia (summarised at the Actuary Magazine). As you know I keep a watching brief on the likely collision at C-suite level between the Risk and Actuarial professions, and so I pulled the following out from the "opportunities" themes in Mr Scott's speech. They were;

The skills of actuaries helped keep the insurance industry out of the headlines during the "enormous economic storms" (pulling a rabbit out of an empty hat for an encore I guess...)
Acknowledges that Solvency II does not require an actuarial function to be run by an actuary
"...Many [actuaries] will expect to be able to find employment in the risk function
Lines up a few soft skills which will need to be enhanced in this regard (improved comms and decision making understanding, as well as "becoming more risk focused")
Skills from the CERA qualification "should open up a whole range of career opportunities for those who take up the challenge"
Looking to define (with CERA) "the distinctive contribution that actuaries provide as practical, mathematically skilled, rigorous and regulated risk professionals"

I guess it is the last statement that would perhaps put one or two IRM/FERMA/GARP noses out of joint* - is the Risk profession itself so disregarded that the Actuarial profession can usurp the established offerings with CERA?

* I say this somewhat reluctantly as someone who, thanks to a rugby players errant knee, literally has his nose out of joint currently!

Allianz CFO and Solvency II

2011-10-17T19:25:00.000+01:00

Few nice nuggets of truth from the Allianz CFO on both Solvency II and IFRS, where he candidly stated that he has "expressed his concerns several times" on Solvency II from the perspective of onerous treatment of long-term guarantees.

NAIC, ORSA, ERM and SRQ - Acronym day!

2011-10-17T19:21:00.000+01:00

Saw this nice piece from Towers Watson on ERM developments Stateside (I had blogged on this from an ORSA perspective a couple of weeks ago). The pressure from the AM Best ratings agency seems to be pretty intense to this regard, and indeed Towers Watson's article here highlights what AM Best consider "leading" and "lagging" practices.

"Leading" practices have all the hallmarks of the IAIS/Solvency II world that we all know and love ("tolerance", "appetite", "risk-adjusted return", "modelling used in strategic decision making" etc etc). What is more enlightening is the section on "lagging" practices, as it seems pretty bold to say that by not adhering to the AM Best standards you are a laggard.

However, the stats are pretty sobering (and mouthwatering if you are consulting over there!). 90% of respondents' risk tolerance definitions were "too broad", 12% had no ERM Committee/CRO and 72% do not use internal models.

Towers (who have issued guidance on the 2010 iteration) go as far as to say that the new ERM section on Best's SRQ (Supplementary Ratings Questionnaire) will '...become more influential on ratings outcomes' and that this evolution will compel insurers to 'stay ahead of their peers and Best's evolving ERM criteria'. How the SRQ obligations marry into the ORSA guidance due out soon is another thing, but fascinating times ahead for the North Americans...

Solvency II/FSA reference documents catch-up

2011-10-13T20:33:00.000+01:00

Thanks to a dodgy laptop, I am a bit behind with blogging, although to be fair all of the real drama happened last week! I came across a number of handy documents this week which you might find handy, listed below;

Clifford Chance document "Guide to the European Union" - very useful if you have board training/briefing requirements and need to explain why Solvency II is taking so long!

Lloyds ORSA Guidance - in order to assist their syndicates in preparation for their December ORSA submissions, but obviously useful for all of us. In particular, they are not asking for a a great deal (15-25 pages), which seems a touch light, but probably proportional for a lot of syndicates.

SCOR Presentation at banking conference - Some cracking stuff in here related to risk, capital deployment and strategy in preparation for Solvency II. Model enhancements for Solvency II, diversification benefits, and risk appetite all touched upon in the slides, and should give you some good ORSA/MI ideas.

Milliman paper on Pillar III - Nice summary on the forgotten pillar and likely requirements!

Milliman legislative update - Generic and very useful Solvency II presentation from Messirs Claffey and Coatesworth which again should be useful for anyone who needs to explain to their Boards what the hold up is! Three slides on proposed timeline divergence between Parliament, Commission and Council are very sobering...

FSA Newsletter - Fresh from the horse's mouth, the Solvency II update (including last week's news on internal model application timeline changes) confirms that "we must maintain the momentum and stay focused on implementation", despite adding as much as 14 months onto some firms' model submission windows! The Small Insurers Seminar on October 20th sounds like it will be a hoot. Also a nice piece on reverse stress testing which should help anyone in ORSA land.

PwC piece on FTSE 350 strategic/risk reporting - Claims that, having studied the FTSE 350, less than half explain the impact of identified risks to their business model (despite almost all detailing what their principal risk are), and subsequently portrays the downside of this being felt in a marked-down share price.

Gender diversity on boards feedback statement from the FRC- a topic I have blogged on before, and one which is seemingly the zeitgeist. This came out almost hand-in-hand with the Cranfield school monitoring report on Women on Boards which is reasonably critical of progress to date (bearing in mind the political pressure commenced around February).

From a Solvency II project planning perspective, the issue in hand is reconciling the Fit and Proper requirements in the System of Governance articles with "decision making bodies" in 2014/15 being artificially loaded with female Execs/NEDs/function holders. Likely that I will blog more extensively on this from a pure governance perspective another time, but some good media comment already out on this document (see here and here).

GCAE minutes for September - Quiet month by the looks of it, though it does mention that at the International Actuarial Association meeting in Zagreb, they discussed ORSA and ERM "including the need for educational material and standards" - land grabbers!

FSA ask risk and internal audit to "step up" - Slightly provocative language from Andrew Bailey, where wimpy Internal Audit and Risk functions appear to be the "untold story" of the financial crisis (provocative but pretty fair?). His point on the role and influence of both functions not being as it should be is also fair, though I would have some truck with the suggestion that companies want the FSA to do risk and internal audit for them (I would actually rather they discharged their Solvency II obligations in a timely manner, cheeky beggars!)

"First Class" FSA - last but not least, delightful story on how much it costs to fly the FSA Chair and Chief Exec around - it certainly puts my annual Flybe bill in the shade, though there isn't a business class option to be fair!

More on FSA Solvency II delay to 2014

2011-10-06T22:03:00.000+01:00

Some cute contradictions beginning to emerge off the back of the FSA's pronouncement on extending the IMAP window to 2013 and the go-live date itself to 2014 - EIOPA's top man Carlos Montalvo warned the following day not to "put Solvency II in the fridge" (chillingly?), which is all well and good when Omnibus II appears to be pretty well refrigerated itself!

Similarly, Post magazine have reported that smaller firms will be relatively happy at the FSA's news on the basis that they are not as far down the road. Interestingly one of the "Big Small" firms, LV+, has an executive quoted in the Wall Street Journal no less to express his dissatisfaction at the "unhelpful" prospect of delay, and noting that they plan to crack on with a 2013 target.

It should be noted that the quote was pulled from a press release from some Marketforce research due to be published in November which seems to be focused on supporting the very early adoption ruled out in the same week!

