EIOPA's Bernadino with keynote speech - D'ohs and Don'ts...

Solvency II implementation
- Homer called it...

The latest pit stop on the Solvency II Last Legs tour was in the picturesque, almost-an-anagram, Slovenia, where EIOPA's gaffer joined a throng of hearty souls to deliver a keynote speech last week.

Given that the outside world is seemingly becoming more sensititve to the ensuing changes (at least from a capital adequacy perspective), it has been noticeable that EIOPA's speeches have become heavier in practical tone rather than the flabbier ethereal tones of yesteryear. In particular, conduct risks, conflicts of interest and the importance of an effective second pillar to counter the aggression and self interest of distribution arms/firms have all become prominent features of what is being touted as the Solvency II benefits package. Given what it has cost, we'd better deliver it!

Back to the speech, a few basic soundbites are littered throughout, which might benefit your training packs for the home stretch;

• Solvency II is "EIOPA's top priority", 
• It is a "pretty good starting point", rather than perfect, is "...a must and a true game changer", and "brings a new risk culture"
• It is "a tool to foster a true risk culture in the organisation"
• "It is clear that Solvency II will bring more awareness and transparency on the true risk profile of certain business models"
• It will deliver "intelligent and effective regulation which does not stifle innovation"

A couple of open-ended questions emerge from the text itself;

• Does Solvency II only "encourage" firms to define their risk profiles and risk appetites, as opposed to compel it?
• Is the Solvency II take on ORSA really "best practice at international level" - seems fair, but does anyone else want a shot at the title!
• Why is "overall solvency needs" constantly accompanied by bunny ears - if these guys aren't convinced by the term, what hope does the industry have of driving it into the glossary!
• Is it just executives who need to know that ORSA is a "cultural change", as opposed to NEDs, non C-suite senior management and wider stakeholders. Institutional investors would surely benefit a 101 class, given their demonstrable views on what SCR coverage ratios mean for the plausibility of some firm's strategies, and while Sr. Bernadino comments that "...effort needs to be made" to explain SCR volatility on p8, a dawn chorus with Karel van Hulle on how "ridiculous" the outside world's expectations are doesn't even qualify as an hors d'ouevre.
• That risk culture provides "...an appropriate balance with the natural sales driven culture" - EIOPA have alluded to this before, but never quite as explicitly as this. If the Risk function's job is predominantly to counter sales activity, can it ever be seen as value adding?

And a couple of specific themes are given special treatment for everyone's benefit;

Prudent Person Principle and the investment strategy of insurers

• PPP emphasised as not giving insurers a freebie to hit the roulette tables with their asset book, and will be "...closely monitored".
• Current environment encourages aggressive monitoring, with the "search for yield" quote now ubiquitous in supervisory speeches which touch on macro matters.
• "Asset risk calibration in Solvency II should not be used to privilege or incentive any specific asset class" - not convinced on this front, given the remit of your friendly local CIO must contain an element of maximising gains within appetite, and the calibration can surely influence that.

Product availability

• "Solvency II does not intend to unduly penalise specific products" - evidently does though, hence the sprint to the door from Ergo et al in the guaranteed interest rate product space (not unduly though to be fair, given the Teutonic pleas for transitional mercy!)

ORSA and Risk Culture

• The section somewhat labours the point on coverage of all risks, assessment of all mitigation techniques, and the role of the Board in driving the associated cultural changes, but I guess given the geographical location of the speech, some of the nearby countries may benefit from the encore un foi approach - no names naturally...
• "Capital will never cover up for the lack of proper governance"
• "ORSA is based on the companies' DNA - their strategy"
• "The key role in the implementation of ORSA belongs to the top management"
• "It is up to the Boards to set, communicate and enforce a strong risk culture..."

Insurers and Supervisors in general

• Talks of Risk Functions needing the correct skills to assess risks in asset classes - is there an implication here that functions will be light on quantitative skills post-2016?
• Squares the circle of prudential and conduct risks on p7, talking of mitigating conduct risks "since inception" in one's product development, design and marketing processes.
• That Solvency II "...requires an increased degree of supervisory judgement" in order to intervene at the right time, and the new supervisory requirements represent "...an upgrade in the quality of supervision". I'm sure some countries might take that as something of a slight, given the maturity of their existing processes, but probably fair for the majority.

Plenty of fuel for your respective Board and Senior Management briefing fires, so go forth and propogate!

EIOPA Chair's speech in Ireland - Nothing Compares to U2...

The huff has concluded it would appear – EIOPA’s gaffer has returned to the speaking circuit after a few weeks where the institution’s communications had been reduced to Post-It notes on the fridge after the EU butchered their budget.

