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!

"Dear Deidre" - Cross border insurance flogging under General Good provisions

One for giggles more than anything else. The other day I spotted a response from Lord Hill, the esteemed EC Commissioner for Financial Stability, to a question arising from Deidre Clune, a relatively new Irish member of the European Parliament.

Good question, wrong Deidre...

Specifically, the question related to a Maltese-licenced insurer which hit the skids back in 2014, with the CBoI's summary information here. It seemingly only wrote business in Ireland (hence I suspect it was cheekily named after Ireland's TV sports channel to aid sales!), and therefore left every White Van Man/Woman without cover, until Ireland's Insurance Compensation Fund stepped in.

A few things stood out about this exchange;

• The then prospective MEP used the incident as political currency in the election campaign - "Vote me in, and I'll personally fix the EU insurance industry...", she almost said!
• That Ireland, the log-term epicentre of EU cross-border distribution and birthplace of Quinn (which almost turned over the UK White-Vanners back in 2010), would have the brass to nibble at the hand that feeds it! Only 3 months ago, the CBoI's Sylvia Cronin was warning of a likely "...increase in cross-border activity", and at the same time EIOPA's Sr. Bernadino left a not-too-subtle hint that "In the specific case of the Irish insurance market, special attention needs to be devoted to the fulfilment of the general good provisions of host countries by the companies selling cross-border."
• That it took 6 months to get an answer to Deidre's very basic question (at least according to her first public mention of a response in this media article). It took an extra two months for that answer to be published formally.
• That in that article she was reported to believe that the measures spelled out by Lord Hill were to "...prevent this from happening again" (as opposed to enhance policyholder protection while facilitating orderly failures when they occur, etc etc). To be clear though, that is quoting the article, not the member!

Does anyone think that now, even after EIOPA's efforts to-date, that supervisory colleges will be effective enough to prevent these kind of events, or do we just buy local and hope for the best?

ORSA's Head? International Actuarial Association on ORSA Value

Unknown unknowns
- just say it one more time...

A rather verbose piece from the International Actuarial Association, or AAI if you are inclined comme ça, on Delivering Value From ORSA. Always worth a glance over these at this stage of proceedings, regardless of which side of the Atlantic you are currently rocking (with both Canada and the States keeping noisy on the topic in recent weeks).

As one might expect from a publication from an actuarial representative body (and one which aims to cover all IAIS bases, rather than the specificities of US/Canada/EU ORSA), it struggles for semblance once it needs to cover non-quant, and is therefore heavily flannelized.


The definition used by the IAA is:

ORSA provides a declaration of the company’s assessment of its position in terms of profit, risk and capital, both now and in the future, under different scenarios and relative to the company’s appetite to risk.

The purpose of the paper is to provide Board members with "insight into the value of the ORSA Process", which is a noble aim in itself, and a few nice touches can be found throughout, in particular:

• The word “profit” features on virtually every page, almost unheard of in the EIOPA Guideline world where being able to “enhance the management of the undertaking” is King. Heaven forbid anyone makes a quid or two out of it!
• The coverage of how insurance companies tend to profile risk is clean and rational (p3).
• The concept of mitigation through company policies, overseen by good governance structures, as opposed to either holding capital or purchasing mitigation, is also expressed with clarity.
• “A company’s risk appetite, once determined by management and approved by the board, can be treated as a budget”. Lovely concept, though it needs more flesh to provide the 'insight on ORSA Process value' that the paper is intended to.

A few contradictions emerge in the document;

• ORSA “needs to consider and be consistent with an insurance company’s business strategy” – does the process not need to as good as set it? Indeed, they go on to say on page 2 “The true value of ORSA can only be realized when ORSA becomes integral to management’s strategic decision making”!
• Does ORSA “help build/maintain risk awareness throughout the company” – it would be a struggle to say it could do that any further than the relevant staff which EIOPA ultimately allude to. 
• Concept of “Solvency Risk Profile” is borderline unintelligible (p3)
• Terminologically, the section on risk appetite and risk profile on p3 is heavily quant-based, and feels country miles away from similar materials published by the CRO Forum a few weeks back. Specifically, it talks of “acceptable levels” of solvency risk, “minimum and maximum bands”, and that in aggregate across risk categories “This band of acceptable risk is referred to as the risk appetite”. Given it doesn't appear to veer to far away from the FSB's take on Risk Appetite, perhaps this is more of a step forward than EIOPA's 2013 back pass to the AMSB on the matter (p59-60)
• That models used should be “subject to independent validation” – is it that important if you are not using your model for regulatory capital purposes (i.e. just for ORSA)?
• The residue of Rumsfeld, which I had hoped had been resigned to the Noughties dustbin, reappears on pages 7 & 8, specifically “A complete ORSA would include the assessment of unknown unknowns”. Pacino said it best in Godfather III…

Solvency II Industry Forum in Ireland - Clint and Chocolate

Having treated the speech by EIOPA's Chair as the main course a few days ago, I'd better take a look at the hors d'ouevres and pudding. At the CBoI's industry event in late April, a couple of their biggest hitters delivered speeches of their own, with a similar tone to the PRA's effort in October (i.e. a considered yet firm rollicking).


Solvency II Marathon
- no Snickering...

Sylvia Cronin's speech, in which she referred to Solvency II as the "Marathon of Marathons", shone some light on how Ireland plc has dealt with ORSA during the preparatory phase. If you remember, the CBoI kindly provided ORSA templates for the entities lower down the PRISM spectrum, which I felt at the time was fully justifiable, and a tactic other NSAs should have adopted.

