Clear Path Analysis - Interview with EIOPA's Montalvo

The guys at Clear Path Analysis have come through with another suite of exclusive Solvency II material, following along from their efforts in September 2012 and 2011 (sign up required if you are not already hooked up with them).

This is dominated by asset allocation and Pillar 3 requirements, and I'll cover through those in due course. It was the interview with Sr. Montalvo from EIOPA which immediately caught my eye, so I picked the following bones out of it:

• Solvency II is "...nothing more and nothing less than a risk-based supervisory framework"
• Solvency II "aims to be a neutral system" with regard to asset allocation
• "The new framework creates business opportunities rather than operational risks"
• "No Pillar prevails, all are equally important" 
• The capital weightings on asset lines are based on "...sound technical calculations that were taken by the supervisory community (and in particular by the actuarial teams involved)" - is this a tacit acknowledgement of a residual element of black-boxedness?
• On IFRS convergence "...we had to move forward because in the accounting areas progress was not being sufficiently made". 'Aimerez-vous rencontrer M. Kettle, M. Pot?'
• On early implementation, "...once we see how it is working, [EIOPA] will have the courage to say which things can be improved"

Perhaps his sweetest quote is worth isolating:

Clear Path Analysis - Solvency II "The Global Dimension"

This piece of research from the guys at Clear Path Analysis (sign up required) has been in the offing for a while, and as I covered their last impressive release on this blog (and I don't have a life :-( ), I've been looking forward to it...

There is certainly plenty in here to keep those of every persuasion entertained (with the sponsors as omnipresent as their funding permits!), but I've sectioned out highlights for my own benefit;

Foreword

• Solvency II "...clearly a step in the right direction" - oddly, not followed by a punchline...
• On the likelihood of Sol II remaining ahead of the IAIS approach to solvency regulation - "Asia no longer looks to the west for regulatory best practice", going on to cheekily recommend a cherry-picking approach

Barbara Ridpath - think tank CEO, on short-termism and regulation

• Highlights one (widely acknowledged) consequence of Solvency II being a disincentive to invest in long term and/or non-Sovereign debt instruments, which is not in the mandate of the regulations, or indeed the regulators.

Roundtable on un-level playing fields between EU and non-EU insurers - includes Standard Life Sol II lead

• Solvency II likely to weed out companies who can't handle the ongoing compliance cost from running EU operations
• Large piece on Canadian equivalence (of particular importance to Standard Life of course) and the practicalities of equivalence being neither sought nor at this point offered for a non-EEA wing of a EEA HQd insurer.
• Standard Life not happy with equivalence assessments running concurrently with IMAP, due (rightly) to the significance of a "yay" or a "nay" to the strategic thinking around non-EEA arms.
• Suggestion that Asia is looking harder at the IAIS approach as opposed to Solvency II for future direction

Data and Risk Reporting Interview - Dan Wilkinson, ERM head at Liberty Syndicates

• Increased formality around Data and Risk reporting, using both controls-focused and risk-focused approaches. Makes reference to a monthly management committee which takes reporting on data deficiency matters, which I have heard reference to on the circuit before, and certainly demonstrates that data inputs, whether for internal modelling or for strategic decision making, feature as a high priority, rather than taken as read.
• Notes that his employer is moving risk reporting away from the 1-in-200 VaR to "...more foreseeable points in the distribution", which we definitely like to hear in the ORSA world!
• Alludes to concerns around disclosing ORSA-related information to the outside world, which is an area yet to be adequately chewed over by regulators and industry quite yet, let alone ratings agencies, analysts etc
• "Sensible amount of proportionality" should be adopted when deciding what should be disclosed - is that a contradiction in terms, an oxymoron, or some other expression I can't quite lift off of Google!
• Sensibly stresses that an effective emerging risk policy should allow input and challenge at all levels of an organisation, when asked about internal models evolving with the risk profile of the business.
• "...biggest deliverable is cultural" - i.e. stripping back your long-since-gone consultancy friends' technical documentation (where required) in order to make it more accessible and free BAU staff to use the new facilities, be it a spruced up RMF or a full Internal Model - appreciate I may be doing myself a disservice by highlighting it!
• Didn't agree one bit with the comment that ORSA could "...inflate regulatory capital, based on rather speculative assumptions" - FSA have been pretty clear that ORSA has no bearing on required capital, appreciating the nuances around what they say and what actually transpires!
• Also wasn't massively sold on the comment that the ORSA "...should bring together information that is used within the business to allow analysis of medium term trends", unless of course he was cut off mid-sentence!