Bernadino - dodgy stand-up

 

A recent Solvency II industry event was held in sunny Dublin, with Sr. Bernadino providing the keynote address. He chose to start and conclude with U2 jokes, which were as lame as a constipated flamingo (I would have thought Ben Folds Five or Lulu would be top of his playlist right now…)

That aside, the meat in this musical sandwich was pertinent to the whole industry, so I've picked out a few highlights;

General

• Wants to outline EIOPA’s move “from regulation to supervision” (p2), though goes on to say that “…EIOPA does not replace NSAs. The responsibility of the day-to-day supervision…rests with the NSAs” (p10). I think this subject warrants clarification from NSAs and EIOPA in concert, given we can see how having a remit-less overseer is putting the PRA on the back foot
• Acknowledges that the result of the mathematical squabbles is “…perhaps a too complex SCR formulation” (p3)

ORSA

• ORSA considered to be “…best practice at international level” (p4) – not sure if he means ORSA in general IAIS terms, or the ORSA concept he has curated within the EU!
• While he drops some of the usual ORSA bluster in about it being a “game changer”, he beefs up on the Board’s obligations, citing their "fundamental role to play", and stating in particular that "they need to set, communicate and enforce a risk culture".
• Of particular significance to his Irish audience was his emphasis on risk culture as "..an appropriate balance with the natural sales driven culture". This is perhaps the first instance where I have seen insurers' distribution arms formally considered by a supervisory body to be the enemy of 'risk culture', and for EIOPA's chair to choose Ireland, a country which has for years marketed itself as a cross-border sales centre on the right side of General Good provisions, is shown at the end speech to be a pre-emptive strike.

Internal Models

• Like his associates at the PRA, he notes that the use of internal models on the banking side "has been subject to increasing scepticism" in justifying the rigour of the Solvency II approach to modelling
• Worried that models will become a "capital optimization tool" - the PRA's NED briefing (slide 8) paints a similar picture if you read between the lines regarding missing risks and experience not reflected in parameter setting.

EIOPA's workload

• "Current different supervisory cultures" in the EU are creating work for EIOPA, noting that "our feedback can sometimes be challenging". Wonder who they're getting at there, France!
• They appear to be developing a Supervisory Handbook of good Solvency II practices. Chapters are already written on Risk Assessment, Boards and Governance, PPP and proportionality in Key Functions to name a few. Something to look forward to no doubt

Ireland-specific

• Go out of their way to applaud the onerous reserving governance in Ireland (here?), considering it practice which other countries should emulate.
• On the other hand, "...in the specific case of the Irish insurance market" he targets the country from a conduct risk/General Good perspective as one of the main cross-border players in the Union.

One can't help but feel the latter part of the speech was deliberately laid at the feet of the Irish, rather than aired in a more generic manner, given the country's continued corporation tax-related appeal to cross-border distributors. I guess when it comes to identifying the perfect audience to sketch out EIOPA's inevitable foray into Conduct Risk regulation, Sr. Bernadino found what he was looking for...

Solvency II, Omnibus II and Trilogue - two steps forward, two steps back?

Headline results from an Economist Intelligence Unit survey have been published this week, apparently suggesting that most global insurers continue to see Solvency II as their biggest regulatory challenge. Despite its prominence in the agendas of insurers' committees, boards and control functions, the legislation appeared to have taken a back seat in the decision-making fora of the European Union since the publication of EIOPA's LTGA in June.

So while the EU Parliamentarians go off for their hard earned 5 weeks in the sun (and by association Omnibus II/Solvency II will temporarily sit untouched like a pair of pink booties in Buckingham Palace), we can try and work out what the crack is with the dossier!

Trilogue
So with the Trilogue process itself necessarily one of closed doors, secret handshakes and unpublished shady deals, at least we formally know that they reconvened before the summer holidays thanks to Sharon Bowles' diary handler! Other than InsuranceERM's piece on a "muted start" to the negotiations (subscription only), the well is pretty dry on comment, suggesting that they got off to an inauspicious (re)start.

Parliament
As far as the latest ITER listings go (p1), ECON will not be considering the dossier again until 18th November 2013. From what I can read of the Parliamentary calendar, that is too close to supply the November Plenary with anything to vote on, and the December one is scheduled early in the month. Fair to say that, as indicated by Burkhard Balz last month, the Parliament won't vote on Omnibus II before 2014?

Council

Bed made - but covers stolen...

So the Lithuanian presidency is in town, and apparently sees the Omnibus II dossier as having "high importance" (p3) within their recently published work programme. ECOFIN have a state of play meeting provisionally scheduled for 15th October 2013.

