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...

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!

Solvency II and IMD - Parallels

Post magazine editor's comment on Solvency II deadline shenanighans highlighted an intriguing parallel with IMD, saw the UK industry in the vanguard, and the rest of the union complying at their own pace, if indeed at all.

I can certainly vouch for the tardy and decrepit attitudes towards IMD's pan-European application first hand, so let's hope this isn't too accurate a prediction!

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

Insurance Mediation Directive responses - done deal?

Having read through the mercifully brief responses on IMD consultation today (and having plenty of experience in cross border selling under the directive), I noted the following;

• UK and Ireland pitched in with around half the responses - guess we know where the beneficiaries are!
• Standard arguments on distributor pay, policyholder hidden charges and coverage of the directive to include bancassurers and PRIPs all in
• Amusing piece from (I guess) the IFA industry on lower commission possibly leading to lower quality of advice
• Little drive on efficiency of process, though some support for a central permissions bureau, which from my experience would be an excellent idea.

Strangely, no cross references to Solvency II, despite both pieces of legislation being ostensibly for the benefit of EU insurance consumers