Solvency II delays - the unanswered questions...

There's a couple of unanswered questions loitering around in the Solvency II space which I'm sure a more plugged-in switched-on kind of girl could answer, but which I'm struggling to pin down. Looking forward to hearing from anyone on the following;

"Quick Fix 2" - as far as the paperwork from the first "quick fix" is concerned, the Solvency II 'clock' starts ticking on 30th June 2013, and despite the brave attempts of a cabal of Parliamentarians to obtain a second "quick fix", it seems like they failed. Is the clock really ticking for transposition into national law as of Monday?

Omnibus II - putting quick fixes to one side, the anticipation of EIOPA's LTGA report feeding into a positive EU Parliamentary Plenary vote in October 2013 was one of the anchors of what one might call a timely implementation calendar (i.e. 2016). In a typically unannounced manner, the indicative Plenary date, which had already been kicked down the road at least seven times, has this week been inauspiciously removed from the Procedure File entirely (confirmed here on the 'History' tab on 20/06/13).

With EU Parliamentary elections scheduled for May 2014, and Parliament begging for the Solvency II inertia to be broken beforehand, do we reasonably have another window to get Omnibus II through a Plenary vote before that political upheaval, or is the removal of an indicative date acceptance that the LTGA has generated more problems than it has solved?

(Level 2) Implementing measures - the European Commission had these timetabled in their 2013 "expected adoption dates" list, chalked down specifically for Q4 2013. In the last two months this has been removed from the list in its entirety (well spotted Norton Rose). Is this direct acknowledgement that, as indicated by Burkhard Balz last week, that there is no chance of Omnibus II clearing the Plenary hurdle this year?

Someone must know something - don't be shy!

Adams speech to the Economist Insurance Summit - lessons from financial crisis

Some particularly useful context setting from Julian Adams last week for anyone in the Internal Model game, with this speech to the Economist Insurance Summit around what lessons could be learned by insurance supervisors from the financial crisis.

While he amusingly interchanges between "financial crisis" and "banking crisis" to emphasise that it wasn't our fault, and drops in the now obligatory reference to the importance of insurers as long-term investors, echoing the Commission's pleas from late last year, the majority of the speech focuses on why models go wrong (not the name of a ropey catwalk reality tv show...)

Insight on where the FSA thought firms were going awry in the Solvency II modelling preparations was delivered to the industry in the middle of last year, but I found this speech helpful in the context of proportionality i.e. what elements of economic capital modelling are worth spending extra time on theorising, documenting, debating and minuting for IMAP candidates. I saw the following comments as highlights;

Reasons for internal models in the banking industry being exposed;

• "...rested on assumptions which turned out not to hold when bad times came"
• "...review period" selected when parameterising
• "...insufficient rigour and independence from the front end of the business" when parameterising
• "...management attention too often focused on those parameters considered too conservative at the expense of those that were insufficiently prudent"
• "...destabilising feedback loops" where underestimation of risk (due to data selection) plus use of the model leads to a vicious cycle of unacknowledged over-accumulation of risk
• "...flawed technical assumptions" in tail-end probability estimation where data is drawn from "normal" times

Lessons for Solvency II

• "Data [should be] sufficiently robust"
• Assumptions should be "appropriately conservative"
• "[Supervisors] can be helped...by the much greater use of imaginative tests of resilience to deeply stressed scenarios"
• "...paucity of relevant historical data for the calibration of tail dependencies between risks"
• That "...the limitations [of capturing tail dependencies] are recognised, and conservatism built in to the calibrations"
• That "...correlations in the tail are likely to be assymetric in nature" for insurers
• That "...the adoption of quantitative techniques...will not change the nature of the risk itself"
• That supervisors "...must not blindly accept the outputs of these models"

Appreciating some of this is hardly new news, any increased documentation and rigour in the areas highlighted will no doubt be well received down at the Wharf.

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!

ABI Conference today - reason why the EU Parliament stayed away?

Still very early after the ABI conference today (I wasn't there, so relied on some heavy duty tweeting from Elliot Varnell and Insurance ERM).

All the great and good were there (van Hulle, Montalvo, ABI, FSA, and all the CROs in the UK who blagged a day off!), however there was no representation from the EU Parliament which, bearing in mind we are in trialogue season and there is plenty of debate still to be had, is conspicuous to say the least. A Burkhard Balz or a Peter Skinner would surely have been a good attendee to get the right balance.

However, Insurance Times flagged this from Sr. Montalvo at the conference today - looks like the EU Parliament have missed the pre-Christmas window for discussion Omnibus II, and, looking at a late January debate now, have left almost no wriggle room between debate and the Omnibus II vote.

Who this compromises the most out of the troika is unclear (EIOPA I suspect, being the unelected body), but Parliament's absence surely saved the event from a seasonably frosty atmosphere!

Omnibus II update - implementation plan shenanighans

The European Council pushed out the July version of the Omnibus II draft at the end of last week (a little late perhaps, but the Europeans do go on holiday for August I guess!).

Changes from the June version include;

• Introductory paragraph added on ensuring that continuity and development of long-term guaranteed business is not impaired when developing this text.
• EIOPA now obliged to produce technical information on the Equity Risk sub-module of standard formula
• Supervisors will be applying laws and regs required to comply with implementation plan requirements from 1^st April 2013 (this was from 30^th June)
• Guidance from EIOPA on what the “implementation plan” requirements are still expected on 31^st March 2013 – must now also contain guidance in the context of proportionality.
• The implementation plan must specify which, if any, transitional measures will be utilised.

Most significant one seems to be the third one – I can’t fathom why they have expressly said that regulators need to be able to police the implementation plans in April 2013, if they are not due to be submitted until June 2013.

It may be that the national regulators have lobbied to be able to check up on companies pre-submission to make sure the implementation plans are compiled to their liking first time round. With little room for latency, I suppose that would make sense.