That said, when pressed for comment when attending ECON before the summer holidays, they seems to have learned from the Paula Abdul school of making progress: for the two steps forward indicated by the Lithuanian Finance Minister's comment that the Presidency is committed to resolving, amongst other dossiers, Omnibus II (p12), he immediately takes two steps back by noting one of the key tactics will be "...focusing on uncontroversial technical issues to facilitate progress" (p13) - might be OK for some of the multitude of delayed dossiers, but not this one!

EIOPA
EIOPA naturally consider their work largely done for Omnibus II, and consider the report a "reliable basis" for making decisions on LTGs, and ultimately Omnibus II itself. Sr. Bernadino did however admit at the ABI conference a week back that, for 2016 to remain a viable "Go Live" date, political agreement on Omnibus II would be needed by the end of this year. Judging by Parliament's position above, I guess 2016 is out then!

European Commission
While Commissioner Barnier had lavished praise on EIOPA's, errr, "very good [LTGA] report", the Commission has lost its Solvency II specialist to retirement during this year, which might lead some observers to believe the Commission will be less effective as a negotiator while the new boy learns the ropes. However, Gideon managed to get some words from Karel van Hulle's replacement a couple of weeks back, and his modus operandi doesn't sound like one which will lead to a swift decision at the expense of one or two angry outliers in any case.

Specifically his comment that "We need to find a solution that works for almost all Member States. That is our ambition. So we don’t like to get the project through, just about ", suggests that anyone at the table with a gripe will get some airtime. With the LTGA outcome causing more gripe than at a constipated nursery, I suspect that the delays caused by the current 5 week vacance soleil will be a mere drop in the ocean...

More from EIOPA and PRA on internal models - anything you can do...

Certainly looks like there is a bit more mileage in this back-and-forth around internal models and the assessing of their appropriateness. As I posted recently, the UK's PRA have come out fighting on the subject of 'Early Warning Indicators' (EWIs) to highlight where a company's internal model, for fair reasons or foul, may be measuring the Solvency Capital Requirement in a way which does not meet the required calibration standard of the 1-year VaR at 99.5th percentile.

Early Warnings - time well spent?

EIOPA, through the words of their Chairman, have already made a pitch for assessing internal models on behalf of our overworked national supervisors, at least at some point in the medium-term future. It would now appear they have also piggy-backed the PRA's work around developing and monitoring EWIs as well!

That article is on Risk.net, so for non-subscribers, EIOPAs work is specifically looking at (in the author's words, not EIOPA's) "...threats to a firms solvency that are not picked up by the company's internal model". These will include qualitative and quantitative measures, and are due to be discussed (by their internal models committee) in the Autumn -  you know, that relatively quiet point in the Solvency II implementation calendar...

The EWI article was published at the same time as an interview with Sr. Bernadino and Insurance Risk magazine was released, where the tone of the interview is particularly aggressive around EIOPA's inability to compel national supervisors to "comply" with their recently-issued preparatory guidance. Whilst it is hard not to admire his optimism ("we are moving closer to the date of implementation"), he is quite fixated with "some countries" who, without EIOPA's guiding hand, he feels would end up divergent from the rest of the market.

I certainly am not familiar enough with continental Europe's positions as it stands, but it certainly reads like a not-too-subtle finger point at Royaume-Uni at the very least. He also goes on to mention that, while 'full Board support' was received at EIOPA to issue the preparatory guidance, not all participants were 'completely happy'. One would certainly feel aggrieved at the smaller end of insurance supervisors to comply-or-explain on preparations for a new regime which doesn't have a kick-off date, while still having to administrate the existing one!

An interesting side-issue around potential discord amongst the states is this recent request (which I have procured through the magic of Google!) from most of the Member States for a second "quick-fix" Directive, based on the fact that some of the implementation countdown dates that feature in the first one are next month (good spot Gideon)! According to the letter, the Commission already appear to have singularly ruled out the need for another quick-fix,

Four countries didn't make it onto the list of senders (Ireland, Netherlands, Malta and Lithuania) - not concerned, or not consulted?

Also worth highlighting the recent spectacularly ill-timed London press strafing of the internal modelling world - an strange development, particularly at the same time that the UK Independence Party has been lifting up its dress for London's financial sector to have a gander underneath. With some of the UK's bigger beasts such as L&G and Pru already openly hostile to Solvency II (and Resolution being an early faller in the IMAP stakes), is there potential for the rinsed-out UK insurance sector to throw its weight behind a political force such as UKIP, who would happily make an EU Directive bonfire, using Solvency II for kindling?

