PRA, BaFin and Disclosure - Grüne with envy...

Without being hypercritical, it occured to me that the PRA appear to be keeping materials and opinions "on the downsie" at a time where perhaps the industry would benefit from their overexposure, and I can't work out why.

A few things triggered that thought over the last week;

• The Internal Model Validation presentation delivered by a PRA representative to the Institute of Risk Management's Solvency II group, which publicly elaborates on the topic more than anything I have seen on the PRA site.
• The apparent failure of the PRA to follow their own Terms of Reference for their recently convened Regulatory Reporting Industry Working Group by not publishing the minutes of the December meeting yet. The TORs say 10+2 working days, and I can't find them anywhere!
• The recent overwrite of the PRA's initial response document to EIOPA regarding "comply or explain" for EIOPA's Preparatory Guidance, which has not yet been "explained" to the industry they oversee! (Well spotted John Walton)
• The almost diametrically opposed position which BaFin have taken over in Germany, where they unequivocally lay out their intentions regarding "comply or explain".

It is worth expanding on the last point, bearing in mind what a useful piece of text it is for anyone looking to confirm within their own Programme how best to interpret EIOPA's guidelines. BaFin explicitly state;

• Insurers should "immediately take the necessary steps" to implement the Preparatory Guidelines.
• That "undertakings are effectively the target audience" for the Preparatory Guidance, which I am delighted to see acknowledged publicly by such a significant participant.
• It is up to each insurer to determine the order of their implementation activity prior to 2016.
• That, for the benefit of the industry, BaFin have carved up the Guidance into 15 blocks, and will provide "additional information and tips" periodically over the next two years.
• That a special activity for Life Insurers will take place, one suspects in order to help identify the capital shortfalls hinted at at the back end of last year for those with high cost of guarantees.
• That everyone is expected to participate in the QRT exercise, ignoring the thresholds offered by EIOPA to the NCAs.
• That they will be translating any EIOPA texts released prior to 2016 in English-only into German.

Whilst it may be a case of thinking das gras ist grüner, it would be easy to envy the German contingent when offered this level of disclosure and certainty in dealing with the preparatory phase. What say you, Moorgate?

"Comply or Explain" responses to EIOPA's preparatory guidance - UK oddities?

Isle of Man - "Call that a flood"

Happy New Year (or Blein Vie Noa as we say on the relatively unflooded Isle of Man). I hope you all took the opportunity to fall ill and get fat like I did, so we can recommence battle in 2014 with overflowing sinuses and bursting belt buckles...

I managed to take a look at some of the responses that EIOPA have received regarding whether or not the 32 National Competent Authorities (NCA) currently invested in the Solvency II game are planning to follow EIOPA's Preparatory Guidance over the next 2 years. Please serve yourselves from this central location.

It became evident over December that there was likely to be some non-compliance (both the French and British put their heads above the parapet), though as this was a "comply or explain" exercise, this was not necessarily grave - we are after all in the business of 'preparing' at this juncture - but I was curious to see precisely how different countries "explained" themselves.

In response to each guideline within the 4 EIOPA documents, the options for each NCA were to respond;

1. Yes - we already comply
2. Yes - we intend to comply
3. No - we do not and will not comply
4. Not applicable (though I'm not certain why this is an option)

They were also given space to provide text/links to prove how they are compliant with each guideline, and som space to provide explanations (questionnaire template here).

I was therefore surprised to see the British approach (which was generally "yes") also involved;

• Not providing an explanation when they have said "No" to a guideline (which admittedly is only in one case!)
• Unnecessarily using a copy/paste piece of text as an explanation for a number of guidelines where they have said they "Intend to comply"
• Unexpectedly answering "Not Applicable" to no fewer than 10 articles within the System of Governance guidance, some of which definitely featured in the feedback on the PRA's recent Supervisory Statement as bones of contention (the actuarial function's responsibilities for example).

Obviously no surprises that the French will not be attempting to comply anything in the System of Governance world after their earlier warning, though their rationale is expanded upon in this Risk.net article. That the strict definition of "AMSB" is an issue for the French industry is surely old news at this juncture, and it is ludicrous that such a matter has yet to be dealt with by the Commission's draftsmen. It certainly hasn't posed an issue for Germany (who intend to comply with all of Sys Gov), who operate dual boards.

While more may emerge over the next few weeks on what has been submitted here across the countries, I am more immediately interested in why the UK have elected to respond "not applicable" to so many System of Governance guidelines. It seems to fly in the face of their Supervisory Statement, and I can't imagine EIOPA are satisfied with that response. 

Omnibus II Plenary delayed until March 2014 - 2016 out of the question?

Confirmation was provided today, if needed, that the Omnibus II Plenary vote was being pushed back into 2014 - that it needs until March 2014 perhaps underlines the swell of discord at the trilogue table, all of whom have seemingly been digesting EIOPA's long term guarantees report for, well, a long term...