It wouldn't appear that the industry has performed exceptionally in their 2014 efforts, with Ms Cronin drawing attention to the following flaws in execution

• Variances in ORSA Report content between firms in similar sectors  "cause for concern" - a slightly worrying comment, given that some firms will be over-elaborating with content with the help of their friendly consultancy firm.
• Boards were aggressively called out on the "ownership" front. If your Boards have been ambivalent to-date with regards to participation in the ORSA process, they will seemingly get a hard time from now on.
• ORSA Process "...as important as the document itself" - music to my ears, and still a surprisingly difficult concept to convey
• The "so called use test" is referenced around ORSA, and not in the context of internal model applicants - no idea what that is about, so will assume it was a clumsy turn of phrase, rather than a new element of legislation
• Stress testing seen to be "too benign", with firms ignoring key risks and hard-to-quantify risks. Given that the UK firms received similar feedback on their 2014 ORSA stress testing efforts, it doesn't appear to be a country-specific failing.
• 'Local' (i.e. Irish) ORSAs which filter into wider Group ORSAs have not been adapted to fit the business model of the Irish entity. Good issue to pull firms up on, if they are relying Head Office to provide them with process and reports in template format 
• Business plan and forward looking time horizons not considered plausible, possibly a by-product of the lack of Board involvement in the ORSA Process

On the Pillar 3 front, she noted the following

• Pillar 3 is now a "cause for concern" - decisions by firms on architecture and expenditure "now overdue".
• Only half of High or Medium PRISM firms have participated in external user testing on Pillar 3. This still feels proportionally more than the PRA have tested out, though it is still viewed as a negative by the Bank.

"Problematic Applicant"?

Cyril Roux on the other hand wanted to reflect on "the good the bad and the ugly of Solvency II" in his address. While most executives paying for Solvency II programmes in EU insurance entities would suggest that "A Few Dollars More" is a more apt Clint Eastwood hook, he took a more macro view during which he;

• Patted the Irish regulator for its "good work" putting the house back in order after the laissez-faire approach at the start of this century. 
• Also reiterated that Pillar 3 preparations are light in the country, urging firms to "...devote the resources necessary"
• Dwelled heavily on the subjects of investment risk appetite and prudent person principle
• Pointed at "problematic applicants" who can now seek approvals to do business in the EU regardless of the supervisor's thoughts about their business models
• Called Solvency II's quantitative requirements "ill conceived" and "overboard" and "clearly too complex"
• Commented that SCR is "unlikely, unreliable tool to manage capital" - "...certainly the supervisor will not be using it for more than its worth".
• Gave short shrift to the abolition of prudential reserving under Solvency II, and indeed Bernadino referred glowingly to the Irish approach to reserving governance (presumably to counteract this grievance?) in his keynote speech.

A lot to be taken from these speeches if you have any dealings with Irish insurers, and with the clock ticking, I can't imagine there will be better steers than these during the preparatory phase.

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...

Jurassic Talk - enhanced NED challenges during Solvency II preparations?

 Britain's youngest NED

Given that there won’t be a heck of a lot more briefing done on the Non-Executive Director front, I’ve given the PRA Industry Event slide pack published the other week a bit more of a going over to see if the left and right hands are pushing the Solvency II wheelie bin in the right direction. I haven’t gone as far as watching the 1h 30m video of the event yet – if I wanted to watch a room full of fidgeting old men in ill-fitting suits I’d just go to Bridge Night at the bowling club…

I can’t say I was massively enthused by the read of the slides as an individual who is frequently delivering material to the very audience the presentation was aimed at. I would highlight the following oddities;

Internal Model-specific (slides 6-12)

• That Solvency II “sets a high bar” for model approval – that feels a little disingenuous given that the PRA has had the whip hand in the IRSG’s internal model committee for years, and has evidently driven their CAT. Fair to say that the PRA set the "high bar" on behalf of the rest of Europe.
• From the “lessons learned” section they suggest that some IMAP/CAT firms have used assumptions which are not matching their experience. Is that not bravado bordering on criminality? Doesn’t feel like small beer, so unless the PRA are splitting hairs with that comment, I trust the protagonists had a strip torn from them.
• Some models ignoring “Key Risks” faced by a firm – how can this be? If this is about cheeky risk selection (i.e. let’s use SF, but model Market Risk as we get a good number from it) all well and good, but to say that firms are ignoring them is not a good steer, and if they are, then how is punishment not already being dispensed?
• For Use Test purposes, NEDS told to have “belief” but not “blind faith” – this feels like Bank Creep, given that the PRA  have been vocal (here and here) on firms blindly following models after the banks got caught with their trolleys down a few years back (nice PRA summary here). Doesn’t feel especially fair to tar insurers with exactly the same brush in advance, even if it is smart!
• “Boards need to own validation design” – just sounds meaningless when you read it back. If you want them to “do” the design (which Andrew Marshall’s later slides deriding the efforts of the validation contracting community suggest also support), then just say it.
• The “Key Questions” slides contain some very ropey gear. “Does the output of the model give a credible answer”? “Can the firm survive on the Standard Formula”? The terms used are so flimsy that one could spend hours arguing the toss about their definition – “so what is survival – EC+, SCR+, MCR+ with recovery plan” etc.

ORSA and SoG (slides 14-18)
Starts with a bit of good news – some generic industry feedback is seemingly due within the next couple of months (pertaining to our 2014 ORSA efforts?). The slide summarising findings to date is also a useful yardstick for those who can’t wait that long.

For System of Governance, the executive world should prepare themselves for NED questions regarding whether or not they (as opposed to their underlings and contractors) are reading EIOPA's Guidelines. Let's hope they have!

On the gnarlier side;

• Seems to be an obsession with assigning named individuals (as opposed to roles or teams)  to perform mitigating tasks relating to anything ropey uncovered during the ORSA
• “ORSA should be holistic” – at what point is that breathtakingly grim term going to be put to pasture? For a NED briefing, the use of plain English should be considered par for the course. It is followed two slides later by “top-down/bottom-up” which is equally non-specific.
• “ORSA is not a compliance exercise resulting in a report to the PRA” – I think you meant to say “not ONLY...”!

The final slides from Ian Marshall’s presentation are revealing more due to the clumsy terminology often used at the table with NEDs (“Key Drivers” and “Key Correlations” for example – if you mean “most money riding on it”, then say it!). Also, the idea that Risk Appetite is “no longer an aspiration” is worrying – I would have given the insurance industry credit that it ceased to be aspirational some time ago, and doesn’t need a 2015 ‘tick’, but then I am a trusting fellow.