IAIS - Revised Insurance Core Principles

2011-10-06T08:59:00.000+01:00

Only an optimist would think that, at 400 pages, the revised ICP document is a light read, but it has been approved after the IAIS meeting in Seoul (press release here). May be worth a quick cross-cast against Solvency II CEIOPS/EIOPA advice in the ERM, Capital Adequacy and Internal Model-related sections, but as these borrowed heavily on Solvency II at outset, the final revision is not likely to contradict.

In addition, the latest IAIS Annual Report and Accounts has also been published - some good commentary within this around the purpose and scope of the ICPs and ComFrame. The latter perhaps has more significance for anyone in the UK, on the basis that the FSA are citing groups as one of the reasons for extending the go-live date and IMAP approval process.

CRO to CEO - what's your skillset?

2011-10-04T18:20:00.000+01:00

As flagged on the Reputability blog, Allianz Re have recently promoted their Chief Risk Officer to the top job. Fantastic news for those super-ambitiousin the function, and tactit recognition perhaps that the balanced skillset of the latter day CRO is coming the boil nicely. You will notice that the blogger doesn't prescribe to CRO-to-CEO promotion, seeing the role as a destination, not a hub.

As an avid follower of activity on the CRO front (in particular the sustained attack on the role from the Actuarial profession as an alternative avenue to the C-suite), and was delighted to see that his background was...errr...Actuarial! To all you "Riskies" reading, please see the earlier comments from the FERMA VP on upskilling...

A nice translated piece was published by Clifford Chance regarding CROs in the EU (specifically with Germany in mind) - covers the EC green paper angles on risk governance and risk executives, as well as correctly highlighting that "Solvency II is a key ally in institutionalising the new role of the CRO"

FERMA Risk Conference - various content

2011-10-04T13:36:00.001+01:00

Seems to be a good amount of debate and activity over in Stockholm for the FERMA conference - I heartily recommend the blog.

So far the VP of FERMA has blown FERMA's trumpet, a futurologist (now there's a profession!)recommends looking out for "ninja" trends whilst referring to risk professionals as "sexy magician types", and the head of an enormous German bank telling us that "risk management deficiencies" were at the heart of the financial crisis (as opposed to avaricious bankers). The phrase schadensh*zen springs immediately to mind...

In addition, there was a nice piece on Captives under Solvency II (I liked the parallel between a tightening reinsurance market alongside the expense of allocating additional capital to captive vehicles looking like a double-whammy), and FERMA's VP in the action again recommending that the risk profession engages in some 'upskilling' in order to be engaged more fully with the board, noting "It is all about talking the language of the board...and that is financials".

I wouldn't agree with that, but I appreciate the sentiment in the context of the actuarial professions' upskilling exercises with the CRO/Head of Risk Function role in mind.

FSA Deadline for IMAP - formal extension to "mid-2013"

2011-10-04T13:17:00.001+01:00

After a week of innuendo and winks, the FSA have finally committed to removing the deadline for IMAP submission from end of May 2012 to "mid 2013" for anyone who needs the extension, with allocated slots being issued "which we and they must stick to" instead.

This has a whiff of issues around Group supervision, with the word 'group' standing out amongst the other criteria depicted that will determine allocation slots.

The press release of course confirms 2014 as the official go-live date in the UK, leaving 2013 as a parallel run year at this juncture (summarised in Actuary Mag). There will surely be a few dummies spat out at this, as this is very much a penalty for any early adopters or successful project managers.

This may have increased the likelihood of Lloyds et al's requests for approval to start using the model from 2013, as they will surely need to be thrown a bone after this news.

PS - More for the industry's benefit, or for the institution that is struggling to stay staffed?

NAIC - ORSA and ERM developments in North America

2011-09-30T00:14:00.000+01:00

Spotted this over on the Casact website, and though it was worth sharing - emerging ORSA approach over with our North American chums at the NAIC, which seems to be spooking some insurers who are quaking at the thought of a 2012 ORSA imposition and lobbying for more time (same on this side of the Atlantic fellas!).

Seems to be a bit of draft ORSA guidance on the go (along the same lines as our Level 3 document in the EU), and the one stand out piece for me was the projection of capital requirements between 2-5 years out - seems instinctively light for insurers to project no further than 5 years, but maybe the long-term guarantee piece isn't such an issue Stateside.

There is also an enlightening piece from AM Best on the same document regarding their Supplementing Rating Questionnaire, how best to prepare for it and respond to it, and some benchmarking stats on positive responses to the questionnaire content. Sadly I don't get to dabble too much in this area, so if any of the Stateside readers have any experiences to share on ORSA progress or ERM SRQ completion I would be interested to hear.

GCAE Minutes - "effective co-operation between European institutions"

2011-09-29T23:00:00.001+01:00

I had almost forgotten to post the link to the Groupe Consultatif's minutes for September - concise and clear as ever. Some interesting plans on a potential position paper on ORSA, and some IFRS/Solvency II convergence work.

Nice of them to plant a seed of uncertainty with the headline "Planned implementation of Solvency II on 1 January 2014 depends on effective co‐operation between European institutions and on action by member states". This has the air of fighting talk from EIOPA, who they met with in the month.

CROs and the Society of Actuaries in Ireland - from the President's mouth

2011-09-29T21:19:00.000+01:00

A subject very dear to my heart (from a self preservation perspective more than anything!) was the subject of additional comment in the President of the Society of Actuaries in Ireland when giving the president's address for 2011.

Whilst he naturally states (p8) that the head of the actuarial function roles will be the preserve of the current holders of appointed/signing actuary roles, and that "any other outcome would be bizarre", he then goes on to talk of the "big Solvency II prize for us as a profession" of leadership of the risk management function, which anecdotal evidence suggests is a role favouring the actuarial profession ahead of other disciplines.

Of course while I would love to counter the argument with the Institute of Risk Management's suite of arguments in favour of the risk management profession (blogged on extensively already), I then found that the latest CRO hire was of course an actuary (making the score 3-0 to the actuaries since I started keeping it)!

Time to step up our game 'Riskies'...

ABI Report on Board Effectiveness - board diversity

2011-09-28T23:12:00.000+01:00

The ABI pushed out the findings from their research on board effectiveness, predominantly covering diversity, succession planning and board evaluation. The document itself will be available from tomorrow (the ABI press release link is the best I can do), but I had a look through an advance copy.

The purpose of the report is to focus on the three areas above that they believe "can help ensure an effective board and ultimately contribute to the success of the company", and they make a suite of best practice recommendations. Diversity is more on topic for me, as I suspect smaller insurers may struggle to meet any formal or informal quotas by 2015, while simultaneously meeting the Fit & Proper requirements of the management body under Solvency II, without padding out board with token non-exec female representation (and indeed the ABI allude heavily to tokenism in their advice).

The recommendations cover making the achievement of diversity a key objective when making appointments; stating steps taken to achieve it, and expanding on these in AR&A documents; widening the search for NEDs; developing more women throughout the corporate pipeline; and setting and reporting on objectives to promote gender and other diversity in companies.

I found that the advice is a little light and contradictory - while extolling the virtues of diverse boards, the ABI are against quotas for example, citing the likelihood of "two-tier" boards (two-tier, but better surely?). Norway is cited negatively, which is surprising, and the "marked increase" in 2011 female appointments does not appear to have been linked to two-tierism, despite the speed at which it has materialised pointing towards a "quantity not quality" scenario.

