Insurance Europe on EIOPA's place in the European System of Financial Supervision

As a response to the European Commission's consultation on the new European System of Financial Supervision (ESFS) - you know, the one that gave birth to EIOPA and the other two ESAs - Insurance Europe have laid some home truths down in this questionnaire document regarding the performance of EIOPA to date, as well as problems they see on the horizon once Omnibus II gets through.

Due to the lack of transparency in much of the work performed by EIOPA to date (a by-product of their remit being squirrelled away in the Omnibus II dossier?), I found some of this comment very revealing from a body which I expected would be relatively pally with them. Specifically, I noted the following opinions;

• That ESAs should not issue Guidelines that circumvent legislative powers - these generate blurred lines between technical matters (where their input is welcome) and strategic/political matters (where it is not). Precisely here that would leave EIOPA's Solvency II Interim Guidelines in their ideal world is another thing I guess, though they go on to say that the "...level of detail on the Solvency II implementing measures is alarming", and indeed were pretty vocal in their public response to them.

  

  EIOPA Guidelines - back door regulation?

• That there is an absence of clear definition in EIOPA's materials around where Regulatory Technical Standards (RTS), Implementing Technical Standards (ITS) and Guidelines differ - going on to suggest that there is an element of "regulation by the back door" in the Guidelines issued to date.
• Concern regarding the level of power left in EIOPA's gift to adopt RTS, citing as an example that EIOPA have brought back (as part of L3 consulations) a proposal to make external auditors review SFCRs - this proposal having already been jettisoned by the Parliament at L1!
• Suggest that the Commission should have a vote in contentious decisions within EIOPA (the Commission attend in a non-voting capacity currently) 
• A diva-esque rant (p12) about the quality of EIOPA's processes and outputs during consultations (lack of feedback, poor quality documentation), as well as suggesting that consultation participant quantums are overweight in academics at the expense of the industry.
• That some of the membership of Insurance Europe would welcome qualified majority voting in the ESAs weighted by size (let me guess who!).

So without having been handed their full schmorgasbord of powers, EIOPA are already being lambasted for their use of them - tough break!

ORSA Consultation Paper from EIOPA - bon effort!

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...

CEA releases - SIFIs and ComFrame

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.

CEA on EC Green Paper on Corporate Governance

The CEA have published their response to the EC's Green Paper on Corporate Governance, with an overriding desire that the content should be principles-based does not contradict Solvency II. More detailed responses included;

• No prescriptive box ticking
• Nature scale and complexity also referenced, noting "size is less important than the specific risk taking activities of a company
• No regulatory prohibition of chief executive and chair dual role, rather application of proportionality
• No requirement for published diversity policy
• No formal restriction on NED roles
• Strong support for board evaluation, but don't agree with formal evaluation, preferring "comply or explain"

Barnier Letter to CEA/CRO Forum/CFO Forum - full text

Bit late, but for my own records I'm just making sure I have Michel Barnier's full response to the lobbying forums on the blog (previously only had an abridged version).

Few notes;

• Solvency II "has been subject to more consultation and impact studies than any other piece of legislation I am aware of" - referenced like a badge of honour, as opposed to any negative connotations
• "Not surprising" that surplus capital has declined - is the implication that the industry is undercapitalised
• Commission is not convinced by lobbyists argument on contract boundaries in particular

CEA Annual Report - Solvency II review

The CEA pushed out their annual report today – some very convenient Solvency II and other insurance undertaking-related progress summaries with regards to their lobbying progress.

Solvency II Points;

•  Commission reiterated that the industry should not need to raise additional capital for Solvency II (supporting their view on inclusion of EPIFP in Tier 1, contrary to EIOPA’s wishes
•  Impact assessment will be published when the Commission puts out the Level 2’s later this year 
• “Large part” of the CEA’s Level 3 lobbying work has been on Pillar 3 reporting templates (two rounds of consultation). For some issues they have argues for exclusions on the grounds of utility or cost, as opposed to confidentiality 
• Submitted responses for Level 3 ORSA, System of Governance, Own Funds and Internal Models sounds like these were priority 2. 
• CEA highlights its desire for transitional measures in; hybrid capital; internal models; equivalence and supervisory reporting 
• Commission aims to finalise technical work on L2 this month, CEA provide, in some detail, their lobbying views on; Long-term guarantees; Car Risk; Non-life premium and reserve risk; complexity; EPIFP; Contract boundaries

Other points

• Big reliance throughout the document on CEA’s preferred version of Solvency II application as the supporting excuse for opposing SIFI, Financial Services Tax, extension of Sol II to IORPs and Insurance Guarantee Scheme draft legislation
• Submitted comments to the IAIS on their ICP consultations for global supervisory convergence (they note that it is “moving in the same direction as Solvency II”, whereas I thought the ICPs were pretty much a photocopy!) 
• They note that, unfortunately, Life Insurance products will remain in the scope of EU Savings Directive legislation, as the current impasse is unrelated.
• Very non-committal on progress of the VAT directive, which doesn’t sound promising for “insourcing” of insurance administration 
• On FATCA, they give the impression that their best efforts will be to secure some exemptions for small and irrelevant lines of business, rather than to lobby the USA into submission on this incredibly onerous piece of draft legislation.
• Some constructive effort in the field of cross-border distribution via Insurance Mediation Directive 
• Potential for increased compliance risk off the back of Test Achats ruliing

Barnier fights back - response to CEA/CRO Forum

FT are reporting to have seen the response of Michel Barnier to the lobbying from, amongst others, the CEA and CRO Forum on Level 2 implementing measures. They quote the following;

• Statements that calibrations are too high "have not been confirmed by evidence"
• Commission is taking sustainable provision of long-term guarantee products "very seriously"
• "The industry's position on some of the other issues raised...is not shared by those who will be making the final decisions"

The last quote is obviously quite an aggressive reposte to the list of gripes supplied by the lobbyists in April, and confirms that the bluntness of Bernardino's views from his interview with InsuranceERM last month is very much the party line in the corridors of power.

I will save the gap analysis between the lobbyists and the Commission until after they publish this letter in full!

CRO Forum - lobbying hard

CRO Forum put out lobbying papers on currency risk and liquidity premium this week that compliment the CEA docs (late as they don't have the RSS on their site) - nothing new in them from my end, other than they are much more accessible to the layman on the drivers for liquidity premium and the faults behind the current plans for accounting for currency mismatches.