ABI and PRA on 'Meeting the Challenges of a Changing World' - Solvency II in particular...

Low Yield issue - not just for insurers

While I disposed of my son for the summer last week for an extensive potty training course in Bordeaux (PS you might want to avoid the 2013 whites!), the ABI gathered the great and good for their biennial conference, themed Meeting the Challenges of a Changing World.

A corresponding publication from the ABI which the event hung its hat off to a certain extent is particularly useful for anyone in the emerging risk/ORSA/reverse stress testing space, touching on 7 specific 'challenge' themes, which are themself further broken into sub-categories. With the ABI providing a mouthpiece for the interests of the UK insurance industry (and being currently Chaired by an avid opponent of Solvency II), it was worth picking up on this document's take on Solvency II, specifically;

• That it could be a future constraint on the nascent equity release market
• Its well documented "...potential effects on infrastructure financing"
• That British insurers should "...[continue] being proactive and engaged in trying to shape vital regulation such as Solvency II rather than simply criticising it from the sidelines". Not sure if the implication is that the UK is drifting from the box-seat in this regard, but certainly in the context of the next decade, a slated in/out referendum on EU membership may make proactivity on Solvency II a moot point!

The regulatory meat in this lobbyist event sandwich came from a keynote speech by the PRA's Andrew Bailey which, in the process of publicly revealing a few nuggets of truth, still left me safe in the knowledge that insurance is still the banking industry's boring cousin - that he needed to "...make clear at outset that insurance supervision matters as much as banking supervision" and stress that "...insurance supervision is a skill on its own" while supporting most prevailing regulatory techniques with the prefix 'what we learned from Banking is...' tells its own story.

That aside, the following comments are worthy of highlighting;

• The PRA's current trend of using "business model analysis" in their supervisory work - surprised that this was not already par for the course frankly (what else other than the types of analyses referenced at the bottom of p4 would you be doing?), but one would expect that the advent of ORSA will enhance everyone's activity in this field soon.
• Taking that into account, it is "...logical for us to make early adjustments to our existing regime to incorporate the ORSA under ICAS+"
• The suggestion that management "...take responsibility for understanding and mitigating the risks in their business" - 'managing', rather than 'mitigating' surely, we'll tolerate anything within appetite!
• That the truly woeful "Solvency II/Crossrail" costing analogy used by Mr Bailey to a parliamentary select committee was the PRA "...making a point on behalf of firms".
• That "PRA have not withdrawn from involvement in Solvency II, far from it", though recognises that the result around the classic matching adjustment is not what UK plc would wish for - goes on to comment that we "...still have a good way to go to make the Solvency II regime manageable in its use and implementation"
• That, as far as Sol II's legislative progress is concerned, negotiations "...continue over summer, with a conclusion expected in the autumn", and that the official implementation date discussed recently on this blog is "clearly unrealistic".

In a week where a wall of silence has descended upon the co-legislators and the Commission, it is reassuring to see at least one NSA body with a solid-ish implementation plan, regardless of the immediate lack of things to implement - however judging by the words captured by Gideon of Dr. Wiedner, the lightly briefed (and from what I could read, lightly fed) replacement of Karel van Hulle, I suspect that Solvency II on the whole remains "Klaus but no cigar"...

EIOPA's Long Term Guarantees Assessment and the early fallout - Plenary delay pending?

EIOPA's Long Term Guarantees Assessment rocked up last week while I was enjoying my new arrival, perhaps the most eagerly anticipated document out of Frankfurt since the days of Goethe...

Wielded fiercely all year by all stakeholders in need of an excuse for the delays in Solvency II's legislative passage (and hence the need for more budget), it appears to have variously pleased everyone and no-one at the same time. The key findings/recommendations are nicely summarised here.

Major players have since piped up with the following over the last week, none of which suggests the report's conclusions will be ole'd through the trilogue and parliamentary vote. 

