Deloitte on 'regulatory uncertainty in Europe' - embedding a new modus operandi (?)

In a wonderful example of predicting the present, Deloitte have released a white paper (sign-up required) giving their take on regulatory uncertainty in the European insurance industry, and how the volume of new regulations (and their inability to land on time) is driving emerging best practices in the consideration of regulatory risk at Board level.

New Modus Operandi - alloy wheels optional?

Of course, it is always best to wait for such matters to emerge before proselytising, and the current cup of omni-postponed over-elaborate regulations is running over (Sol II, IFRS 4 Phase II, FATCA, etc), naturally causing difficulties for all those responsible for preparing for them, as well as the execs who take the topics into the boardroom every quarter, only to say "it's been delayed again, can I have more money"...

From my perspective, it was particularly interesting to see that proactivity is recommended regardless of nature/scale/complexity, bearing in mind the first time I spoke to a Board of Directors at a tiny insurer regarding Solvency II preparations was in 2009 - only consultants could comfortably suggest that an new executive-level role is established, and Board agenda time is regularly set aside, only to explain the latest delays in multi-jurisdictional regulations (I certainly know what my old CEO would have said to that!)

That aside, they suggest that two major problems need to be overcome; that few insurers have a single view of regulatory risk; and that regulatory insight is poorly represented in the strategic workings of insurers, both of which are easy to agree with purely on circumstantial evidence.

Whilst this frequently reads like a paper written to justify bringing consultants in to compensate for failing in risk and compliance professionals' armoury, Deloitte make the following noteworthy assertions/recommendations in it;

Trends

• That most insurers prefer to 'wait and see' rather than be 'first mover' when it comes to regulatory preparations - after the Solvency II experience, does that surprise anyone?
• That "...Deloitte's view is that regulation can be regarded as a 'structural' driver of the insurance industry"
• That "...Deloitte's considers a regulatory dividend can and should be sought", which is not necessarily my experience of consultancies when on site, who (presumably for legal reasons) prefer to promote a gold-plated complaince approach to regulation-driven projects.
• Cost of compliance is now materially diluting return on equity in EU insurers
• That Conduct Risk is likely to become high profile across Europe over a longer period of time than its current flavour of the month feel, thanks to IMD2/PRIPS/MIFID
• National regulators are increasingly impeding on day-to-day running - examples given (all of which have a whiff of IMAP requirements about them), include documentation improvements and influencing risk appetite/capital allocation work.

Costs and volume

• Regulation prep cost the European insurance industry €4.2-€4.7bn in 2012 - they go on to expand that to €8.1-€9.2bn over the last 3 years.
• UK industry will be subject to 29 new pieces of legislation of the next 5 years (surprisingly lower than the French at 35, and the Germans at 32!)
• That the "cost of doing nothing" while waiting for regulatory clarity may be significant - as significant as consultancy spend preparing for something which never arrives perhaps?
• That compliance functions are naturally struggling to cope with the current volume of initiatives

Solvency II-specific

• They extrapolate an estimated €550m cost of Solvency II compliance preparations in 2012 into a €1.5bn-€1.8bn 'top 40 insurers' number, and a €2.4-€2.9bn figure for the whole industry - feels a bit light, bearing in mind 'UK plc' must have done the best part of £1bn on Solvency II alone in 2012.
• They quote one strategy director as saying that "Solvency II is killing European M&A..." - p10

Their recommendations (from p19) are too woolly in aggregate to help a normal practitioner - they are probably targeted more towards programme directors and managers - but the recommendation  to establish a Regulatory Assessment and Response Executive with a suitable remit is a smart idea, even if from a practical perspective this might need to either be balled in with the responsibilities of an existing executive, or only be a mid/senior management role, in smaller companies. 

These recommendations also include the marvellous suggestion to "embed a new modus operandi" - an expression normally reserved for profilers of serial killers, and perhaps the hardest sell since Isle of Man beach holidays.

PS I apparently missed the memo where the oft-ridiculed speech of Donald Rumsfeld used to support war against Iraq became de rigeur in risk management/insurance white papers. If there is one "known known" in this world, it is that I will never use that expression on the job!

CEA Annual Report - Solvency II review

The CEA pushed out their annual report today – some very convenient Solvency II and other insurance undertaking-related progress summaries with regards to their lobbying progress.

Solvency II Points;

•  Commission reiterated that the industry should not need to raise additional capital for Solvency II (supporting their view on inclusion of EPIFP in Tier 1, contrary to EIOPA’s wishes
•  Impact assessment will be published when the Commission puts out the Level 2’s later this year 
• “Large part” of the CEA’s Level 3 lobbying work has been on Pillar 3 reporting templates (two rounds of consultation). For some issues they have argues for exclusions on the grounds of utility or cost, as opposed to confidentiality 
• Submitted responses for Level 3 ORSA, System of Governance, Own Funds and Internal Models sounds like these were priority 2. 
• CEA highlights its desire for transitional measures in; hybrid capital; internal models; equivalence and supervisory reporting 
• Commission aims to finalise technical work on L2 this month, CEA provide, in some detail, their lobbying views on; Long-term guarantees; Car Risk; Non-life premium and reserve risk; complexity; EPIFP; Contract boundaries

Other points

• Big reliance throughout the document on CEA’s preferred version of Solvency II application as the supporting excuse for opposing SIFI, Financial Services Tax, extension of Sol II to IORPs and Insurance Guarantee Scheme draft legislation
• Submitted comments to the IAIS on their ICP consultations for global supervisory convergence (they note that it is “moving in the same direction as Solvency II”, whereas I thought the ICPs were pretty much a photocopy!) 
• They note that, unfortunately, Life Insurance products will remain in the scope of EU Savings Directive legislation, as the current impasse is unrelated.
• Very non-committal on progress of the VAT directive, which doesn’t sound promising for “insourcing” of insurance administration 
• On FATCA, they give the impression that their best efforts will be to secure some exemptions for small and irrelevant lines of business, rather than to lobby the USA into submission on this incredibly onerous piece of draft legislation.
• Some constructive effort in the field of cross-border distribution via Insurance Mediation Directive 
• Potential for increased compliance risk off the back of Test Achats ruliing