Does anyone think, off the back of these slides, that their NEDs will be chomping at the bit at the next Risk Committee/Board meeting using the ammunition supplied here?

Maybe I’d better watch the video after all… 

Solvency II - things what happened in the last couple of months...

She might not be singing yet, but just like my nana at Pilates, the Solvency II fat lady is taking some deep breaths. As I have spent the last couple of months at home in au-pair mode, gladly leaving the rest of the world to waffle about ERM and Solvency II, I thought I would throw together a catch-up post, given that applications for some of the Solvency II goodies have been open since 1st April.

Starting at the top, the UK Government managed to stay sellotaped together long enough to get the fundamental Solvency II legislative work pushed through Parliament before they disbanded for the General Election. The documentation is available in full here, with synopsis here. Interestingly, this formally obliges the PRA to review capital add-ons "at least" once a year, as well as to provide specific reporting to EIOPA on the topic. There is also a little more meat around the sticky issue of firms who breach their MCR, then look unlikely to rectify the matter.

The Government also released the findings of their Regulatory Policy Committee (RPC) in assessing whether Solvency II was going to be a blessing or a curse for Britain. This is actually a very handy drop-in document for your NEDs/peripheral programme figures, and is worth pushing on to them.

They do make the rather controversial statement that on top of the estimated £2.6bn cost to the industry of implementation (!!!!!), the ongoing costs of c.£200m a year will be due to reporting obligations (fair enough) as well as the need for a remuneration policy (hmmm?). Rather disparagingly, the Treasury merely estimate "un-quantified administrative benefits" off the back of improvements in risk management and governance arrangements.

The PRA have recently released the Policy Statement covering their final rules for Solvency II implementation, which on paper should contain no surprises (other associated materials available here). Generalist media chatter (here and here for example) was pretty underwhelming, and while Mark Carney emphasises in the statement that Insurers must be "robustly supervised", Andrew Bailey stated merely that while the "...new regime will not be perfect...it is a welcome step in the right direction"

On a lighter note, the European institutions got a bit beefy over the new year when the newly installed Commissioner Hill had his ears chewed by ECON's new Chair regarding a range of issues or unanswered questions regarding the Delegated Acts. Having given himself a couple of weeks to digest, he pinged out a reply thanking ECON for pointing out three typos, and otherwise defending his corner. Much of the background noise in this correspondence regarding infrastructure investment and EIOPA funding has had a life of its own for some time now - indeed, EIOPA's dummy was definitively spat on the matter last week when they "reprioritised" their 2015 work plan to account for budget cuts.

B-ABI - got back?

NEDs have recently been the beneficiaries of a webcast featuring the juicy double of Huw Evans and Paul Fisher discussing the implications of Solvency II's progression for NEDs. For anyone struggling to get their NEDs to read overinflated board packs these days, a diversion to this footge would be a smart idea (video 1 is more chatter, so start at video 2).

A parallel release for NEDs came from the PRA in the form of a slide pack and a monster 1hr 30m recording of the presentation which it accompanied. Clearly the PRA have seen enough gaps in the efforts of NEDs to date to go to these en-masse tutorial lengths, but the material on validation and ORSA in particular should be swallowed whole.

PRA Pillar 3 Working Group - testing commences

Bit of activity on the Pillar 3 front, with the PRA's industry working group publishing minutes from their 'recent' meeting (i.e. 2 months ago).

Rather than another bleat about late delivery in contravention of their Terms of Reference (bottom of last page!), let's enjoy the content for what it is, which is incredibly useful.

Data Collection and xBRL
A few basics were formally tabled, such as the PRA completing their vendor selection for a data collection system, and a note that the xBRL process chosen across the EU has "some commonality". Of particular interest is the commencement of a testing sub-group which has been charged with assisting the PRA in getting their technology up and running with sample data, and that work is apparently ongoing as we speak.

They have planned to allow selected submittors to dry-run their facilities in Q1 2015, before opening it up to all other firms obliged to submit material in the preparatory phase in Q2. Not sure how much lag this set-up allows, so let's hope they get happy before Christmas!

External Audit and Pillar 3
Another sore point has been the potential inclusion, on a short or long-term basis, of external auditors in the preparation and delivery of Pillar 3 reporting (raised on the Solvency II Wire last month). The PRA opine that external audit requirement guidelines "...are not scheduled to be included" in the forthcoming ITS, and that EIOPA has not decided when to issue public consultation on the matter, though they will at some point.

Clearly the PRA have ambitions to continue their existing requirements for the external audit of regulatory submissions, as evidenced by their preparatory phase approach to gaining comfort on Solvency II Balance Sheet components of all IM applicants and larger SF firms, which will pad out a few partner's wallets at the Big 4 (though perhaps for the right reasons).

Lobbying and questions
Effectively told the attendees to direct more questions to EIOPA rather than them, and in particular to wait for EIOPA's second set of ITS, due any day now. On the basis that ITS will (probably) be accepted by the Commission as delivered, the PRA are reminding firms that this is effectively the only window for the industry to bleat.

Board sign-off of QRTs
A huge bugbear across the industry was the implication, reinforced through the PRA's Pillar 3 Q&A document (Q20, last page), that June 2015 would see piles of QRT material tabled at Board meetings across the UK for them to formally approve. They confirmed at this meeting that the Board "...may choose to delegate aspects of the process for operational reasons" - CFO sign-offs all round!

Asset Data, and interaction between Asset Managers and Insurers
A slightly odd, but very relevant point was raised regarding Insurers interacting with their asset managers to ensure they get the right quantity and level of granularity in their asset data to populate the QRTs. The PRA are naturally concerned about this, given the shortening timeframe, and given that the asset management industry themselves appear to be making some voluntary efforts, it feels like the insurers have some work to do.

Approved Persons in UK under Solvency II - "SIMF-ly The Best"?

The UK prudential and conduct supervisors doubled-up this week with a barrage of paperwork regarding "Fit and Proper" assessment of senior staff members in Insurers under Solvency II.