EU Institutions

EIOPA 

- "We are confident that the results of the LTGA, combined with the EIOPA advice will provide the EU political institutions with a reliable basis for an informed decision on the long-term guarantee measures and a conclusion on the Omnibus II negotiations"

EU Commission

- "The Commission trusts that the Council and Parliament will use this very good report and its findings as a basis for an urgent agreement on Omnibus II and show pragmatism and willingness to compromise"

EU Parliament (via Burkhard Balz)

- "Speaking for the European Parliament, we are very confident that Eiopa's work and the subsequent analysis will provide for a successful restart of the negotiations, and as rapporteur, I am ready to start as quickly as possible, even before the summer break, to pre-launch trilogue negotiations. It is our firm intention to conclude the long-term package before the end of this year, so we can adopt Omnibus II in early spring 2014"

Industry representative and lobbying bodies 

- Insurance Europe - "Insurance Europe’s preliminary review of EIOPA’s proposed improvements to the Solvency II regulatory regime shows that adaptations are needed to avoid unnecessarily damaging insurers’ ability to provide long-term guarantees and invest long-term"

- GCAE - "With the publication of the report, the EU is one step closer in the process to finalising the Solvency II dossier"

- UK's ABI - "The EIOPA report is a small step in the right direction. But there is still a long way to go before British pensioners can be confident of a reasonable deal on their annuities"

- Institute and Faculty of Actuaries - "Today’s proposals outlined by EIPOA (sic) would seem to address many of the important issues. However, the detail needs to be worked through and the effect in a variety of scenarios assessed, before the full implications of the proposals for companies and their customers can be understood"

Ratings agencies

- Fitch - EIOPA’s proposals “offer no prospect of an end to the long-running dispute between regulators and insurers over suitable capital levels for products with long-term investment guarantees"

Print Media

- Commercial Risk Europe - "...unlikely to resolve key issues stalling the implementation of Solvency II and may lead to yet further delays to the Directive"

Consultancies

- PWC - "many insurers may find the proposals onerous and will not welcome the continued uncertainty over the final rules. We anticipate there may be concerns about the capital required for certain types of assets backing annuities in particular; and the effectiveness of measures designed to address short-term asset volatility"

- KPMG - "...it is likely that certain European countries will look very unfavourably at the EIOPA proposals."

I have emboldened the quote from Burkhard Balz above which suggests that the Omnibus II vote is going to move again. The rationale for that is two-fold; the prospective Plenary date (which was down as October 2013) appears to have suspiciously disappeared from the EU Parliament's Omnibus II procedure file altogether, while Mr. Balz clearly states early 2014 is targeted 'adoption date' while 'speaking on behalf of the Parliament'!

The aim of Solvency II is...

As Solvency II implementation stubbornly drags its heels like a legislative bull in the Plaza del Toros of European bureaucracy, I noticed a few mutterings about the 'aim', 'purpose' and 'objective' of the Directive and its companion texts as the main protagonists play for time.

Aim of Solvency II - could be better

This is particularly frustrating as a practitioner, where consistency and brevity of message is vital when one generally has limited time with AMSB members (most notably Non-Executives), and therefore may find the messages being offered to the press differ from those previously communicated to clients.

In addition, EIOPA's status as "super-regulator" (Omnibus II pending!) now allows for further demarcation of message between those who currently determine the adequacy of senior management/director fitness, propriety and Solvency II knowledge, and those who will be co-ordinating the revised approach from 2014.

Finally from the bottom up, the stealthy creep of Solvency II into the general public/intermediaries worlds surely makes it imperative that the overriding purpose of the Directive (as well as the expense and delays!) can be explained in unequivocal lay terms - though maybe not as haplessly as the PRA's top man the other week when he tried to price Solvency II in terms of unfinished tunnel projects...


Regulators and industry tend to be focusing on policyholder protection when justifying the Solvency II approach to supervision, though in a rather long-winded manner in the CBoI's case!

Regulators

Bernadino to Croatian press, March 2013

Purpose of Solvency II is "...a harmonized prudential framework in the EU"

Bernadino to German press, April 2013

"The purpose [of Solvency II] was to increase policyholder protection and incentivise better risk management"

The Prudential Regulatory Authority

"[Solvency II's] main objective is the adequate protection of policyholders and beneficiaries"

Central Bank of Ireland

"Solvency II is a risk based approach that aims to provide the basis for a more ‘root and branch’ review of the overall financial position of an insurance undertaking. It represents a new system of supervision that assesses the overall financial position of an insurance undertaking or group. The new supervisory system is concerned with, amongst other areas, highlighting the importance of holistic risk management and prudential standards. Solvency II also aims to reduce the possibility of both insurance undertaking failure and, in a wider sense, of disruption to the efficient operation of the insurance market"