Solvency II Spuds - hoofed

While July and August naturally died a death while the Eurocracy topped up their tans, any thoughts that compromise and camaraderie were on the various parties minds can now be unequivocally hoofed in the spuds, as can any notion of January 2014 being a meaningful date for anyone aside from EIOPA, its national satellites, and the 'soft launch' we have seemingly acquired.

A few of the Big 4's rather underemployed Solvency II experts have commented today on this latest delay and the rammifications, which contrasts against the optimism shown yesterday on Risk.net  by Insurance Europe in particular. I guess what is particularly disappointing is that the ITER listings haven't changed in respect of Omnibus II before and after the summer break (here and here), so why wasn't something said earlier?

I had already blogged on the shifting sands before the summer break, and the stance of BaFin in particular, and it would appear a market analyst sees the German approach (including an uncited reference of a desire for 20 year transitionals) as being a genuine show stopper, rather than a mere irritant.

That may be a touch dramatic, but by shifting the Plenary vote to March, when retiring/deselected MEPs will be on autopilot, and careerists will be electioneering (indeed, Primary activity starts before the end of 2013), is the trilogue's hope that this might squeeze through via fatigue-inspired lack of inquisition? Does the alternative of a fresh crop of politicians picking holes in the work of technical experts from summer 2014 bear thinking about?

Finally, with Sr. Bernadino having already pronounced that 2016 would not be viable without Omnibus II agreement having been reached by the end of this year, can we provisionally move on to 2017 as the new 'go live' date?
 

Germany, BaFin and Solvency II - Tchüss wisely...

With the British Lions rugby team having had such a marvellous summer, it's nice to see that the spirit of "getting one's retaliation in first" has been brought back to Europe with them. The Executive Director of insurance at BaFin, the German regulator, came out swinging late last week (while the rest of Europe was lotioning up), and delivered his two'penneth worth on, amongst other matters, the Long Term Guarantees situation currently holding up Omnibus II.

Omnibus II trilogue - work to do

This is the same man who has recently been quoted as saying that delays are not a problem, as "Solvency II was not designed for today". Which is true - strictly speaking, it was designed for about 8 months ago!

The German contingent have been labelled in a number of articles (here, here, here and here) as a major source of legislative delay (presumably ever since they twigged that the proposed design of the extrapolation element was massively unfavourable to their industry), and the lobbying angles pursued here are not really new news, but to emphasise;

• Concerned about the increase in interest rates at Central Bank level - "should be carried out gradually", though rather disingenuously saying that they would have no influence in that - BaFin may not, but Chancellor Merkel and the overflowing pot of export surplus certainly does!
• Solvency II go-live of Jan 2016 "absolutely realistic" provided the trilogues are finished this year - I've noted in earlier posts that the official schedules of the co-legislators are looking shoddy in this respect, so I'm more inclined to side with S&P (and indeed the president of BaFin!)on 2016 being on shakier ground than a Hippo's decking..
• That transitional periods should be determined individually in accordance with a firms existing maturity profile - they want to avoid an insurer "falling over" just to meet the new regulation. Worrying that after 10 years of efforts, Solvency II compliance still carries such a credible threat of business closure! 
• As they have so many insurance contracts (90m cited), they would simply "say goodbye" in a worst-case scenario if they don't get their way on transitional periods.

So the likelihood of the German industry "taking one for the team" here is pretty small, and with Hrs Balz and Giegold having made it pretty clear that the LTGA result will not elicit a swift conclusion to trilogue negotiations, it looks like there's still plenty of talking to be done...

Actuarial profession and the Risk Function - from 'land grab' to 'colonisation'?

Back in the early days of this Blog I used to post frequently on the Solvency II-sponsored creep towards Risk functions in insurers being 'Chiefed' by members of the actuarial profession as a matter of course rather than choice (here, here and here for a start). It was even a thread in a presentation I delivered to ILAG in late 2012 around areas of control function crossover, in particular that the actuarial profession was acknowledging that there were professional deficiencies in their ability to address the basics of an actuarial function under Solvency II, yet preferred the ambition of conquering a newer (less arduous?) space ahead of remedying them.

Whilst a quant is no doubt a decent fit for such a task, it was an evident snub to the nascent Risk Management 'profession', who took umbridge at the implication of such compulsion from the UK regulator in April 2011, though with seemingly little impact. However, limits to the amount of time and money bodies such as the IRM and FERMA can throw at developing a one-size-fits-all Risk Management qualification package that can appeal to quants and non-quants alike, plus some furious inter-squabbling in the ISO 31000 world, are certainly not lending any credence to "Risk Management" as a profession in its own right as we stand.

Risk and Actuarial professions - 'Poles' apart?