There are a couple of good bits covering attrition rates at FTSE 250 firms (smaller boards, lower attrition, and therefore should evidence their plans and objectives, rather than be obliged to artificially meet target level of gender diversity. They also show a good example of the problems on the hiring front, where one company was previously receiving almost exclusively male long lists for NEDs (now rectified by the recruitment firms voluntary code which requires 30% female representation on the lists).

Finally, a couple of amusing best practice examples - the Man Group and Mothercare are both cited for good work in this area. Coincidence, or does someone at the ABI have a sense of humour!

Clear Path Analysis - Van Hulle interview, legislative path, Omnibus II and more

2011-09-28T20:50:00.000+01:00

Fantastic body of work released by the guys at Clear Path Analysis (need to sign up) - extensive interviews with Karel van Hulle, EIOPA representation and insurance industry senior figures (and as a sponsored piece, surprisingly unaffected by hard selling!). A few revealing pieces from the van Hulle commentary;

Sovereign debt - confirms the Solvency II approach on zero capital for EU national debt instruments copies the CRD4 approach in banking and that "we need the same approach", while going on to say cryptically that "when events change then the regulation will have to change as well"
Go Live date - "believes it is the final revision"
Omnibus II - end of the year for clarity, once parliament and council conclude discussions, with "early 2012" down for the parliament vote
US equivalence - notes that "all discussions with the US are difficult" (saucer of milk?), but has optimism as they "seem to be moving in the direction of Solvency II". Not quite the message being sent across the Atlantic, even if true!
EU regulator - "We have to see how [EIOPA and sisters] work first before we can go to the next stage"
Transitionals - national regulators should not be able to vary the transitional measures to create regulatory arbitrage
EU Parliament's advice on reintroducing regulatory technical standards - "The Commission does not believe that this is necessary"

The following was also useful for calendar planning/expectation setting on your project plans;

Trialogues between Council, Parliament and Commission commence in November to develop common view on Omnibus II (my last point from van Hulle's comments I suspect will be high on the agenda!)
EIOPA major consultations will commence in November this year (on ORSA and the Reporting Package/templates) and mid 2012 on standards they are expected to write.
EIOPA still focused on Jan 2013, regardless of phased approach in Omnibus II

ABI, Lloyds & the FSA - behind closed doors...

2011-09-26T13:28:00.001+01:00

Flagged elsewhere on Friday, I read through the FSA committee minutes which noted that “contingency” may be required (p3) if Solvency II is not implemented by 2013 – no mention of what that will consist of, though it sounds ominous and probably ends with the words “-million pounds”.

Also reported on Friday, the ABI and Lloyds are looking to lobby for a 2013 go-live date, regardless of the content of Omnibus II, so that Lloyds’ existing ICA process can be jettisoned and replaced by Internal Model SCR (thus restricting the dual ICA/SCR obligations to one year). I suspect they will have plenty of people who would ride on their coat-tails if they can squeeze this one through!

Omnibus II update - implementation plan shenanighans

2011-09-26T13:19:00.002+01:00

The European Council pushed out the July version of the Omnibus II draft at the end of last week (a little late perhaps, but the Europeans do go on holiday for August I guess!).

Changes from the June version include;

Introductory paragraph added on ensuring that continuity and development of long-term guaranteed business is not impaired when developing this text.
EIOPA now obliged to produce technical information on the Equity Risk sub-module of standard formula
Supervisors will be applying laws and regs required to comply with implementation plan requirements from 1^st April 2013 (this was from 30^th June)
Guidance from EIOPA on what the “implementation plan” requirements are still expected on 31^st March 2013 – must now also contain guidance in the context of proportionality.
The implementation plan must specify which, if any, transitional measures will be utilised.

Most significant one seems to be the third one – I can’t fathom why they have expressly said that regulators need to be able to police the implementation plans in April 2013, if they are not due to be submitted until June 2013.

It may be that the national regulators have lobbied to be able to check up on companies pre-submission to make sure the implementation plans are compiled to their liking first time round. With little room for latency, I suppose that would make sense.

Business Innovation and Skills department – “Strategic Report” – anything to borrow for SFCR/ORSA/RSR?

2011-09-20T23:56:00.002+01:00

This came out in the week from the Business Innovation and Skills department in the UK - the recommendations clearly impact on the presentation of materials for listed entities, with a "Strategic Report" replacing the various patches of random guff that normally turn up in statutory releases to the market (boiler-plate and pretty offensive in its lack of stakeholder appreciation).

I'm thinking along the lines of Pillar 2&3 in the context of this, particularly if there are some economies of scale which can be generated by sharing information between the Strategic Report and ORSA/RSR/SFCR for insurers - one for your project plans maybe?

North American ERM/Solvency developments

2011-09-20T23:26:00.000+01:00

The guys over the pond are having a busy week (actually two ponds for me, coming from the Isle of Man!), so worth summarising here.

RIMS Conference is underway over in Canada, and while I will need to wait before I go hoovering up material, the Risk Management Monitor dropped this curious piece out on top ERM mistakes - a little hard to substantiate some of the examples, but relevant nonetheless, in particular #5 on the difference between risk appetite and risk tolerance (lack of definition somewhat addressed in the IRM's release last week).

The Canadians, US and Bermudans got together for a group hug in the inaugural North American CRO Council. A very handy looking agenda to start with, particularly "industry leading" emerging risk research and 'harmonizing regulatory capital requirements across jurisdictions' - is this the promised "equivalence on a true outcomes-basis" as alluded to by Mr. Leonardi from the NAIC last month?

Last thing was the NACD Directorship roundtable on the new realities of risk management summarised here. Of particular interest was the attitudes noted, such as; which elements of risk oversight need to be addressed by the full board; need for specialist risk committees (not required outside of financial services); directors saying the are receiving more information on risk than ever before (quality a likely casualty I suspect); Risk managers said to be "less than optimally familiar" to the directors, and then some very generic comment on CRO's, risk and strategy alignment, risk appetite, material risk and risk culture.

My concern with this is that it sounds very much like the output from a lot of these round tables, where the 'risk rabbit' on good practices fills a gap where a more substantial discussion on defining terminology and responsibilities would be more useful.

Guy Carpenter briefing - succeeding under Solvency II

2011-09-20T22:06:00.001+01:00

Nice all round document from the guys at Guy Carpenter on Solvency II, which touches (naturally) on impacts on the reinsurance industry, but also covers broad trends across the insurance industry, particularly in the world of cost-effective/capital lite risk mitigants. The following aspects stand out;

Benefits of transparency and security felt to be outweighed by the challenges of Solvency II
Nicely merges the added cost of compliance for reinsurers with the additional business which will be generated by market demand for reinsurance as mitigant.
They feel Solvency II will help with consistent analysis of reinsurer strength
ILS market again cited as one which benefits from Solvency II pressures on capital bases
Stress the drawbacks of the current standard formula for cat risk, which pretty much forces carriers of non-EU cat risk to apply for internal model approval due to the capital charges as currently calibrated
Strange stats on UK multinational Solvency II costs (£100m quoted as being set aside) - I am assuming this is non-Lloyds reinsurers only, as that barely covers the last 6 months for the Tier 1 companies.
Section entitled "costs may be exacerbated by potential regulatory inefficiency" made me chuckle!
COver the main mitigants available (and of course where their expertise can help!) such as reinsurance, ILS, hedging, diversification techniques and M&A
Good material on the underwriting cycle and how the standard formula simplifications work contrary to it.