Industry

Lloyds (whose CEO has been a touch vocal on the threat of Solvency II early implementation recently) have the objectives bullet-pointed on their site as;

• Improved consumer protection
• Modernised supervision
• Deepened EU market integration
• Increased international competitiveness of EU insurers 

Others tend to get "protection" somewhere in the mix;

"[Solvency II] should bring consistency to the way in which EU insurers manage capital and risk with the aim of enhancing protection for consumers" - Standard Life AR&A 2012 p6

"[Solvency II's] objectives are to establish a solvency system that is better aligned to the true risks of insurers, and aims to enable supervisors to protect policyholder interests as effectively as possible" - Aviva AR&A 2012 p129

"The purpose of Solvency II is to unify a single EU insurance market and to enhance policyholder protection" - IPB 360 AR&A 2012 p69

"The aim of Solvency II is to introduce EU-wide regulations that match capital requirements as closely as possible to the risks incurred." - Munich Re

Expert lobbyists

"The overriding aim of Solvency II is to bring a common, risk-based approach to capital setting, supervision and disclosure to the whole of Europe" - ABI's Tim Breedon, 2010 (original speech text unavailable from ABI site)

"The primary purpose of Solvency II is consumer protection" - FERMA executive board member 

Naturally, the consultant/vested interest world generally prefers to keep it fluffier to justify the invoices (Thomson Reuters a notable exception);

Consultancies

"Solvency II represents an opportunity to not only improve insurers' operations, but also develop significant competitive advantage in a challenging market" - KPMG's Phil Smart

"[Solvency II] is expected to provide a catalyst to transform the way insurance companies run their business" - E&Y

"[The Solvency II] project aims to create a more harmonised, risk-oriented solvency regime resulting in capital requirements that are more reflective of the risks facing insurers" - Towers Watson

Vendors/vested interests

"The aim of Solvency II is to gather all risk together in a holistic way" - FINCAD

 "[Solvency II] will ensure that insurers are protected against financial collapse, which is rife in today's unstable financial environment" - Xactium, clearly not big readers of the SIFI materials currently doing the rounds!

"The primary aim of Solvency II is the creation of an effective single market in insurance services across all 27 countries, creating the conditions for an adequate level of consumer protection." - Thomson Reuters

"[Solvency II's] aim is to ensure the financial soundness of insurance companies to not only protect policyholders’ interest, but also increase competition in the EU insurance market" - SAS 

Saddening really to see how a decade of malaise and false starts can even start to erode the fundamentals...

ABI update on Board Effectiveness - updates on Diversity and more

The ABI pushed out their Board Effectiveness update recently, which remains thematic rather than broad-brush, so I hoped to take something significant out of it, particularly around Board Diversity, which they have touched on before in a rather clunky manner, reflecting the uncertainty around the topic (specifically the gender element) last year when it was brought to the fore politically by Lord Davies report amongst other works


Diversity - apparently impossible
without symmetry...

 Staggeringly, the terms "Board Diversity" and "Gender Diversity" continue to be interweaved, which flies in the face of recommendations around "diversity of perspective" (p8, then reinforced by Chairs on p18), which of course needn't be constrained by gender any more than class, race, age or all-round Manx rugged handsomeness...maybe not the last one then :-(

That said, the statistics have clearly improved over the year on overall female Board representation, despite some recent high profile FTSE 100 CEO resignations leaving things at the Executive end somewhat less positive. Some benchmarks included on what "good" looks like in the context of disclosures and gender diversity policies, with M&S (what we're doing) and Vedanta (why we can't do it) representing opposite ends of the inclusivity spectrum while remaining concise. Good stuff on examples of gender diversity policies and affirmative action from p31-33 as well.

The ABI have also picked out the trend of using existing relationships with remuneration consultants/auditors to spin-off independent Board evaluation work to, and have recommended that it cease, and be replaced by something more independent (hmmmm, wafer thin market and lack of independence - sound familiar to anyone in IMAP?)

Operational Risk - Scenario analysis and best practice

Short and sweet - couple of interesting papers in the Op Risk space which should help anyone working on operational risk scenarios or indeed brushing up on best practices.