"Challenges of Pillar III" roundtable, focused seemingly on getting asset managers to pull their fingers out! Includes a CRO from an Italian insurer

• "Asset managers who are not willing or able to invest in appropriate data management and reporting systems will find it hard, if not impossible, to attract or retain insurance clients" - so there!
• Suggestion that "parts of the industry will have to get up to speed on" underlying assets which they are currently invested in for the look-through basis - I suspect that there are plenty of horror-stories to emerge once some CIOs and CFOs get a proper butchers at what some of their collectives are actually invested in, particularly with the advent of outsourcing investment management or just administration over the last decade or so...
• Note that ratings agency priorities over the near-term may focus more on differences between SF and IM-calculated SCRs and the impact of transitionals, rather than purely on SCR outcomes.
• Note that "Solvency II is effectively a lead in this area [transparency]", so no pre-conditions should be expected from ratings agencies
• Even bring up the old gripe that EEV/MCEV is still not understood well enough by agencies/analysts, so by implication there should be few worries about additional disclosures!

Considerations for Building a Diversified Investment Portfolio - Charles Pears from Insight Investment

Really accessible and well structured two-pager on portfolio diversification, of particular use to non-experts which covers

• Rationale for insurance companies looking for low risk returns;
• Risk drivers which make that difficult in today's environment, even if accepting minimal risk
• Why companies may look to seek excess returns, and the constraints around that
• Why decisions to accept more risk for enhanced rewards should be (but perhaps aren't always) knowledge based
• Basic options for enhancing portfolio returns without breaking the bank from a capital perspective.

Interesting is wrapped up with a comment that "...we expect insurers who adopt a Liability Driven Investment approach will secure a meaningful competitive advantage" - hard sell perhaps, but the rationale for it is well documented here.

Clear Path Analysis - Van Hulle interview, legislative path, Omnibus II and more

Fantastic body of work released by the guys at Clear Path Analysis (need to sign up) - extensive interviews with Karel van Hulle, EIOPA representation and insurance industry senior figures (and as a sponsored piece, surprisingly unaffected by hard selling!). A few revealing pieces from the van Hulle commentary;

• Sovereign debt - confirms the Solvency II approach on zero capital for EU national debt instruments copies the CRD4 approach in banking and that "we need the same approach", while going on to say cryptically that "when events change then the regulation will have to change as well"
• Go Live date - "believes it is the final revision"
• Omnibus II - end of the year for clarity, once parliament and council conclude discussions, with "early 2012" down for the parliament vote
• US equivalence - notes that "all discussions with the US are difficult" (saucer of milk?), but has optimism as they "seem to be moving in the direction of Solvency II". Not quite the message being sent across the Atlantic, even if true!
• EU regulator - "We have to see how [EIOPA and sisters] work first before we can go to the next stage"
• Transitionals - national regulators should not be able to vary the transitional measures to create regulatory arbitrage
• EU Parliament's advice on reintroducing regulatory technical standards - "The Commission does not believe that this is necessary"

The following was also useful for calendar planning/expectation setting on your project plans;

• Trialogues between Council, Parliament and Commission commence in November to develop common view on Omnibus II (my last point from van Hulle's comments I suspect will be high on the agenda!)
• EIOPA major consultations will commence in November this year (on ORSA and the Reporting Package/templates) and mid 2012 on standards they are expected to write.
• EIOPA still focused on Jan 2013, regardless of phased approach in Omnibus II