This was already acknowledged as an area where intelligent copy-out wouldn't quite cut the mustard for UK plc, so no doubt the Compliance functions of insurance entities have been looking forward to these publications appearing. Given the light touch on the topic in the Directive (Art.42) and Delegated Acts (Art.273), this is very much welcome gristle.

Evidently "Proper" - but "Fit" enough?

While the maintream media has cranked out some comment already on both the FCA (here) and PRA approach (here, here and here), they are naturally broad with their brushes. I thought I would cut it up into my much more insular world of "what does it mean for Key Functions under Solvency II".



PRA Consultation Paper

• The regulatory framework for individuals will be called the Senior Insurance Managers Regime (SIMR), and will come into force from 1st Jan 2016. 
• The CP is targeted at ensuring fitness and propriety of individuals running an insurer, or performing a Key Function.
• NED's have been left out of this paper, as there is a wealth of comment already provided on a separate joint FCA/PRA consultation from the Banking industry.
• That said "...the regime for insurers should not be identical to the regime for banks". 
• While Controlled Functions continues to exist as a PRA term, it will be interchangeable with the term Senior Insurance Management Functions ("SIMFs"), which I have used below.

Going into detail, we find the following;

• CEO, CFO, CRO and Head of Internal Audit are all SIMFs, with Chief Actuary, WP Actuary and a couple of Lloyds-specific roles also lined up.
• Some Group-specific SIMFs also created.
• Any Solvency II "Key Function" holders who are not SIMFs will simply be assessed within the business, with the PRA having right to overturn. I thought this would include the Head of Compliance, but they are picked up by the FCA (below). Not sure who else could be Key Function but not a SIMF, unless some SIMF role-holders don't plan to also do a day job.
• List of new Core Responsibilities provided which need to be allocated to one or more SIMFs (2.21). These include the old chestnuts of remuneration policy and "culture" in its broadest sense, as well as performance of ORSA.
• A form will follow which needs to be completed by firms for all prospective SIMFs and Key Function holders containing "relevant information" on them - I suspect this will be a LinkedIn cut-and-paste job.
• Obligation to make and maintain a "Governance Map" listing the positions and key functions which run the firm, the allocation of management responsibilities (including the new ones in 2.21 presumably) and relevant reporting lines. Oddly, the PRA think "...there will be some costs in compiling and maintaining the Governance Map", when it feels like a lazy Thursday morning for Company Secretarial to me...
• Some reinforcement of Conduct standards for SIMFs and Key Function holders, with Key Function holders having an additional policyholder protection-related standard added to their armoury.
• Emphasise that Fit and Proper needs to be assessed on an ongoing basis, as opposed to periodically, which effectively gives the regulator a get-out-of-jail when a bad apple SIMF mismanages a firm (i.e. "why didn't you pick it up internally first?").
• Solvency II brings in a legal requirement for firms to satisfy themselves of a candidate's fitness and propriety before sending applications to the PRA. They therefore plan to assess whether firms recruitment processes are "appropriately rigorous", which feels like a step into the un-assessable (if that is even a word).

Proposed Supervisory Statements are appended to their document covering the assessment of fitness and propriety, and the application of new conduct standards. From those I would highlight;

• "The norm" is for single individuals to perform SIMFs
• That firms may add to the list of conventional Key Functions using a bullet-point checklist
• Firms can "...freely decise how to organise each function in practice"

FCA Consultation Paper

• The existing Approved Persons Regime will be adapted to fit Solvency II and PRA/EIOPA requirements, as well as existing application forms.
• "Pre-approval" will therefore still exist in 2016.
• While the PRA pick up approval of most Key Functions under Solvency II, the FCA keep hold of the approval of Compliance Function heads, which don't feature in the SIMF list.
• Give themselves some leeway to impose approval and conduct obligations on "certain other functions" in insurers
• Appear to be combing over conduct-related rules from their work with the banking industry

Frankly, the amount of crossover between prudential and conduct regulators, existing and new rulebooks, and banking and insurance industries, makes this particular topic an awkward read, which is why I don't work in Compliance!

Levity aside, the outcome of these consultation papers will have a significant effect on insurers existing onboarding and approval processes, content of executive job specifications, and indeed the fundamental operacy of governance systems, given the level of prescription involved. Now would be a good time to start briefing!

EIOPA's Implementing Technical Standards on Internal Model Approval - ready to "submit"?

EIOPA have kicked into life at the end of October like Freddy Krueger on laughing gas, releasing a swarm of consultation papers and summaries. While the releases on Colleges of Supervisors or the calculation of the risk-free interest rate will be of interest to some, my own interest was in a subset of their draft Implementing Technical Standards on Solvency II Approval Processes

I have tried to cover the distinction between ITS and the other weaponry in the hands of EIOPA and legislators here. The aggregated feedback received by EIOPA on the suite of Solvency II approvals covered by ITS is neatly summarised in this doc, with EIOPA adding dollops of proportionality into the summary, to effectively remind supervisors not to treat the applications of giants and pygmys with the same vigour. Given the audience reaction to the UK regulator's industry event a couple of weeks ago, I think 'proportionality' may need to become the PRA's middle name (though it probably works better as its first name...)

Clearly, two big moans have been common threads in the responses received, and both have been rebuffed. The concept of supervisory requests for supplementary information "stopping the clock" on one's approval window has been retained, while the idea of "no answer in 6 months equals approval" has been firmly rejected.

Internal Model approval
- "Easy, Easy"

Of more interest to me than the other approvals covered by the consultation is the Big Daddy himself, Internal Model Approvals. From a UK perspective I have covered this in multiple posts previously (here, here, here and here for a start) , and was interested to see if any more whistles and bells had been added to what is already an area causing serious fatigue within the UK's potential applicants, not to mention a few dozen corpses from the c.100 interested parties back in 2011 (slide 4 here).