IRM principles on Risk Appetite and lessons from UBS

2011-09-20T00:03:00.000+01:00

Pretty interesting finish to last week, with UBS getting spanked for a cool $2.3bn through the now-typical route of a back office know-it-all getting promoted to the trading desk and circumventing the plethora of internal controls designed to stop the very activity they and they alone know how to take to the n-th degree.

I thought of this when looking through the IRM's risk appetite and tolerance paper released at the end of last week (separate post to follow incidentally, only so many hours in the day!), specifically whether there was anything being promoted/supported by the institute which may have averted this rather grim result for the boys from Berne.

6 IRM principles to start with;

Risk appetite can be complex - don't try to dumb it down if it isn't justifiable
Risk appetite needs to be measurable
Risk appetite is not a single fixed concept
Risk appetite should be developed in the context of an organisation's risk management capability
Risk appetite must take into account views at strategic, tactical and operational level
Risk appetite must be integrated with the control culture of the company

Sadly for the profession, the risk governance set up at UBS is paper-perfect in this regard, so I dare say the CRO may feel obliged to hand in his cards. This despite the fact that, as with the Leeson and Kerviel cases beforehand, if you personally know the gaps (and the reward is great enough) the rogue trader is nigh on unstoppable by the second line of defence in these kinds of organisations. However, it looks more of a "should have done better" case for the second line, and should categorically be used as a counter argument to the dismissive tones of management when discussing risk limits and qualitative tolerances.

Some great quotes below from their website (highlights are for my benefit);

High Level – Risk Management and Internal Control

The [risk controls]framework is dynamic and continuously adapted as our businesses and the market environment evolve. It includes clearly defined processes to deal with new business initiatives as well as large and complex transactions.

Risk assessment and management oversight performed by the BOD considers evolving best practice and is intended to confirm to statutory requirements

Risk Appetite

Our risk appetite framework establishes risk appetite objectives in respect of earnings and capital levels that we seek to maintain, even after experiencing severe losses over a defined time horizon.

Our risk appetite is approved by the BoD. Risk appetite is based on our risk capacity, which is in turn based on our capital and forecasted earnings resources. Our overall risk appetite is set as an upper limit covering the aggregate risk exposure for each risk appetite objective, taking into account inherent limitations in the precision of risk exposure measures that focus on extreme market and economic events. Comparison of the firm's risk exposure with our risk capacity under prevailing operating conditions as well as prospective business plans serves as an input to the risk limit framework. This comparison is also a key tool to support management decisions on potential adjustments to the risk profile of our firm.

Operational Risk-specific

Management and risk committees are the governing bodies responsible for oversight and active discussion of risk management activities, including the question of whether or not the cost of mitigating actions is adequately balanced against the acceptable level of operational risk. Management, in all functions, is responsible for establishing an appropriate operational risk management environment, including the establishment and maintenance of robust internal controls and a strong risk culture.

Material operational risks and significant internal control deficiencies are identified and reported at least quarterly to stakeholders, including the BoD, GEB, divisional/regional/local management, Group Internal Audit, external auditors and regulators.

We have developed a model for the quantification of our operational risk, which meets the regulatory capital standard specified by the Basel II advanced measurement approach (AMA). Our model has two main components. The expected loss component is a statistical measure based on our own historical loss experiences (collected since 2002), and is used primarily to determine the expected loss portion of our capital requirement. The unexpected loss component is based on a set of generic scenarios representing categories of operational risks that are relevant to the firm. The scenarios are reviewed extensively on an annual basis by internal experts, using internal and external event information, information about the prevailing business environment and our own internal control environment. This component is used to determine the unexpected loss portion of our capital requirement.

Risk and Reward

Over the last two years, we took comprehensive steps to help ensure that our compensation plans and processes were re-designed and implemented in such a way to ensure appropriate risk-taking.

Active Risk - 'What makes a great Risk Manager' results...

2011-09-16T00:28:00.001+01:00

I participated in a survey a little while back about "what makes a great risk manager" which involved looking at personality traits, and the guys at Active Risk posted the results today.

While I was hoping the results would look like my CV (!), there were some interesting findings from the 200-ish sample;

Categorises risk managers into Traditionalists (from the 'department who likes to say no'!), Drivers (who are pragmatic and impatient) and Evangelists (who have the CRO style, without necessarily the substance. The split of respondents was 60/10/30 respectively. The obvious thought for me was that this was the perfect ratio of the three skillsets to arrive at a quality Chief Risk Officer, and the conclusions touch on this throughout.
Suggests traditionalists may be holding their companies back due to presentational shortcomings (probably fair), while Drivers should understand their impatience can come over as aggression and Evangelists should wind back on what I like to call 'risk rabbit' (where throwing terminology left and right leaves the consumer disinterested or confused.

Should certainly be of interest to my friends at Clarity Resourcing, as these kinds of considerations cross over most industries when fishing for risk talent - I hasten to add that I can't immediately recall what I was classed as!

Late post-script - found my personalised report, and I was down as a "reactive extrovert" - I'll settle for that!

AON Report on Regulatory, Accounting and Rating Agency critera changes

2011-09-15T00:50:00.000+01:00

A decent piece from AON covering influences of Solvency II (amongst other similarly flavoured risk-based capital regulatory influences), IFRS, and ratings agency criteria for ERM on capital allocation strategies.

Some (surely sympathetically sampled) stats are included on how ratings strength will be more important than Solvency ratios - remains to be seen which measures are preferred for economic capital measurement for those who don't necessarily want or need to chase ratings agency favour.

Also includes country specific details on ORSA in the US, Risk based capital in Asia and Latin America, and references the AM Best supplemental rating questionnaire for ERM, which sounds like there might be some merits in reading

IRM Risk Appetite Guidance released

2011-09-15T00:14:00.000+01:00

Closely associated with the last post, the IRM have pushed out the results of their consultation on Risk Appetite. I'll pick through this next week, so help yourselves via the link in the meantime

Society of Actuaries in Ireland - newsletter treats

2011-09-14T21:23:00.000+01:00

As ever, the Society of Actuaries in Ireland produced a riveting read this month, with some hot topics covered very succinctly, and useful to multiple jurisdications for benchmarking.