Over in Ireland, the opportunity for the Actuarial profession to secure an additional control function has been pursued so rabidly that the SAI incoming and outgoing presidents were recently able to congratulate themselves on having busted into "the new frontier" of Risk, and are now moving on into "colonisation mode" (p2)! In the UK, the Institute and Faculty of Actuaries already seem to consider that area of influence secured judging by the new president's remarks recently, indicating a desire to influence more mainstream debates than those around risk management systems and corporate governance.

The UK and Ireland don't appear to be the only ones afflicted by the perception of compulsory quants in Risk functions. Munich Re's excellent Knowledge Series delivers a Germanic take that there is "no doubt" that professional mathematicians will be needed for tomorrow's Risk functions.

When considering the history of the Actuarial profession (beautifully summarised here), there should be no reason why Risk Management cannot achieve a similar position given time, regardless of the disparity in existing approaches from representative bodies. A modular qualification which can prepare a 'risk professional' for their favoured activity (insurance buying/continuity management/financial risk/op risk/ERM) is surely an ambition which those bodies can harbour in concert? My concern would naturally be that I probably don't have another 50-100 years to wait for the that convergence to happen and enhance my own career prospects!

Or maybe I do - does anyone know an expert in longevity?

Ernst and Young European Solvency II survey - the storm before the calm...

So Ernst and Young have decided to join the party with one of the more noble attempts to gather EU-wide industry opinion on progress towards Solvency II compliance, and kindly published those findings recently. Yes, I understand that this survey came out over a week ago, but I left my notes in the Isle of Man last Monday, and I'm not so enthusiastic that I fancied another turbo-prop into Ronaldsway Airport to 'go fetch'.

There was naturally plenty of media comment on its content (here, here and here for a start, but I'm sure you can do better), but bearing in mind it was released with a backdrop of 2015/2016 and the moveable feast that is UK IMAP, one could be forgiven for not caring less about the results that point to preparedness 'by 2014'. However, the E&Y guys obviously stayed up all night to do it, so I gave it the once-over and noted the following;

Sample - 160+ respondents from 19 countries, about as volumous as I have come across, though clearly weighted towards medium/large firms (€100m+ premium income per annum), and what we might call "old" Europe.

General

• 90% reckoned they could be compliant by 2015 (though E&Y say that is the date proposed by the EC, rather than to it)
• High level of confidence around Pillar 1 and Pillar 2 preparedness, though shockingly two-thirds of respondents did not use the draft L2 rules when producing their balance sheet, which makes you wonder what constitutes "ready" in some countries! 
• 80% not meeting Pillar 3 "requirements", with loose use of the expression "all requirements" for (as mentioned for Pillar 1, is this 'Level 1 plus draft Level 2', or 'Level 1 plus EIOPA advice'?). One of the worst affected areas is the development of a Disclosure Policy, which I find as understandable as I do sad.
• Almost 70% have only met some of the data quality requirements - I'm sure the national regulators, in particular the FSA, would wince at that, even factoring in an extension.
• Very interesting stat on the number of respondents developing Partial Internal Models (around half), with half of that number again looking for, what was at the time, "Day 1 approval". I wonder if the likely shift of "Day 1" to 2015 or 2016 allows these figures to flex, and if the national regulators are staffed to cope with it?
• "Range of capital optimisation strategies" will be applied by the majority of respondents in 2013 - curious to know why firms would not optimise their capital deployment as a matter of course!
• Larger organisations said to be tailing off expenditure during 2013 and have delivered compliance by mid-2014. Will an extension simply elongate existing expenditure plans or require fresh budget, and indeed how many times can one go 'back to the well' on this?
• ORSA is by some distance the biggest laggard in the Pillar 2 space, with only 30% "mostly" meeting requirements as they stand. Can only imagine the question was asked before EIOPA came back on the L3 public consultation in June, as EIOPA were pretty clear on what to do next.
• Some pretty flabby words on Data and IT readiness, but easy to get the general picture of "not very good" progress, particularly in the end-user computing space (three-quarters

E&Y angles

• Clearly lobbying for recalibrating long-duration debt (p5)
• Bit of scaremongering for smaller companies on their resource estimates (p6) - shake them down all you want, they just can't afford you!
• Strange bit of touting done around a lack of formal assessment around the effectiveness of one's Risk Management System (p12) - don't believe this is compulsory, only that your Risk Management System is effective.
• Also fishing hard for what was previously low hanging fruit around documentation, data governance and use test (p20).

Internal Model - specific

• Two thirds of French and half of German internal model applicants not fishing for "Day 1" approval - not sure if this is due to BAFIN and the ACP playing hardball (already seen an instance of a modeller fleeing Germany), but an extension to 2016 puts them back in the game for "Day 1" surely.
• Some expected discontent, though not in the majority, around the current SF risk calibrations (Op risk too low, underwriting and market too high). Even number found credit risk too high and too low, perhaps reflecting thought on long duration corporate debt and Eurozone government debt respectively.
• Nearly 80% of respondents expect the IM SCR to be at least 10% lower than SF SCR.

