Reporting/Submission of information to NCAs - EIOPA's FINAL preparatory guidance for national supervisors

And last, but not least, EIOPA have produced their final preparatory guidance to NCAs regarding the submission of information by firms to their supervisors, covering both quantitative reporting templates (QRTs) and narrative reporting. The consultation paper (summarised here by the PRA) caused quite a stir due to the volume of requirements during what is purported to be the 'preparatory phase', and even EIOPA's own Insuarnce and Reinsurance Stakeholders Group (IRSG) put the boot in on a number of elements.

It was of course natural that a combination of parallel running, legacy system horror-shows and potential ambivalence from third party information vendors was going to make this consultation the most controversial, but that said, the outcome appears to be pretty fair insofar as concessions have been made by EIOPA while still keeping the pressure on over-reluctant firms to construct the required processes in a timely manner.

One attempt at quarterly reporting is therefore retained (set for Q3 2015) as well as one run at completing annual templates, based on YE 2014.

The preamble borrows from the other preparatory guidance documents without anything new, so ignoring that, the following items jumped out at me thematically;

Concessions
3.54 Despite the gibberish in paragraph a), this effectively allows for some simplification in the quarterly reporting during the preparatory phase
3.55 Captives are excused for the quarterly run in Q3 2015

Parallel run costs/strains
3.58 As with other papers, EIOPA don't care!

Template changes
3.62 A change log covering amendments between the original template release and those now available has been included to help firms level any work already done in this space. A surprisingly large number of changes made, magnifying the difficulties faced by firms, NCAs and ultimately EIOPA.

Legal entities which are below the threshold
3.72 If a legal entity is below the reporting threshold in isolation, but forms part of a group which is above it, the LE will still have work to do

Annual reporting
3.76 An extra two weeks added to the submission deadline (now 22 weeks for solos, 28 for groups)

Quarterly reporting
3.81 As above, the requirement to report on Q4 2015 has been removed, a practical attempt to manage the myriad other reports expected from firms in early 2016.

XBRL
3.83 Up to each NCA as to whether they demand firms use XBRL in submissions - I think some of the supervisors may already favour it or have indirect experience of handling it (UK, Ireland, France)
3.84 EIOPA will provide a tool to aid firms in doing this, should they want/need to

Internal Model applicants obliged to complete Standard Formula templates
3.94 Confirms that IM applicants will need to complete both, though their SF template work will be governed by the pre-application for internal model guidance (due to the different timescales applicable to that work)

Narrative reporting
3.102 Not negotiable - get it done!

Balance Sheet
3.106 Statutory accounts figures must be included

Assets
3.111 Unit-linked assets will not be exempted - also a clumsy reference to "contagious risk", one of many which betray mother-tongue related drafting problems

Particularly telling is that while the IRSG were obliged on some of their issues, they were not able to drive home all of their agenda - they had asked for and additional 4 weeks for completion of all templates for example.

Unquestionably a great deal of work to do for both firms and NCAs on this matter, and with existing reporting teams no doubt working to tight schedules, the sooner 2014 programmes factor in this disruption the better.

Solvency II "Where are we now" - summaries from Milliman and PwC

Some useful "where are we now" materials have emerged over the last couple of weeks which you may find helpful, if only to validate your own interpretations of the current state of play:

PwC Ireland preparing for solvency II

Predominantly covers summaries of EIOPA's preparatory guidance, with some nice touches around;

• Differences between Irish Corporate Governance code and L3 system of governance demands (p15)
• Insisting that "an automated solution is required" for the reporting to NCAs, no doubt in the hope of drumming up some work out of such projects now that Pillar 2 work is largely done (p27)
• Comprehensive Use Test schematic (p39)
• General problems encountered meeting data requirements (p47)

In addition, PwC appear to be facilitating the set-up of a CRO Network over in Ireland, which will allow "all the different professional skills that feed into risk management" a place to swap Solvency II risk function-related war stories. First meeting at the end of the summer, can't wait to hear the outcomes.

Milliman - Solvency II Where are we now?

This very detailed slide package was released last week, and like the item above, covers all of the timeline-related activity around EIOPAs L3 work. It goes into updating readers on the latest position on;

• Economic Balance Sheet - noting similarities and differences in IFRS Phase II/Solvency II approaches to valuation, and a large amount of detail around technical provisions
• Data Management - retreads some of the FSA's findings from last year
• SCR - Covers latest standard formula position, as well as partial internal models and generic IMAP issues (again, retreading FSA letter content from last year). Particularly nice IM schematic on slide 21
• System of Governance - Basics on general requirements, function requirements and risk categories (which they have as 'risk management areas'). ORSA piece is fairly generic, but the schematic on Risk Appetite Frameworks (p35) is quite handy.
• Supervisory review - covers circumstances around capital add-ons and how they see the PRA identifying and assessing such instances.
• Supervisory disclosure - SFCR, RSR and QRT content and timetables for submission. Particularly useful to have this summarised, bearing in mind EIOPA's expectations for the interim period are for a subset of the full QRT suite previously published
• Insurance Groups and Equivalence are also covered at the end

Plenty of substance between the two (around 100 slides), so if you have an hour to kill, sers toi tout seul!