Risk Appetite (specifically how best to communicate and document it) is particularly prominent with new obligations under the corporate governance code kicking in throughout this year, and the Society's ERM committee hauled in one of the CBIs top men to talk through options, with another couple of private sector big hitters. I spotted in particular;

Risk Appetite Statement cannot be vague, and should include some financials
Traffic Light system of monitoring was viewed favourably (amber being a warning sign to act)
Breach alerts best in real time
Solvency I and Solvency II measures matter - so don't rush for future state
Very sketchy response on how to quantify "material" breaches of appetite, with no response documented from the regulator in this letter
CBI want to know about "misses and near misses" - not quite sure about what the difference is frankly - are we now tiering 'misses' into categories? RAG's and traffic lights?
No firm guidance on quantifying appetite for Op Risk
Willingness (from the floor I imagine) for CBI to use standard definitions for risk appetite/tolerance/preference - amen to that brothers!
Risk Appetite Statements should not be purely downside based

I must highlight the spectacular comment that "The risk appetite statement ensures decisions are made by the business rather than just by actuaries" - there's an eyeopener for all you insurance CEO's that thought you were the boss!

Some other very cute stuff included on Internal Model progress (a massive 45 models in the IMAP process - good luck staffing that!). On a serious note, one suggestion from the CBI was for 'independent validation' engagement documents to be submitted to the regulator to ensure they pass muster, which suggests there is a hot market for this type of service.

Two other parts of this jumped out. A sharp piece on diversification, where the CBI acknowledge that heavy use of expert judgement is anticipated, and point towards senior management understanding and ensuring the statistical quality standards can be met as aspects to consider.

The second linked piece was whether, as Insurance is a "mathematical business", that it is "not too much to expect" that the board and senior management to understand copulas and variance-covariance matrices.

You can tell that to the ex-politician NEDs first buddy...

Chief Risk Officer activity

2011-09-07T23:51:00.000+01:00

LV+ got in on the CRO staffing activity in advance of Solvency II this week, pitching a finance-oriented executive into the role, with a remit of embedding an ERM Framework and managing Solvency II. In line with previous posts, I'm not sure who to score this one to (probably not the Risk team), but important to note the reporting line still going into the CEO.

On topic, but bank rather than insurer as the example, the Reputability Blog picked up on a slightly different organisational problem that I suspect will become more prevalent over the next couple of years - namely that with the maturity of the CRO role comes an ambition to be more than the CEO's "angel on the shoulder".

Larger financial services organisations may find their CROs develop something of a wanderlust if they don't expect a reasonable shot at the top job will be forthcoming (indeed an earlier blog post highlighted that a company Stateside is using the role as CEO training). I would have thought this is even more of a strategic issue for insurers, where existing CRO/de-facto CROs will be critical to Solvency II delivery plans, and will of course have extensive knowledge of their respective institutions' economic and regulatory capital weaknesses after 2+ years of project graft!

CEA releases - SIFIs and ComFrame

2011-09-07T14:04:00.001+01:00

The CEA got busy this week with a double release, covering their feedback on the IAIS's ComFrame proposals for group supervision, and feedback on ongoing discussions on SIFIs.

As far as ComFrame goes, they express that they feel it is too prescriptive, and potentially onerous for some groups ahead of others. They do not agree with the introduction of "living wills" for insurance companies (in the same way that banks are being obliged to document 'orderly wind-down' strategy in the UK for example). They also highlight that it does not address minimum standards at national level, so could be viewed as an additional layer of compliance for groups.

The CEA go on to countersign a separate letter with a number of other insurance associations to highlight these viewpoints.

The response to the ongoing SIFI work of the Financial Stability Board reaffirms the position of the CEA (and indeed the Geneva Association who have been vociferous on the matter) that insurers, by nature of their long term and less portable liabilities, should not be subjected to the same categorisation and timeframes as the banking industry. Cognisance of the ladder of intervention afforded by Solvency II is also requested.

Financial Reporting Council - new guidance on company stewardship and public reporting

2011-09-02T00:45:00.000+01:00

Just in case you UK insurers don't have enough to factor in to your next annual report and accounts (least of all commencing the alignment piece between SFCR/ORSA content and the risk/strategy/capital aspects of your existing reporting releases) , the Financial Reporting Council (FRC) have dropped a couple of grenades into to mix with this release on Effective Company Stewardship, and perhaps more significantly for our kind, the expanded commentary regarding Boards and Risk which was gleaned through a range of interviews.

The stewardship document obviously has some "comply or explain" regulatory relevance for UK readers, whereas the second is a phenomenally useful benchmarking tool to match up against your own board/executive/committee considerations of risk regardless of your jurisdiction.

The stewardship document then focuses more on reporting obligations, in particular Audit, and the associated consultation was triggered in Jan 2011. I was drawn to their findings on reporting "Strategy, Risk and Going Concern" which touch on communication of risk appetite, namely;

"differing views as to whether it is either necessary or possible for a board to apply a single, aggregated definition of its appetite for risk as a whole"
"when developing [the] strategy however, it is important for boards to agree their appetite or tolerance for individual key risks"
"reporting on the company's risk appetite was felt to be difficult, even if it could be defined, as risk appetite is not constant but varies depending on market conditions

The FRC's proposals were therefore (on the basis that the legal obligation is to report on "principle risks and uncertainties);

Focus reporting primarily on strategic risks (as opposed to those which occur without company action) and
Disclose such risks to business model and the strategy for implementing said model
Not to "scatter" descriptions of the risks faced by the company throughout the document

All of this is a little plus ca change for insurers, who are already pretty good at these aspects!

The second document carried additional interest for me, bearing in mind it collates genuine opinion of the decision making bodies on their existing risk management obligations (and therefore could provide insight into future issues with Use Test evidence, ORSA processes and SFCR/RSR sign-offs). They reiterate that this is not guidance!

Obvious headline from this work is that the Turnbull Guidance will get a brush up in 2012, but I also picked out the following aspects;

Risk Committee should not be obligatory for all industries
Boards need to focus on risks that undermine strategy or long-term viability (i.e Reverse Stress Testing)
The "velocity of risk" meant that reputational risk requires greater attention
Essential that boards should focus on "gross" as well as "net" risk (inherent and residual in our lexicon)
Challenge of determining whether a particular risk should be brought to the board's attention remains one of the greatest challenges
Risk and Internal Audit should have clear reporting lines to board committees
Investors are seeking "more meaningful reporting on risk", much like that prescribed earlier
Risk categorisation terminology used is relatively crude (operational and strategic risks being the main distinction made)

I suspect most insurers would rest pretty easy if they benchmark their ERM frameworks against the contents of this paper.

Article - Journey's end for Solvency II

2011-09-01T23:35:00.000+01:00

Well researched article in Financial Risks Today (including a name check for yours truly!) is worth a look - it covers quite a lot of ground and references a suite of research and comment, so you might find it useful as a one-stop shop.

Leadership, psychos and moon faces

2011-09-01T19:14:00.000+01:00

On the corporate governance front, please be on the look out for any psychopaths or wide faced execs who may be the causes of your strategic undoing...

Solvency II and asset allocation - mixed messages

2011-08-31T18:39:00.000+01:00

There seems to have been a suite of materials on Solvency II and predicted asset allocation impacts recently, from the great and good (Gideon on the Solvency II Wire has kept on top of these, and I took a look at the Oliver Wyman/IIF document last week - much of the materials pointed towards a drive towards short term EU government debt (capital-free, and no duration penalties) ahead of where an insurer may traditionally have invested for policyholder benefit, corporate (and specifically bank) debt.

