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...

Risk Appetite Statements and Solvency II project planning - Milliman and Ireland, douze points!

Not content with hustling the Irish insurance industry towards quality (legally required) Risk Appetite Statements this time last year, Mike Claffey has repeated the trick with another quality breakfast briefing on reviewing those very same risk appetite statements!

I like his approach to defining tolerances (acceptable variances) and limits (hard maximum/minimums gross and net of controls), which most practitioners should be able to roll with (alternative ideas are covered in a recent post), as well as a glorious slide with my old favourite, the 3 StDevs!

There is of course a suite of utility here for non-Ireland based practitioners, particularly for ORSA (scenario testing, business planning, financial condition reporting etc etc), so I recommend a leaf through, and to get hooked up to Mike's twitter feed if you haven't already done so.

Of as much utility to anyone who has been slow off the mark with their Solvency II planning (or who has been waiting, fingers crossed for a 2015 kick-off!) is a presentation by another of Milliman's finest on what to do in 2012 to avoid Solvency II project failure.

Nicely split into pillars, the priorities all seem fair, although one would expect 2012 to be the tying-up process, rather than commencement, of Pillar 1 activity on data requirements, documentation etc (or else what did you spend your cash on last year!). I also don't think targeting 14 weeks for results turnaround is necessary at present, bearing in mind the commission have got transitionals built in to their draft Level 2 text to give us until 2017 to get to this turnaround time (these guys may know something I don't however)...

For Pillar 2, the list of "required policies" in the slideshow looked very light indeed, but this may be becasue it is focused on 2012 priorities - Remuneration Policy can probably wait until 2013, eh! The other pieces on ORSA and Pillar 3 are all fair, so don't be afraid to check off against these, whether in Ireland or elsewhere.

Well done lads, and keep up the good work.

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

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.

Central Bank of Ireland - Solvency Matters number 5

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"

Central Bank of Ireland - Annual Report

So the Central Bank of Ireland pushed out their Annual Report and an accompanying Performance Review this week. Few interesting things of note;

Annual Report

• Introduction of "Risk Governance Panels" for supervisory staff to 'engage with technical experts, risk specialists and senior staff other than those they report to on a day to day basis' - sounds almost like industry sponsored talking shops.

• Solvency II preparations section seemed very light in content (hosted seminars and workshops, conducted a survey and wrote the Solvency Matters newsletters). However, unlike the FSA, the Solvency II-specific costs are not busted out.

Performance Review

• 7 less (re)insurance undertakingsver the year
• Less inspection work but a third more review meetings
• Already 25 in the policy department from a standing start
• Another 220 staff to come on board over 2011