Standard and Poors on European ERM - momentum lost after Solvency II delays?

S&P released these pearls of wisdom regarding ERM within European insurers, specifically whether the additional breathing space offered to Solvency II may put the brakes on developments.

There's certainly no sitting on the fence with them - they start with the following as a statement of fact;

...the delayed start date of Solvency II has prompted some insurers in the region to reduce their efforts in developing ERM

Unsupported, but probably fair! They are also overwhelmingly positive on Solvency II on the whole, for example;

Solvency II remains a major driver of ERM improvements in Europe

the Directive has firmed up insurers' approaches to risk appetite, risk governance, and risk reporting

The introduction of the Own Risk and Solvency Assessment (ORSA) process...has helped to embed risk appetite in insurers' operations

Solvency II has brought risk management to the fore in insurers' strategic planning 

Easy to take any of those comments to task in the UK and Ireland, where national corporate governance code revisions, listing requirements, IAIS considerations and developments in both the actuarial and  nascent Risk professions are all taken very seriously by the respective industries, all the while cognisant of the shadow cast by Solvency II. In addition, the disciplines espoused by S&P's ERM assessments are practiced to a decent extent in existing ICA/FCR processes/reports, regardless of how 'ORSA-fied' they have become over the last couple of years.

This potential slight to the Western world is remedied on p7 however, where the research acknowledges that Western Europe effectively leads the way on ERM, and in the appendix (p8-12) where the league tables sit Germany and the UK firmly at the top of the ratings class.

They ultimately get to the real crux of their fears with this;

We would view negatively any evidence of a reduced role for economic capital in insurers' capital management arising from the delay

They are also gunning for insurers who continue to sell uneconomical products in the face of sustained low interest rates (p4), and validation standards in internal modelling (p5).

One would hope that, certainly in the UK with ICA, ICA+, and a supervisor who is continuing to staff pre-application for internal models adequately, that momentum around using economic capital in decision making will not be lost during 2014, particularly now that the PRA have as good as said that they accept EIOPA's preparatory guidance.

So give this a read if you want to know where your firm lies in the S&P ERM rating table, and if their opinion matters to your bottom line, be sure to quote this material when your Programme sponsors try to take the pace of 2014 Solvency II activity!

 

 

European Economic and Social Committee paper on Solvency – 5th May

I do recall fishing for this and having no success, but the EESC Opinion Paper on Solvency II (agreed last month, but not sure when released) makes for fascinating reading.

As with most things relating to European bodies, I struggle to identify exactly what the purpose of it is, but the committee, at the behest of the European Council no less, make a number of substantial points;

• Solvency II "should not result in market consolidation, especially in respect of small and medium insurers
• Focus very hard on sustaining the provision of guaranteed long-term products, and therefore an "appropriate" interest rate term structure is indispensible in calculating SCR
• That this is not just a technical issue, but also a political issue when involving provision for old age
• Explains the reason for "implementing measures" becoming "delegated acts" at Level 2 (which I never knew the driver behind until today!)
• Heavy on smoothing the transition between Solvency I and II, and states that the transition should cover "all three pillars"
• Proper assessment of how transitional rules can be consistently linked with supervisory actions in cases of non-compliance post go-live date
• "Transition should refer more explicitly to the upgraded Solvency I standard as an (optional) minimum level" - I may be wrong, but is Solvency I not a retrograde step for UK  plc, who are already knee deep in ICAS?
• "Interest Rate term structure and illiquidity premium will not be determined by legislative bodies"
• Timeframe for effective launch of Solvency II "particularly challenging" - "Insurance companies cannot be held accountable for instructions that are to be published at a later stage"
• "The proposal that EIOPA develop draft implementing measure by 31 December 2011 at the latest would seem to be somewhat ambitious"!
• Discourages developing more Level 3's where Level 2's already exist - "In case of any doubts, for individual implementing measures (Level 2), no additional technical standards (Level 3) should be provided for; eg Level 3 would not appear to be necessary in respect of own risk and solvency assessment (ORSA), the classification of Own Funds or ring-fenced funds" 

I honestly don't know how to read this - is it the start of the goalpost moving process, the issue of a public challenge to meet tight dealines, or a reprimand for CEIOPS/EIOPA for regurgitating most of Level 2 into Level 3? I guess there will be more to follow...