There were some left-of-centre views that I spotted, one from a representative of Markit opining that, in the current climate, government debt was now being viewed as riskier than Western European corporate debt. Another covered the potential for Insurance Linked Securities demand to increase under Solvency II, thus necessitating more issuance to be EU-based (as opposed to traditional homes Bermuda or Cayman). The third came from Union Banque Privee, with research cited in the FT that, with appropriate asset selection (cheeky derivatives used as examples), asset arbitrage will allow insurers to obtain exposure and performance without necessarily holding onerous amounts of capital as prescribed under Solvency II.

The first then indicates that the weightings may need a genuine re-examination with the Eurozone debt issues as the backdrop, while the other two suggest there are investment options to counter the new requirements. Is the IIF research therefore much ado about nothing, or perhaps is the mighty banking lobby having one last "flex of the guns" before its emasculation over the next few years?

FTSE Insurers - last but not least...

2011-08-31T18:13:00.000+01:00

Having tried on a number of occasions to complete the traipse through FTSE interims for Solvency II progress and mistakenly thought I was finished, Chesnara (a Resolution-style acquisition vehicle) dropped their results today - Reuters take on them is here, but I would highlight;

On target for the current implementation date of 1 January 2013. "...the exact date is currently being reconsidered by the EU and may be deferred to 2014”
[We] also believe that the current climate and the challenges of Solvency II will give rise to possible acquisition opportunities and [we] remain keen to progress these.
Current planning indicates that [we] are well placed to meet the deadline and that there is not expected to be any increased capital requirements in the Group's UK businesses.

Irish Life and Permanent also got in on the act - I had spotted a few years ago (p21 of the document, p23/24 of the pdf) that they were massively ambitious to enjoy the capital savings expected under Solvency II (this was pre-crisis of course!) Their ambitions seem rather curtailed now, commenting only that "The group believes that the adoption of Solvency II will increase available capital resources."

ERM benchmarking - Accenture - "High-performance insurer of the future"

2011-08-31T17:52:00.000+01:00

A decent effort from the guys at Accenture on identifying and explaining the kinds of strategies which in their mind will separate the insurance men from the boys in future.

They have researched 70 companies (mix of single line, multi line and multinational companies) and come out with;

A suite of KRIs to measure and benchmark corporate performance
5 Key attributes of "high performance" insurers; Customer-centric distribution, responsiveness to market, operational excellence, pursuit of cost reduction and focus on risk management
5 forces for change in the industry; growth shift to emerging markets, increases in technological development, escalation of risk and regulation, changes in consumer behaviour and changes in the competitive ladscape
6 distinct business models that should flourish

Very useful for benchmarking, KRI and ORSA purposes, particularly if you are working for a "multi" - the future growth aspects are likely to be hitting a strategic plan near you in the next couple of years...

Think piece from CII - rethinking risk management (Solvency II angle)

2011-08-31T01:16:00.000+01:00

In the context of the FSA's perceived wish to have more mathematicians in charge of Insurance company risk functions, it is always nice to wrap one's self in the comfort blanket of some views from the soft side of the fence.

This paper from Dr. Ashby, taking a sample of 20 risk management professionals (no mention of their backgrounds, which would have been handy in the context), is a look back over the causes of the credit crisis and how to negate such causes in future. It points at the following;

Consensus that inappropriate risk culture, poor risk communication and over-reliance on modelled risk assessment were significant contributing factors (both institutions and regulatory/ratings agencies highlighted). These are of course the kinds of aspects most difficult to attack without an appropriate remit and seniority (i.e CRO seat)
Recommends more of a balance "between modelling and judgement", to counter the increased focus on "objective measurement over effective management" - guessing the quota of pure risk versus actuarial-style in the 20 person sample was weighted towards my kind!
Fairly critical of risk functions for either alienating themselves from the business with a compliance-led approach, or for lacking the skills to communicate risk exposures
None of the sample agreed that Solvency II would lead to improvements in risk management.
Strangely highlights operational risk as an aspect of risk management "that does not lend [itself] to formal mathematical modelling" - couldn't agree less, and I'm not an actuary!

A worthy paper, good for benchmarking, and good for reassurance - well done to all involved.

Gender Diversity on Boards - the drive continues...

2011-08-24T14:00:00.003+01:00

Lots on gender diversity this week, which I keep a watching brief on for obvious corporate governance purposes as well as impact on the post-Solvency II board, bearing in mind the Level 3 guidance on System of Governance in the area of "collective knowledge, competence and experience of the management body" (Guideline 12).

The Guardian highlighted progress towards Lord Davies recommendations (where the 6 month "ticker" has almost "tocked"), and flagged that there is some rather specious cramming of female non-execs since February to get the numbers up (only 1 executive appointment since Feb!). Interestingly, the responses sent to the FRC on adding a piece into the Corporate Governance Code on promoting diversity have been mostly in favour.

Looks like the 25% target could be a while away yet, and may be against the spirit of Lord Davies intent if completed by using the Non-Executive tactic.

The FT also flagged up a drive in Norway to extend the 40% female quota past listed entities and on to large unlisted companies (where it currently stands at 17% in the numbers quoted). The positive criteria cited made me chortle with my own inadequacy, namely that female board candidates;

Are younger and better educated
Are less risk prone (NB as a risk professional I have no idea what to think of this "trait")
Are not as driven by high salaries and bonuses
Generate deeper and broader discussion

Evidence cited below this argues against, whilst highlighting that it is a fait accompli when considering the political persuasion of the current government.

Staying in Scandinavia, I checked out the recently revised corporate governance code in Denmark. Whilst they have a number of pieces on board "diversity", its benefits, and recommendations on regular reporting on diversity, they also slip in a clause (4.1.4) recommending the board discuss annually their activities to "ensure diversity at management levels, including equal opportunities for both sexes", as well as recommending that "measurable objectives" be set to this respect and publicly commented on.

Further comment gets to the heart of the recommendation by using the proportion of women at specific management levels as an example - they could just put the quota in and be done with it!

FT report on listed insurer's capital trends

2011-08-24T13:45:00.000+01:00

Just in case anyone missed out on Monday, the FT provided a quality summary on perceived advance capital planning by UK and EU insurers ahead of Solvency II. I say quality despite the couched terminology (SCR referred to as the "softer capital requirement"!)

The suggested SCR coverage targets referenced are interesting (125-150% in the UK, and as much as 170% in continental Europe) – I have heard generalisations on target SCR surplus before (in the context of economic capital targets), but the guy from JP Morgan obviously thinks he’s onto something.

I had a quick look, and thought Generali may struggle on the European side (they had 168% as their Economic Solvency Coverage on p23), but everyone else was well covered.

The schematic also highlights the increase in surplus capital pre and post-credit crunch.

Implications of financial regulatory reform for the insurance industry - IIF and Oliver Wyman Paper

2011-08-24T13:36:00.000+01:00

I managed to get a good look at the paper reported widely last week on how Basel III and Solvency II appear to have conflicting end-games, which could prove calamitous for banks should there not be at least some cognisance of each other's ambitions - thanks a bundle to the guys at Oliver Wyman for sending me a copy gratis (just fill in the form here to get your own, much trickier from the IIF website).