I thought the following was worth highlighting;

• Given that the Delegated Acts are already loaded with granular Documentation requirements for IM applications (articles 243 & 244), the ITS insists on a few more pieces! Having cross-referenced between the DAs and the ITS, I reckon the items listed in Article 3 d, h, j, p, q and r are all new requirements, though none would be a stretch to produce.
• Expectations that your model has been in use prior to application (Art 2 (3 a ii)), and is integrated into your current system of governance (Act 2 (c)) - perhaps this is the effort which firms with capital add-ons will be compelled to do in 2016 & 2017 in advance of model applications?
• Results of your "last" Validation Process must be submitted in a Model application (Art 2 (m)) - again, suggests there will need to be a year's worth of "live" modelling in advance of making an application
• The supervisors have 30 days to assess the "completeness" of an application - this feels weirdly generous, given those 30 days count towards the overall 6-month assessment window (provided the application is complete).
• Despite the PRA's firm assertion on Oct 17th (slide 8) that conditional approval for Model applications is not available, Articles 3 (8) and 5 (4 b) both suggest otherwise, namely that proposed "adjustments" or "terms and conditions" can be accounted for in their decision. 
• As much prominence being given to Model Change process and Model Change policy as the initial Model Application process - applications can actually be rejected on the strength of the change policy (Art 5 (2)). Despite that, the articles designated for these areas (Arts 7 & 8) are relatively straightforward.

There is no real reason why these ITS for IM approval won't sail through at the Commission, so best to prepare accordingly. However, UK applicants with 2016 modelling ambitions will of course need to wait further for EIOPA's Common Application Package before they can finalise this montagne de papier.

PRA's Countdown to Solvency II Implementation Event - When I Need U(SPs)

PRA Implementation countdown
- "Feel like dancing" now?

So along with the entire UK Solvency II sticky-beak brigade, I had the unbridled pleasure of attending the PRA's 'Leo Sayer' on Friday, confidently titled Countdown to Implementation, despite going on to list a range of matters which have probably given both Internal Model and Standard Formula firms plenty of enthusiasm to try and turn the clock backwards rapidly!

Paul Fisher, Julian Adams' replacement as Executive Director of Insurance at the PRA, kicked off with a set of Solvency II vox-pops;

• Solvency II is the "main game in town"
• "The end is in sight"
• The PRA are "not gold-plating the Directive"

A nice bit of reassurance at kick-off time then - unfortunately, the clarity which was to follow from the technical specialists on a range of topics was probably not what everyone wanted to hear, given the tone of some of the audience questioning that followed! In particular (and with everything in full quotation marks below having been said by a PRA rep on the day);

• That the PRA will "have to prioritise" if everyone in the IMAP queue for 'from 2016' approval drops their applications in at the end of June, and that applicants should be "striving to submit" sooner. Suggests to me that the smaller firms in IMAP may get bumped to squeeze in the big boys.
• The reinforcement of Mark Carney's message from the other week that they will have no problem refusing permission to use models, though this was couched by Fisher in the more appropriate context of failure to meet any of the TSIMs simply "cannot be allowed".
• That, although over 90% of the UK industry was down for using Standard Formula, the PRA will be equally aggressive when challenging their preparedness as they will for IM firms.

I didn't hang around for the afternoon sessions as I had a hot date with BA, so pull whatever you can out of the Other Approvals and Regulatory Reporting slideshows. However, I would draw attention to the following from the earlier sessions:

Implementation and Policy overview

• The Old Lady of Threadneedle Street protested through multiple speakers about how they recognise that bank and insurance internal models are different, and how Insurance Supervision is now "embedded into the Bank" - I would assume to justify the credit crunch-influenced aggression now being taken by the PRA on assessing capital models (visible from Adams's speech around the time of BOE/FSA merger right through to Bailey's speech at Mansion House on Thursday night).
• An interesting slide 3 about how much more work Solvency II will generate for the PRA from go-live!
• Referred to FLAOR only once before switching to ORSA, suggesting that this disposable acronym is as much of a pain in the neck for the supervisor as it is for firms!
• Highlight what "Good" and "Bad" ORSAs have contained to-date. Clearly some firms are box-ticking, leaving an unusable report which is only skin-deep compliant as output. They were particularly scathing on Stress and Scenario Testing efforts, and implored that Reports should not be written for the PRA's benefit (though naturally must cover what the DAs and EIOPA have already set out).
• A nice piece was discussed around the expected depth of director-level knowledge of their internal models. Andrew Bulley made a useful distinction between "conceptual" and "technical" knowledge, where your dithering 80 year-old INED from the fishing industry might not be expected to understand correlation matrices, but should probably know their significance, and alternatives to them.
• For model applications to date, far too big ("encyclopedic" in cases), with too much process description, and not enough on assumptions and expert judgements.
• That it is a firm's responsibility to "ensure compliance" with the Delegated Acts, and given their lessening proximity to the legislators, the PRA flag in advance that they will not be able to give "concrete advice" to firms in future.

Standard Formula

A particularly good ground-setter, given the dearth of work published previously on Standard Formula firms and the PRA's expectations. Calendar included on the slide pack, which will be of massive use to your PM/PMO staff!

• PRA will review ALL firms ahead of 2016 for SF appropriateness - "priority" firms assessed by Q1 2015, everyone else by end of 2015.
• While SF SCR is apparently close to current ICG numbers for GENERAL insurers in the UK, it is noticeably larger in LIFE firms 
• PRA is "not promoting" SF ahead of internal models
• Vigorously directed all attendees to EIOPA's Underlying Assumptions of SF Paper - expectation that some firms won't read it, and just expect SF plus any add-ons?
• Very vocal on the "significance of the deviation" between SF SCR and one's own Risk Profile - as we know, the Delegated Acts quantify what 'significant' is in the context of capital add-ons
• An expectation that ORSAs will be used in the assessment of SF appropriateness - qualitative for sure, possibly quant elements as well?
• Range of examples of where significant divergences are being found, by Risk Category, and by Life vs General Insurer.
• A lot of emphasis on Capital Add-ons being used "only as a temporary measure", which will ultimately allow firms to PIM/IM or de-risk. They are however "patient and realistic" on how quickly that change can be done, so it sounds on the face of it like 2016 and 2017 will be targeted for Capital Add-on elimination.
• In the following session on models, a piece came up on Capital Add-ons, where the PRA confirmed that their process for handling these in future is "still developing", though they expect them to be "a lot, lot rarer" than the existing regime of ICG.