Milliman start off with this scene setter on approaches being adopted in order to bypass the rather broad brush (and I suspect in some cases, financially onerous) standard formula approach to calculating the Op Risk SCR element. They of course touch on the old-but-legitimate complaint around imput data quality if one wants to model their capital requirement rather than sketch it on the back of EIOPA's fag packet.

While they take the opportunity to applaud the efforts of those creating a database of scenarios, or indeed using the ORIC database, they ultimately come down on the Bayesian side of the debate, which I suspect is a touch too rich for most people's blood, but those of us with deep pockets (and large Op Risk SCR totals!) may give that a stab.

The second piece came from Corven around best Op Risk practices from other industries, and how they could be adopted by the Financial Services industry. Not much of the research is actually published yet (and the main meat of their published findings is hidden behind FT's paywall), but I found it particularly interesting to see which industries were cited as areas where Financial Services could learn from.

Some good interim stats (full report to follow in October), including;

• All respondents to date trying to tie in op risk performance with compensation
• Regulatory hounding appears to have inspired 64% of respondents to inprove Op Risk management
• Full root cause analysis only conducted by 38% of respondents upon a "major risk failure" - woolly words aside, that is not impressive at all.
• Responses to major risk incidents overwhelmingly look to amend processes and systems, not the people and capabilities that inevitably led to them!

The example of air crews being compelled to point out senior staff members' inadequacies is a particularly powerful example of bottom-up op risk mitigation, though I struggle to see its application in financial services. However, it was also strange to see the Oil industry also cited as a best practitioner - the major risk events in that industry surely draw parallels with financial services at their most grasping over recent years.

Bank of England and Solvency II - Tucker's Luck

Joining in with the rather boorish cacophony of UK-sponsored protectionist racket on Solvency II, one of the Bank of England's big hitters put his two-penneth worth in this week in a speech to the ABI.

Whilst his observations on the general train of thought being that insurers are not a threat to financial stability and that AIG was a "complete aberration" certainly ring true with the Geneva Association/IAIS lobbying line on SIFIs, and that all and sundry are "dismayed" with the costs to-date, I was a little less enamoured with his problems with "microregulators 'approving' specific models".

If his issue is one of staffing it at the FSA, and the likelihood of those best placed to assess being priced out of the market, fair enough, but the issue of "regulators drowning in data" could be quite easily solved by not asking for so much in the Self-Assessment Templates!

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

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

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?

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

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.

ABI - Solvency II Bulletin for October 2011

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).

ABI Report on Board Effectiveness - board diversity

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!

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

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!

ABI supports FSA Solvency II stance - 2013 regardless

Peter Vipond (Association of British Insurers head) is quoted in InsuranceERM today as supporting the FSA's "2013 regardless" stance for Solvency II implementation.

The logic is cold but impressive, as not only is the ICA process already onerous enough to dismiss any kind of parallel run, but the Internal Model application process has been structured to deliver concrete decisions on admissability by Jan 2013.

Certainly don't fancy the FSA's chances of getting a 2013 Solvency II "parallel run" levy out of the ABI based on this statement!

PS Shouldn't have access problems, the InsuranceERM guys made this one free!

Vince Cable speech at the ABI Conference

Always noce to get a steer from Government on future policy in the governance world (bearing in mind that, even with a coalition, it will get enforced quicker than Solvency II!).

Dr Cable in his speech to the ABI today seems to be fishing hard at the "voluntary" targets for improving gender diversity on boards (I believe if enough FTSE companies haven't declared by September we are probably looking at quotas). Executive pay and short-termism also feature high on the Business Secretary's agenda.

ABI Solvency II Newsletter for June - clear words (and nice pictures!)

The ABI have pushed out their June industry newsletter, and it's a beauty. Highlights;

• Compromise for long-term products appears to be palatable (to the ABI's working group at least). Final proposals in their 'package deal' will be discussed tomorrow at the Commission's Solvency II experts group
• Clear "that some of the Level 3 guidance will not be available, nor imminent by go-live date
• This will require regulators to "cede some autonomy" to the industry over implementation techniques
• Asking for 1 year grace period between presentation of Implementing Technical Standards and actual application (indeed the ABI seems a little anxious on developments in this area)
• Nice piece on justifying their approach on contract boundaries
• Some good schematics on legislative timelines and Implementing Technical Standards due dates