Worth adding as a footnote that 14% of UK respondents thought they'll be ready for implementation "in the course of 2012" - without Level 2 kiddies, are you sure!

Omnibus II moves again - accelerating the inevitable?

No sooner has the holiday season drawn to a close (and by that I mean everyone else's holiday season, as we don't 'do holidays' at Governance Matters...) than our good friend Omnibus II has jogged down the road another month - the procedure file has just been updated to show it will be hitting the November parliamentary Plenary (by my count, the 5th postponement since 2011).

Not entirely sure of the rather abrupt nature of this movement, bearing in mind the main players are probably still wearing their 'budgie smugglers' in the Med at the moment, but Gideon over on the Wire picked up on an issue which may have led to an early concession that October was simply too early, with an impact assessment on LTGs likely to roll off the back of the next trialogue.

We are also close enough to the finish line (don't laugh) to be getting into the national political cesspits, so a whiff of sabotage and national interest may also be coming to bear. Not only have the UK political opposition decided that Solvency II is controversial enough to start point scoring on, but last month Sharon Bowles (current Chair of ECON) gave an astonishingly frank interview to Risk.net (subscription only I'm afraid) where Das Küchenspüle was thrown at the German contingent. Quotes included;

• "...certain leading German MEPs have publicly said that Solvency II is never going to happen anyway" and
• "...I think there is a subtext here that the Germans - and I think this is well known - are trying to jettison the whole of Solvency II"

Well if Der Wahnsinn really is eine schmale brücke like the song says, its probably best not to cross it!

Internal Models - more "Hassel" than they are worth?

Pardon the dodgy David Hasselhoff pun (product of an idle mind!), but it looks like a storm is brewing with out German pals on the internal modelling front - hot on the heels of Hannover Re's threat to abandon ship via a Societas Europaea passport to an easier ride, Gothaer, a German mutual, has now apparently decided to give up altogether.

Whilst the knowledge that people are giving up part-way through is not new (the UK managed to slim down from 100+ expected to 70-odd pre-applications between 2010-11), I was under the impression that Bafin were not dealing with a huge number to start with (this seems to suggest no more than a dozen), so to see two teetering on the brink is newsworthy I guess. 

It could be that these guys have seen something in the Commission's draft Level 2 that they don't like, or indeed the outcome of the ECON lobbying didn't quite go there way, but anything which leads to insurers not measuring their overall solvency needs using their own experience analysis and calibrations is surely unwelcome.

Some good quotes on just how onerous Bafin may be are included in this article (subscriber only I'm afraid), the most telling perhaps being "So far we see very few small insurers building an internal model [or partial model],". Very few, minus one, it would appear...

EIOPA Stress Tests - come on Germany, who failed!

The pressure on the insurance industry to 'fess up to the undertakings who failed aspects of EIOPA's stress tests appears to be ratcheting up. Reuters claimed this morning that the UK and Germany has 'stayed mum',, while the French and Italian contingents were happy to announce they had a clean bill of health.

This was followed by the ABI reporting that the UK were similarly clean. This increasingly makes our friends in Germany look like the odd-one-out (indeed I blogged yesterday on the unique problems facing insurer's balance sheets in that country).

Please therefore keep a look out for anyone announcing a German 'clean bill of health' - then we can take the guessing game to some of the peripheral European players!

Late post-script - more detail on how German insurers are expected to fare is available here. I couldn't locate the research cited, but the numbers bandied are pretty modest, so I can't imagine there would be too many MCR failures if these numbers stand up.

Finanzplatz Munchen Initiative - Solvency II and Basel III impacts for corporate Germany

Whilst I try to restrict my German exposure to Rammstein and beer (ideally both!), this particular piece of research from the Munich Financial Centre Initiative was too substantial to ignore, covering the likely impact of Solvency II (and Basel to a lesser extent) on corporate financing across Germany (summary here).

It loses a little subtlety in translation, but the research certainly helps draw attention to the lobbying direction of the German contingent in CEA, focusing on the detailed investment strategies of national insurers (favouring the routing of institutional investment via banks, being big in the world of hybrids etc). It draws particular attention to the intra-national differences between Germany versus the French and British on these matters. It also suggests that the threats of Solvency II and Basel III twinned have had a substantial downward pressure on insurer stock prices.

It ends by strongly suggesting the EU trigger a QIS to consider the reciprocal effects of the two pieces of legislation, and push those results to the relevant bodies (EIOPA in our case).

Ultimately, my read would be that of all the transitionals currently on the table, the classification and eligibility of own funds would be highest on their list, and if they could squeeze in any calibration-related changes on long-dated debt all the better