Internal Models

Calendar also provided for IM firms (slide 4), showing how tight their schedule is, and explaining why they threw the earlier curveball about all firms expecting to drop their applications in on 30th June 2015. They also touched on the following:

• Highlighting weak areas identified to-date such as over-optimistic (new?) business plans being used in capital calculations; ENIDs; omission of certain "Key Risks", and suspiciously low correlations
• That Use Test is "fundamentally important", and is an opportunity for firms to "put their money where their mouth is". They do not expect to see either end of the use spectrum i.e. no use, or blind use!
• Too much technical actuarial validation seen. Usefully suggested that validation questions may be better posed as "where might this model be inadequate", rather than "why is it OK".
• Confirmed that the PRA's SAT has now been replaced by EIOPA's CAT, which won't arrive until the back end of this year - surprisingly, no-one laughed when they said this "might create some work" for existing IMAP programmes!
• Importantly, they stressed that their powers are to Approve or Reject applications, with no "conditional" powers whatsoever. Attendees were therefore encouraged to delay applications which were thought to be unlikely to succeed, both now and in future.

Though they instinctively feel like they could have been supplied sooner, the clarifications provided in the presentations I witnesses will be hugely welcome by programme directors and PM's alike. I would venture a guess that they will be less welcome by executive committees, who may have hoped for more flexibility on the risk quantification front post-2016.

PRA on Solvency II Approvals - One in the "IMAP"

The PRA today released a consultation paper on applying for Solvency II approvals (with the checklists for firms thinking of applying here), covering such juicy topics  as;

• Matching adjustments
• Ancilliary own funds
• USPs
• Group shenanighans (single ORSA for Groups, and excluding entities from Groups)
• SFCR dispensations

And of course the big man on campus - Internal Model Approval.


I had covered on here back in March that EIOPA intened to bring in a common internal model application package (press release here), whilst also noting that while EIOPA "expected" NCAs to accept and use it, it was not compulsory.

IMAP - waste not want not

With the UK being the largest Internal Model application handler by some distance, the stupendous amount of money, management time and administrative effort which had been injected into the IMAP Process since 2011, there was at least a theoretical possibility that the PRA might say "no thanks", and ask its applicants to continue as they were, albeit with an Excel template amended to reflect the Directive and Delegated Acts as they currently stand

Therefore the rather vicious tearing of hair and gnarling of teeth coming from the UK today is the sound of 60-odd internal model applicants finding out that 3 years of IMAP work is now redundant! Section 2.11 of today's CP states;

EIOPA is expected to publish an internal model application template which the PRA will require all firms to use for their formal internal model applications.

...[firms] will be expected to transpose data onto the new EIOPA template when they make their formal application. The PRA will not be updating the SAT to align with EIOPA's application template

Perhaps I am being a touch harsh to call IMAP efforts to-date "redundant". The UK will naturally have dominated EIOPA discussions around what a template should contain, and how it should be structured to assess applications with maximum efficiency, as they have had the Chair of the Internal Model Committee since 2009!

There is an implication in the CP though that the transposition between the two "templates" will not be as seamless as I had imagined back in March, so I suspect that internal model applicants will need to go back to the market looking for expensive IMAP cajolers in the not too distant future. A shame for UK plc, who will rightly feel they have spent a lifetime's money on this topic already.

 

ORSA and Independent Review - Misunder-stud?

Independent review of ORSA
- banging the drum?

I listened in on a Solvency II readiness webcast a couple of weeks ago which pricked my ears like a low-budget high street beauty parlour. The specific theme was independent review of ORSA, and the broadcaster confidently included it in the list of "things we all need to do" in the Solvency II preparatory phase, both 2014 and 2015.

While most familiar with the topic would immediately cry "that got lobbied out in 2011", the speaker's argument was that, while EIOPA's Guidance no longer says firms should "independently" review its ORSA, it also doesn't not say it, therefore we must do it, and do it annually!

I would have chuckled and left it at that, but having read InsuranceERM's recent roundtable on preparations for Solvency II, the topic again reared its head, albeit in a more controlled manner, as a number of attendees explained how they have used Internal Audit (and dismissed the idea of using external firms) in reviewing their ORSA processes during the preparatory phase.

My problem is this - as an industry we were happy to, erm, relieve ourselves and moan when CEIOPS's first attempts at ORSA Guidance in 2010 included a guideline which compelled annual independent review of the ORSA Process (included in slide 32 of Mr Bernadino's pack here in Summer 2011, as I can't find the original CP anywhere).

This was lobbied-out by the time the re-badged EIOPA released their 2011 CP (here), and when their Final Report followed in June 2012, "independent review" was a distant memory.

Any compulsion to review the ORSA Process is now  covered only by EIOPA's System of Governance Guidelines (here), specifically Guideline 8 asking that a firm's SoG is regularly "internally reviewed on a regular basis" (5.11).

EIOPA continue in 5.11 that "...the review undertaken by the internal audit function on the system of governance as part of its responsibilities can provide input to this internal review" - i.e. this is not work considered to be performed automatically and exclusively by one's Internal Audit function.

In terms of frequency, EIOPA elaborate in section 4.26 of the Guidelines, namely that your AMSB, given your firm's nature, scale and complexity;

...determines the scope and frequency of the internal reviews of the system of governance

 So three things - no 'annual' requirement; AMSB's choice on frequency; and that this is internal review, not "independent", "external", or indeed any other word which gets me contracted past 2016!

KPMG on Pillar 3 and Public Disclosure - in or out?

Pillar 3 - rude awakening?