More important to note the additional lobbying angle and indeed the people behind it (Zurich's CRO and Swiss Re's CEO appear to be prominent in the IIF's insurance working group, with Allianz and Aviva also participating), rather than the minutae of the report (which is less than 30 pages regardless).

It of course points out the folly of EU government debt being "risk free" in the current environment, but also shows the differing capital requirements for corporate bonds in the NAIC, Basel III and Solvency II approaches, highlighting how relatively onerous long-term corporate debt will in terms of capital consumption, despite the fact that long-term bonds are ideal from an ALM perspective for many insurance products.

Bermuda, Solvency II and equivalence (and some US comment)

2011-08-19T13:48:00.000+01:00

No doubt you would have seen the release of EIOPA's equivalence work to date on Japan, Switzerland and Bermuda. Summary articles here and here if you haven't.

I will take a more substantial look at Bermuda's report shortly (in the context of Ireland's captive preparations, it could be a welcome fillip to the country if there is an exodus). They were certainly singled out as the least-well prepared, being criticised on a number of legal requirements as well as wholesale gaps in governance requirements and, more worryingly, capital requirements which, in EIOPA's words, "in practice can be very low for insurers with a high risk profile".

Interestingly one of the USA's finest insurance commissioners weighed in on equivalence this week. I suspect it was not intended as a sleight to refer to the prevailing European regime as "admittedly outmoded", though he appears to be to be staunchly conservative in his stance, commenting "...any equivalence process must respect the different legal and regulatory systems that exist around the globe".

A request perhaps to "respect his authoritaah" a la Mr Cartman? Certainly a view not shared by the queue of other countries wishing to attain equivalence, and a repetition of the IFRS/US GAAP protracted convergence the most likely result.

Irish Corporate Governance Code for captives

2011-08-19T13:27:00.000+01:00

The Central Bank of Ireland pushed out the Corporate Governance Code for Captives this week, which is to all intents and purposes a lightly abridged version of the main event.

My particular interest was their approach to governance and risk appetite, and there is no let-up from the obligations on insurance undertakings in this regard.

Full qualitative and quantitative documented Risk Appetite required - argued against by some in the industry on the basis of "natuire, scale and complexity"
Material deviation from Risk Appetite to be reported CBoI within 5 days - regardless of whether parent company or captive manager identifies it
"Where appropriate", the board may consider a risk committee
Internal Audit function required, but may use Group resource, or indeed outsource

Handy FAQ document accompanied its release - unlike in the consultation for the main code (in which almost every suggestion was ignored save for tiering supervision between 'big' and 'little'), they have actually made a few tweaks in response to the industry, which is very healthy. They have increased the transitional period by an extra 3 months, dropped the requirement for a deputy chairman, and permitted non-directors to aid in the development of captive strategy.

I am by no means an expert in the area, but they seem like proportional, tailored solutions to retaining a presence in this market, and the Central Bank ought to be applauded for the effort, even if judging by the number of "no's" in the consultation, the industry wanted more!

FTSE Insurers - last interim result (I think!) and Solvency II progress

2011-08-16T18:03:00.002+01:00

Resolution/Friends Life, the darlings of the disclosure world, released their half year results today (there is a location check on the way through on this URL, but don't be put off, it's a Guernsey thing!). This of course compliments the other FTSE Insurers' releases which I have blogged on previously.

As ever, Resolution are very forthright on most aspects of their raison d'etre, including Solvency II preparations - they note the following;

"The implementation of the EU Solvency II Directive continues to be a key focus of attention for the Group...Friends Life group is closely involved with the industry in lobbying on key areas where uncertainty remains"
£24 million of cost booked in respect of Solvency II and finance system developments, complimented by "overall [Solvency II] implementation programme is on track against its plans and budget"
"the Group believes that [Solvency II] will have a favourable capital impact on the Friends Life group relative to current Pillar 1 solvency requirements"
"Disappointingly, there is a lack of clarity on the final position with respect to Solvency II, and the implementation date looks likely to be delayed" - no commitment on date, unlike some of the others
“participated in the EIOPA stress test exercise” and are “closely engaged in the development of the tax proposals including any changes arising as a result of Solvency II”.
"The Group has been accepted into the FSA’s pre-application process"
"Providers, in anticipation of the higher capital requirements under Solvency II, have been adjusting their pricing which is leading to increasing margins." reinforced later specifically on annuities
Solvency II considerations down as a "key driver" in the context of the cash generation result - presumably in the context of how much they can pay away and how much must be retained, though I could be wrong
German product range directly affected by "the impact of Solvency II [which] is expected to limit market participants' ability to provide traditional with-profits product offerings."

The comment that "The Group assesses strategic developments and opportunities on a Solvency II basis" was perhaps the most fascinating part - how you do this without clarity on the suite of transitional measures, Omnibus II elements etc is beyond me.

As a post script, Phoenix also posted interims, albeit a little later than the others - again, a lot of disclosure on Solvency II, quotes as below;

The Group remains actively engaged in supporting the development of Solvency II through industry consultation and participation in FSA and ABI industry forums.

Both the European Council and the European Parliament have proposals to amend the timescales for the implementation of Solvency II and there appears to be growing political momentum towards delaying full implementation until 1 January 2014. At the present time however, there is no certainty that this will happen and the Group continues to plan for implementation on 1 January 2013.

The Group remains on track to deliver an approved partial Group internal model and has been accepted into the FSA internal model pre-application process following the submission of the pre-application process qualifying criteria template in 2010. In respect of the resources the FSA will devote to the pre-application process it has stated that it will concentrate on a small population of firms representing a significant market share and which it regards as having the highest potential impact on its objectives. The Group is included in this category and remains in continuous and constructive dialogue with the FSA.

The Group's actuarial IT systems transformation project will deliver a single actuarial modelling platform across the business, transforming modelling capability and efficiency and underpinning development of the Solvency II internal model and Own Risk and Solvency Assessment.

"We continue to target full Solvency II readiness by the end of 2012.Our Internal Model Self Assessment Template has been approved by the FSA and we are on track to meet the Internal Model Application Process date of 1 April 2012."

On 23 March 2011, HMRC issued a technical note on 'Solvency II and the Taxation of Insurance Companies' outlining changes to the taxation of UK insurance companies with effect from 2013. The Group has been actively involved in consulting with HMRC and HM Treasury on the detail of the new rules, with the aim of ensuring that the Group's policyholders and shareholders are as far as possible not adversely affected by the changes.

The consultation process is still on-going in relation to certain aspects of the new rules, and as a consequence of this and the complexity of the proposed changes it has not been possible to estimate their potential future impact on the deferred tax balances shown in these interim financial statements. Draft legislation is expected in the second half of the year and its estimated impact on the deferred tax balances will be considered and disclosed in the year end financial statements.