EIOPA's Long Term Guarantees assessment - long time coming

So EIOPA have finally released the specifications for the Long Term Guarantees assessment (press release here), the second most eagerly awaited release this year behind Kate and Will's baby. Relatively straightforward timetable of events expected by EIOPA it would appear;

• End of March - completed templates submitted to national regulator
• April and May - national regulator and EIOPA will analyse and synthesise results
• Second half of June - technical results to be provided by EIOPA to the trilogue parties
• Mid-July - report provided by the Commission to the co-legislators

I am stressing the second half due to the current procedure file for the Omnibus II Parliamentary Plenary session pointing at a 10th June date, which is of course too early to consider that report in making a decision on Omnibus II. That leaves one more Plenary window in July before the summer recess, so we can probably bank on a postponement to September at the very least, particularly as the report is bound to contain more contentious bones than a frozen beefburger...

A few things of note in the suite of materials published by EIOPA today, of which the presentation slides are perhaps most useful;

• Objectives of the assessment include "possible competition distortions" and "impact on long-term investment", which have surely topped the list of differences between trilogue parties and indeed individual countries to date.
• Predominantly based on YE 2011 balance sheet, but will test pre and post financial crisis positions as well (2004 and 2009)
• Can optionally use internal models for capital and risk margin calculation, provided the entity is in a national IMAP.
• At least 50% of Life non-linked TPs and 20% of Non-Life TPs in each country must be covered (hence the industry has been quite vocal about doing this at financial year-end!)
• 13 scenarios included in the assessment, of which one does not include any of the proposed measures - not sure if that reduced quantum addresses the concerns of the FSA's Insurance Standing Group back in September, when the number sat at 18.

The main meat in today's releases are of course for the digestion of your friendly local actuaries and accountants - best of luck!

Morgan Stanley and Oliver Wyman - Solvency II "The Long and Winding Road"

I came across a very high quality thought paper from the double team of Morgan Stanley and Oliver Wyman (you will need to sign up, but nothing intrusive), regarding the expected impact of Solvency II implementation on the industry as a whole, looking from an investors perspective in the main.

At 60 pages, it touches on just about everything you might want for Board/Exec and even personal briefing. I particularly liked:

• Unlikely that Solvency II will become a global blueprint for insurance regulation
• Cost of capital is likely to increase for insurers
• Winners and losers will ultimately take longer to emerge, due to grandfathering having less of an effect on strategies in medium term
• Non Life and Reinsurers are likely to be amongst the winners, with traditional life companies losing out.
• Suggesting product pressures will lead to more back-book consolidators and unit-linke/VA products
• The "weak insurers" will take on more reinsurance
• Matching premiums may encourage investment in illiquid classes
• More pragmatism expected around equivalence (for our US pals)
• Nice piece on p6 on attractiveness of different asset allocations
• "...in some jurisdictions the model approval process is proving to be very cumbersome" - Well spotted Sherlock!
• Nice table of Key Debates on p8, and throrough coverage of each of those debates follows, with liability measurement given a lot of airtime in particular (for obvious reasons)
• Good section on the Euro-cracy side of things p28-33, covering Omnibus II, prospective calendars etc
• Nice comment that, while sovereign debt risk may not necessarily be picked up in the regulations, Internal Models and ORSA would certainly be expected to reflect it. In addition, the phenomenon of "domestication" of balance sheets by EU insurers is also touched upon, along with the rationale (p36-37)
• Exploration of the potential for diversification benefits for insurance groups without the provision for Group support (p44-45)
• Decent section on Internal Model vs Standard Formula, and comment on how investors may struggle to compare like with like (p46-47)
• Expectation that local supervisory differences will continue despite increased co-operation required for Group supervision (highlighting IM approval as one particular area where the wheels may be greased better in some countries than others)

As for their choice of Beatles song in the document title, I would have personally gone with "When I'm 64" (which is when it feels like the trialogues will have finished!), or maybe "Help" (no explanation required!)...

More excellent Solvency II materials

"Reassuring expensive" - not a bottle of Stella Artois, but subscription to InsuranceERM, who continue to produce cracking material to help validate your Solvency II approach on all three pillars. I picked out the following from last week (sign up for trial to view if you don't subscribe).

Dutch problems under Solvency II - Fitch ratings provide the research this time on Dutch preparedness for Solvency II. It highlights a couple of items; that AEGON and ING will be praying for the USA equivalence assessment to be successful (both of course have received state help on the capital front recently, so will be light on that front), and that secondly there would be a maximum of 12 Internal Model applicants, and potentially even less, due to resource scarcity.

CRO at Torus on his Solvency II approach - As a new company, he notes that the benefits of not having to incorporate legacy systems into the data warehouse is somewhat negated by the lack of historical data in producing the calculation kernel (relying on a deterministic approach in some areas). Very interested to see his approach to addressing the use test, which is by performing gap analysis between current and future state in 12 areas where model output could potentially be used.

Solvency II Balance Sheet volatility challenges - succinctly lists responses to the volatility expected when performing market consistent valuation as "raise capital, hedge, or change product lines". While UK already values in market consistent manner under IFRS, this will introduce SCR volatility across the continent. Makes a nice distinction between short and long term liabilities, and the ease of capitalising the former with reduced spread risk. Also suggests that asset-liability matching will become a more exact science across the board.