The operational reality of Solvency II Pillar 3 is seemingly about to deliver a ruder awakening than breakfast at Chubby Brown's. Whilst for example the UK's regulator has offered an element of flexibility in the content of the QRT reporting to be submitted during the Solvency II preparatory phase (Q21 here), Finance functions across the EU will be in an spreadsheet-fuelled scramble to deliver Solvency I, Solvency II and public reporting from now on in.

The lie of the land is not pretty as it stands. Evidently the PRA's crack team of Pillar 3 regulator and industry expets is tabling some sobering questions, given their recently revised Q&A, and both software solution providers (here) and asset data firms (here) continue to ebb and flow with their contributions to preparedness, depending on the pay-off. Some co-odination efforts have recently begun on asset data transference involving the larger EU players, but doesn't yet sound like the golden ticket for the teams charged with delivering Pillar 3 material.

Even EIOPA, the new custodians of the word ERRATA, are seemingly tied up with the less technologically developed EU members in an Excel-flavoured workaround to the xBRL question which, judging by the number of QRT template amendments already applied, has an air of inevitability about it.

It was therefore nice to see one of the Big 4 release results from this survey on how firms are preparing for Pillar 3 in the content of existing and future public disclosure requirements. Small sample (11 firms, all multinationals), and all evidently have existing plc-type disclosure requirements, but the topics and trends covered should inform anyone in the Pillar 3 space who has transitioning on their agendas.

Worthy of note:

• Pre-Solvency II disclosure of quantitative material not favoured - not much to be gained I suppose
• No-one planning to publish projected capital adequacy!
• Responders in IMAP seemingly working on the basis that "Plan B" won't be required
• Few likely to publish "internal views of capital" ( for this read "overall solvency needs" or "ORSA Capital") - analysts felt unlikely to be looking for it.
• Most common differences between Pillar 1 and OSN used were treatment of contract boundaries and the risk-free rate, with the list of distinctions going into double figures
• Some provisional plans for IFRS alignment on the balance sheet methodology front
• Embedded Value about to be jettisoned as a reporting metric - analysts are of course devastated!

Who said accountancy was boring?

Central Bank of Ireland and ORSA - fancy a bunch of FLAORs?

So the Central Bank of Ireland went and knocked together an ORSA Reporting tool for the less complex end of the Irish Insurance industry, specifically the "low" and "medium-low" rated insurers. And to think I have spent 4 years railing at the consultancy and supervisory industries for catering for the big boys, while ignoring the immaterial...


2014 FLAORs
- a serious affair

The tool was released back in July, and while it (intelligently?) copy-pastes EIOPA's guidance and dissects most of those words into a set of obvious questions, there are some aspects which are very revealing in respect of where supervisory expectations for 2014's ORSA reporting and process development efforts perhaps are at the less material end of the industry.

They have evidently taken the approach that most large programmes will have used over the last 3 years, namely to deconstruct paragraphs in Directive/Delegated Acts/EIOPA Guidelines in an Excel spreadsheet, and pose them as questions. Not every firm's budgets would have stretched to accommodate even that level of analysis though, so I'm sure the CBoI's efforts have been warmly received to date.

For example, the following elements are very shocking to me, given our proximity to go-live;

• No compulsion for ORSA Policy (and therefore process) to be documented and Board-approved in 2014 (2.3 and 2.4)
• No expectation that the 2014 version assesses one's ability to continue past the 1 year horizon (4.8)

These elements are perhaps revealing as to supervisory planning for 2015 and beyond;

• Asking when the Board approved the results and conclusions - likely to be hunting for evidence in minutes (2.2)
• Asking which personnel/units have been briefed as to the ORSA results - is there a feeling that outside of EXCOM and control functions, the reports won't see the light of day? (3.4)
• Highlight what they are really interested in, in the context of "overall solvency needs" quantification - risk measure, confidence level and time horizon, which feels proportionately light in focus given the detail in Article 262 of the Delegated Acts (4.1).

Some good elements include;

• Uses of ORSA in decision-making process listed in 1.1 - some are directly lifted from EIOPA, but couple of other examples may help focus the mind (I would add that setting "risk limits" feel sloppy, given the legislation uses "risk tolerance limits")
• Ask for a table to be populated with quantitative results for each risk category, but don't prescribe the category names, rather provide the legislative categories as examples - this is how it should be, especially for the smaller firms. (4.2)
• No expectation that the "medium or long-term" capital is calculated at this point - the column provided is marked *OPTIONAL* (4.2) 

Whilst the data gleaned from the template they have provided may be a bit cumbersome, fair to say that CBoI's efforts will be welcomed by both the qualifying firms (as a pro-forma) and the larger firms as an INED guide.

EIOPA's Implementing Technical Standards on Approval Processes - Cut and Paste?

EIOPA have at last commenced their work on "Level 2.5" regulation in the Solvency II world, and with it being something of a trip into the unknown (only their sister body ESMA world appear to have performed a similar exercise to-date), their consultation papers will no doubt be getting torn apart like a parking ticket by Insurers and NCAs alike.

Open until the end of June with a view to presenting this particular batch to the European Commission for endorsement by the end of October, the ITS cover how the following approvals should be applied for and administered, with definitions and rationale provided in this cover note.

• Use of Matching Adjustment
• Use of Internal Model, "Major" changes to that model, and changes to the Model Change Policy (phew!)
• Use of a Group Internal Model
• Use of Undertaking-Specific Parameters (USPs)
• Use of Ancilliary Own Funds for SCR
• Use of Special Purpose Vehicles for risk transference

For this post, I wanted to concentrate on the Internal Model-themed ITS (emboldened), specifically things which introduce something new to the table (i.e. not already in the thoughts of UK firms/regulators through the Directive, Delegated Acts, Preparatory Guidance or indeed the existing IMAP structure in the UK).

Therefore in the interests of recyclability, UK firms will be delighted by the requirements within this particular ITS - you will recognise the text as part of the Self-Assessment Template "tabs" which you would have been populating as part of IMAP over the last 2 years!