Groupe Consultatif and dates for revised pre-consultation docs for Pillar 2

2011-08-11T09:16:00.001+01:00

Nice and simple this one - Groupe Consultatif Actuarial Europeen minutes for the last month's lobbying activity. Note the quote that "It is expected that pre‐consultation on ORSA and governance will be re‐published in the autumn." Might want to put that into your diaries...

Central Bank of Ireland - Annual Compliance Statement guidance for new Corporate Governance Code

2011-08-10T22:07:00.001+01:00

The fun never stops in the world of Irish corporate governance and risk management - new guidance from the Central Bank has been released to aid with the completion of Annual Compliance Statement (and how to evidence the statement's content) - "compliance" of course being with the new corporate governance code. Some fascinating elements, which should have crossover uses regardless of your jurisdiction, such as;

Boards must determine breach "materiality", in the context that "the Central Bank views all areas of the Code to be equally important"
Code will be reviewed "in light of relevant EU developments", naming Solvency II specifically - I personally read that to mean that the new code will be subservient to any Solvency II requirements.
Retention of supporting documentation section - excellent as a checklist of the kind of materials all Solvency II-affected undertakings should be reviewing as part of System of Governance and ORSA requirements, as well as likely sources of Use Test evidence
Risk Appetite section (sub section of the above) - confirms that, by implementing these requirements effectively, one should be in great shape for Pillar II

Look forward to seeing some of the "material deviations" being made public once the guys get up and running, should be some nice test cases over 2012.

FTSE Insurers - Solvency II Progress

2011-08-10T20:48:00.001+01:00

Having already checked out the earlybirds in the interim reporting season for their Solvency II progress (here and here), Standard Life chipped in today with their progress.

Slight IGD surplus improvement (others have followed suit to varying degrees of prudence)
Having de-risked their business and having a capital-lite business model, they feel "well placed to operate in the currently proposed Solvency 2 environment"
Transformation costs (including Solvency 2 costs) up from £17m to £23m in the half year
Solvency 2 "currently expected to implement in 2014" - a little more presumptuous than the others who preferred to stick with 2013, but bearing in mind it is a fait accompli, fair enough.

The recurring motif across the listed insurers seemingly increased costs, increasing own funds (possibly more through equity markets being peaky in June than by design), and a resignation that 2014 is the new full implementation date.

Central Bank of Ireland - Solvency Matters number 5

2011-08-09T23:42:00.001+01:00

Still a touch light from a forward looking perspective, the Solvency Matters bulletin from the Central Bank of Ireland. As well as a few reviews of activity already long passed, they "strongly recommend that your working assumption should be that the implementation date of Solvency II remains 1 January 2013... This is what we continue to aim for in the Central Bank of Ireland"

FTSE Insurers - more revealing on Solvency II preparations in the interims

2011-08-05T13:48:00.003+01:00

Old Mutual and Pru announced their half years today - much more information around Solvency II preparations than presented by Aviva, L&G and St James's Place earlier in the week;

Old Mutual

Capital - "The Group issued a £500 million 10 year Tier 2 bond in June 2011, which is expected to be compliant with the anticipated Solvency 2 requirements and qualifies as Tier 2 capital for FGD purposes."

Important uncertainties - "The discussion on the treatment of EPIFP (Expected Profits In Future Premiums), as to whether it should be fully eligible to be treated as Tier 1 capital under Solvency 2 continues. No consensus has yet been reached between the different European bodies.

We await the completion by regulators of the initial equivalence assessments of the first three non-EEA jurisdictions, one of which is Bermuda. Results are due in November. "

Liquidity premia assumptions - "In deriving the liquidity premia at 30 June 2011, we have reviewed emerging Solvency II matching premium guidance and a comparison of the yields of similar durations on South African government bonds and bonds issues by state-owned enterprises. At those durations where swap yields are not available, e.g. due to lack of a sufficiently liquid or deep swap market, the swap curve is extended using appropriate interpolation or extrapolation techniques."

Economic capital, risk management and Use Test - "The iCRaFT project is progressing to plan and is on track to deliver the requirements for Solvency 2 compliance. Despite the ongoing uncertainty in respect of certain Solvency 2 detailed implementation measures we remain confident in our current design. We are now entering a phase of the project, in which we will demonstrate the extent that we have embedded the new tools and risk management processes. This marks a significant milestone in the project and ensures that the iCRaFT deliveries are being integrated into business processes and are adding insight in our key risk decisions. This will place us in a favourable position for the ‘Use Test’ requirements under Solvency 2."

Prudential

General - "We are supportive of the risk-based approaches to capital management provided the metrics used are appropriate. Along with our European peers, we do have concerns about the potential volatility which Solvency II could introduce and the degree of prudence built in to the proposed calibrations for the standard formula. We are engaging directly with our peers, politicians and regulators to ensure a fair and reasonable outcome before the regime becomes law."

Lobbying - "Prudential is actively participating in shaping the outcome through our involvement in industry bodies and trade associations, including the Chief Risk Officer and Chief Financial Officer Forums, together with the Association of British Insurers (ABI) and the Comité Européen des Assurances (CEA)."

Key Risk - "There is also a possibility that depending on the outcome reached on a number of key issues, the effect of the measures finally adopted could be adverse for the Group, including potentially a significant increase in capital required to support its business."

Solvency II costs- "A total of £27 million of Solvency II implementation costs were incurred in the first half of 2011 (2010: £22 million) as we continue to make progress in preparing for this change."

"Central outflows increased to £141 million in half year 2011 (2010: £118 million). Higher tax receipts in the first half of 2011 were offset by increased net interest payments, following the additional debt raised in 2011, and higher Solvency II implementation spend."

What makes a great Risk Manager? Survey

2011-08-05T00:19:00.000+01:00

I implore you to have a go on this if you haven't already - the (ex) Strategic Thought Group have a psychometric test available to show how your personal attributes map into your professional make-up. They will send you the results (free I might add), and it's only 20 questions, so give it a go if you have 10 minutes spare.

I felt like a sucker from one of those pyschic shows once I read the report back - I struggled to disagree with anything on it!

Aberdeen Group - Managing Enterprise Risks

2011-08-05T00:11:00.000+01:00

Relatively small sample size (213), and rather confusedly assembled (constantly referring to an earlier piece of research they also produced), but this piece of research from Aberdeen Group is well worth a read for you benchmarkers out there. You may need to register, but either this link or this link should get you to the right place to do just that. It covers;

Catalysts for adopting ERM
Favoured strategic reasons for implementing ERM
Primary driver of ERM in the organisation (10% CRO!)
Techniques for optimizing ERM Processes
Techniques for improving Risk Culture

All of this comparing "best in class" companies against the mean.

Strategic Risk magazine also had a decent stab at summarizing the main points, which may also do a job for you.

FTSE half-years - Solvency II whispers

2011-08-04T23:56:00.000+01:00

Not much from the first few half-year results, other than St. James's Place suggesting that 2014 was increasingly likely for Solvency II and that they are looking at a small surplus on the basis of QIS5.

The interesting aspect from those with no particular comment (L&G and Aviva) is that their IGD surpluses are well up, as well as being relatively cautious on the spending front (cost savings and cash generation leading the story, rather than acquisitions or huge new business growth.

More to publish over the next week or so