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...

EIOPA on Solvency II implementation - "no doubt about it"

Now that most Solvency II stakeholder's hands have been temporarily filled with the LTG spreadsheets and assorted accoutrement, Seniors Bernadino and Montalvo have hit the trade press with more aggression than an Irish prop forward in order to clarify their position on the drivers behind their opinion on interim measures at the end of 2012, as well as the ultimately likelihood of Solvency II implementation.

From Sr. Bernadino to the Actuary magazine

• On the shortcomings of Solvency I - "...if you have more risk, you should have more capital"
• "I think it will take until then [2016] to get started" on Solvency II
• "We [EIOPA] believe 2014 and 2015 can be used as an opportunity to enter into the system in a better way"

From Sr. Montalvo to Reactions magazine

• "Solvency II will be implemented, and there should be no doubt about it"
• "EIOPA will do the necessary work to make the implementation of Solvency II happen on January 2016"
• Emphasises that we are "not building from Solvency I", in the face of "Solvency 1.5" questions
• Notes that EIOPA's opinion on interim measures is borne from concerns that the delay may lead to "different national solutions [emerging] to the detriment of a good functioning market"
• "Differences between supervisory cultures" is part of the IMAP inconsistency problem - no implication that either the UK is doing too much or mainland Europe not enough
• Makes the point that stakeholders "...must avoid the temptation of re-opening more issues" - hard to think of any contentious issues which aren't already wide open for debate, but clearly some concern that the current smorgasbord could be supplemented.
• For those at the smaller end of the market, he gies a specific example of where an Actuarial function could be staffed by someone other than a "pure actuary"

All this in the week where a succession of industry figures in London lined up to flog Solvency II's hobbling carcass, whether it be the IMAP element (Hiscox), or the very premise of one-size-fits-all regulation (Pru). Not a good week to be trying to kill a horse in the UK gents...

Solvency II implementation delay - round up

"No news is good news" so goes the old motto, but in the case of this blog, "no news is new news"! After last week's sneaky peek at the options presented during trialogue discussions, the inevitable change of  EU Parliamentary Procedure file for Omnibus II was duly applied, and will now be discussed at the Plenary on March 28-31^st 2013 (honest).

That wouldn't have ruled out either of the options on the table of the Trialogue parties at the moment, but they might struggle to squeeze in an impact study on LTGs and publish the findings between now and March, particularly after it was made publicly clear by one regulator that EIOPA were not going to start that work as scheduled. The EIOPA lads did push out the tech specs for balance sheet valuation today though, which should at least get the frog out of the box.

 

It would have been a push to complete the study and leave enough digestion-time by March-end even without a late kick-off, so our friend Sr Bernadino has happily corroborated the "Big 4" speculators and faceless "sources" promoting 2016 as the new "go-live" date by giving his own counsel to the Wall Street Journal (cited in this non-paywall article). His preference for 2015 is qualified with the probability that 2016 will prevail.

 

While thumbing my nose at the Reuters article above, it does make the link between postponement and the Commission's desire to immediately spur longer-term investment in a stagnating, rioting, semi-employed Eurozone (which is much easier without Solvency II's heavy embrace, particularly the calibration of capital requirements for long duration debt instruments which the document referenced in this post covers all too well).

 

However, for DG Faull to effectively command a recalibration of that element now the going is a bit better makes you wonder how many more cherries we are going to pick - un deux trois, nous irons aux bois...

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

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.

EIOPA 1st Annual Conference - Anything of note?

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!

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

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...

Bernadino interview - short summary

Again, one for the subscribers, Insurance Times had an interview with Gabriel Bernadino this week -not much in the summary, other than a prediction that Internal Models will become more prevalent under Solvency II

EIOPA Stress Tests - all good?

Rather than replicate anything covered by Gideon Benari's excellent piece on the Solvency II relevance of the stress tests, I have just aggregated thoughts a few articles here.

Modelling Design always provide a digestible summary of the mathematic around these things, and didn't fail here either.

It was a bit of a non-story as far as BAU goes (I suspect most participants were furious at having to play at this while so many aspects of the Standard Model used for the exercise are up for debate). Bernadino himself is quoted saying as much when explaining why there would be no "naming and shaming" of non-MCR compliant firms.

However there was a suggestion in the FT today that the companies which missed the MCR under one or more stresses were "widely suspected to be smaller mutuals rather than larger listed [companies]". As they broke the Omnibus II delay story, they appear to have their snitches in the right place, so it would be interesting to know which "smaller mutuals" participated, and what caused the breach.