That text was of course co-opted from the Draft Implementing Measures from October 2011 (specifically Article 203 IM1 for the application requirements, IM2-IM8 for the model change and administrative process elements). These articles had disappeared from the latest version of the Delegated Acts, only to find its way into this ITS almost verbatim.

Elements which therefore show noteworthy change from that old text (other than semantics) include

• The addition of a requirement for a (year-end 2014?) P&L Attribution to be submitted as part of the application.
• Withdrawal of some of the ceremony around applying for a change to the Model Change Policy, which was a little more elaborate in the October '11 text (AMSB explanation and justification text, 6 month turnaround time for NCAs to make a ruling).
• The same for an application for a Model Change itself, now seemingly less formal
• Giving room for terms and conditions and transitional plans to be factored in to an NCA's decision on model approval
• That more detail should be published on the NCA's website regarding the approval (namely that the scope of the IM should be disclosed, as well as risk categories and business units covered, which feels a touch commercially sensitive to me!)

I'm guessing this isn't the only ITS which is going to use this approach (i.e. ripping text directly out of the Oct 2011 Draft Implementing Measures where it has been seemingly jettisoned), so a bit of cross checking might help you second guess what is going to appear in the rest of the ITS!

Now I'm off to have a look at the others...

EIOPA's "Common Application Package" for Internal Model Applications - UK back to the drawing board?

The release of an EIOPA Opinion today may very well raise the heckles of the UK Insurance Industry, regarding a move towards a "Common Application Package" to be used across Europe for assessing internal model applications. This appears on the face of it to be disjoined from the internal model-related ITS already scheduled in EIOPA's calendar (p12) over the next couple of months.

Their "package", to be published after consultation with the National Competent Authorities themselves, will comprise of;

•  Instructions 
•  A self-assessment 
•  Background Information 
•  An inventory of internal documentation 
•  An explanatory document 

Worth remembering at outset;

• This is an EIOPA Opinion. In their own words, "This opinion is aimed at proposing to NCAs the use of such common application package", so their proposal is non-binding (p10 here as well)!
• The UK has seemingly (and based on number of applicants, rightly) been in the box seat on this particular topic within EIOPA, so it is likely that their approach won't be far away from the UK's existing one! The suite of Internal Model Application (IMAP) materials in the UK is available here for example, and isn't far away from EIOPA list, in form at least.

That said, a combination of EIOPA's desire for convergence, and the recently released and revised Delegated Acts may have a particularly destructive effect on existing IMAP efforts within the Solvency II Programmes of UK insurers. I have therefore had a deeper trawl through the Delegated Acts in order find out what the practical implication of any changes in the redrafted Delegated Acts might be.

As anyone who has worked in the UK IMAP space will (un)happily tell you;

• The PRA's approach to assessing internal model applications (inherited from its predecessor) involves deconstructing Solvency II Directive and Delegated Act text into sentences, and in some cases sentence fragments. This created over 300 "requirements".
• Those are transferred into a spreadsheet list, within which firms are asked to list evidence of their ability to address each item (or why the requirement is not relevant).
• That spreadsheet list is housed on an Excel workbook known as the SAT Template, which contains various other worksheets, all of which require manual population of some kind.
• A fully populated SAT Template is required by the PRA for IMAP participants, along with some ancilliary documents (listed here), supplemented by any further documentation which the legislation or EIOPA deem is compulsory.

It's not a tick-box exercise though...

The recent versions of the Delegated Acts which have been creeping around are therefore of some significance to this work. Over the last couple of years, firms will have populated a SAT Template which contained deconstructed sentences from the Solvency II Directive pre-Omnibus II, and the Delegated Act text from November 2011, both of which have now been superseded (without being too presumptuous!).

How do the changes affect the contents of firm's existing IMAP templates, and indeed does it matter? Well, it goes without saying that the SAT Template will need to be amended and reissued by the PRA, regardless of what EIOPA produce. The question for UK firms, having spent considerable money and resource on populating the template in 2011/2012, is whether or not to start from scratch, now that time is something of a luxury, and the end-game is more definitive.

With 2013 being something of a write-off for both Solvency II programmes and the PRA's IMAP campaign (although the costs suggest otherwise!), it is likely that existing SAT templates, crammed with bespoke explanatory text and document references, have either gathered dust for a month or twelve, or received only minimal maintenance.

To see exactly how much of those early efforts will be salvageable, I have taken a look at the Delegated Act articles from January 2014* regarding the Tests and Standards for Internal Model Approval (or 'TSIM', after the acronym allocated to these articles by the draughtsmen), and compared it against the November 2011 version of the same text, and found some significant changes in form and substance, which may render some of your earlier SAT population efforts chocolate-fireguard useful.

The 24 original TSIMs, once deconstructed, respresent over 200 (almost two-thirds) of the "requirements" listed within the SAT template, so any changes in them could massively impact the recyclability of existing content.

IMAP Changes - has EIOPA gone Gaga?

I found, of those 24;

• 6 are unchanged verbatim
• 2 have minor definitional tweaks, but are otherwise unchanged
• 2 have been merged
• 2 'new' articles have been introduced into the section, though neither are labelled "TSIM" at this point.
• All others have been changed in at least form, and in the majority of cases, substance

IMAP candidate firms have therefore been left to contend with more awkward changes than a Lady Gaga concert in a broom cupboard...

Those which have received the most aggressive reworking include;

• Article 225 TSIM 15 - Management Actions
• Article 229 TSIM 18 - Model Validation Process
• Article 230 TSIM 19 - Validation Tools
• Article 232 TSIM 21 - Minimum content of the documentation

It is fair to say therefore that UK-centred internal model applicants may struggle to recycle their existing IMAP drafting efforts without re-engaging Business-As-Usual staff in a substantial way, and that is before we even get to what EIOPA may propose in the "common application package". It also remains to be seen how the other European countries react to the likely Anglicisation of internal model assessment.

If you need help with this on your Solvency II Programme, don't be afraid to get in touch at allan@governance-matters.co.uk


* Just for reassurance, the TSIM text doesn't change between the January 2014 and March 2014 versions, but unless someone published the March version online, you'll have to take my word for that!