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?

EIOPA's Long Term Guarantees Assessment and the early fallout - Plenary delay pending?

EIOPA's Long Term Guarantees Assessment rocked up last week while I was enjoying my new arrival, perhaps the most eagerly anticipated document out of Frankfurt since the days of Goethe...

Wielded fiercely all year by all stakeholders in need of an excuse for the delays in Solvency II's legislative passage (and hence the need for more budget), it appears to have variously pleased everyone and no-one at the same time. The key findings/recommendations are nicely summarised here.

Major players have since piped up with the following over the last week, none of which suggests the report's conclusions will be ole'd through the trilogue and parliamentary vote. 

EU Institutions

EIOPA 

- "We are confident that the results of the LTGA, combined with the EIOPA advice will provide the EU political institutions with a reliable basis for an informed decision on the long-term guarantee measures and a conclusion on the Omnibus II negotiations"

EU Commission

- "The Commission trusts that the Council and Parliament will use this very good report and its findings as a basis for an urgent agreement on Omnibus II and show pragmatism and willingness to compromise"

EU Parliament (via Burkhard Balz)

- "Speaking for the European Parliament, we are very confident that Eiopa's work and the subsequent analysis will provide for a successful restart of the negotiations, and as rapporteur, I am ready to start as quickly as possible, even before the summer break, to pre-launch trilogue negotiations. It is our firm intention to conclude the long-term package before the end of this year, so we can adopt Omnibus II in early spring 2014"

Industry representative and lobbying bodies 

- Insurance Europe - "Insurance Europe’s preliminary review of EIOPA’s proposed improvements to the Solvency II regulatory regime shows that adaptations are needed to avoid unnecessarily damaging insurers’ ability to provide long-term guarantees and invest long-term"

- GCAE - "With the publication of the report, the EU is one step closer in the process to finalising the Solvency II dossier"

- UK's ABI - "The EIOPA report is a small step in the right direction. But there is still a long way to go before British pensioners can be confident of a reasonable deal on their annuities"

- Institute and Faculty of Actuaries - "Today’s proposals outlined by EIPOA (sic) would seem to address many of the important issues. However, the detail needs to be worked through and the effect in a variety of scenarios assessed, before the full implications of the proposals for companies and their customers can be understood"

Ratings agencies

- Fitch - EIOPA’s proposals “offer no prospect of an end to the long-running dispute between regulators and insurers over suitable capital levels for products with long-term investment guarantees"

Print Media

- Commercial Risk Europe - "...unlikely to resolve key issues stalling the implementation of Solvency II and may lead to yet further delays to the Directive"

Consultancies

- PWC - "many insurers may find the proposals onerous and will not welcome the continued uncertainty over the final rules. We anticipate there may be concerns about the capital required for certain types of assets backing annuities in particular; and the effectiveness of measures designed to address short-term asset volatility"

- KPMG - "...it is likely that certain European countries will look very unfavourably at the EIOPA proposals."

I have emboldened the quote from Burkhard Balz above which suggests that the Omnibus II vote is going to move again. The rationale for that is two-fold; the prospective Plenary date (which was down as October 2013) appears to have suspiciously disappeared from the EU Parliament's Omnibus II procedure file altogether, while Mr. Balz clearly states early 2014 is targeted 'adoption date' while 'speaking on behalf of the Parliament'!

KPMG's Solvency II Readiness Survey for CEE - the flaw in EIOPA's plan?

So KPMG released this little gem in the same time period as Solvency II preparedness became something of a moot point!

Drawing in responses from 84 people, with around three-quarters EU-based and 70% under £100m in GWP, the questions were posed in Q2 2012, so with Omnibus II missing the last plenary before summer holidays, the writing was already on the wall - despite that, KPMG reckon most respondees would have been working to a 2014 go-live date. It expands on their 2010 work in this area, where 44% or respondents hadn't got started on their Solvency II projects, so progress on that front would be considered a good start!

I gleaned the following from it;

• 31% not expecting to be "Solvency II compliant" before 2014 - one problem that's gone away then!
• Almost half do not have a risk management function in line with the Directive, with smaller companies the main culprits
• Only 19% (down from 40% in 2010) will be using IM or PIM for SCR calculation. Attributed to the realities of building them as well as Groups rethinking their IMAP strategies over the last few years.
• 62% of companies not even planning an ORSA dry run until 2013 at the earliest, with 14% not planning for one at all as it stands.
• Only 14% electing to use more than 3 years as their "business planning period" for ORSA - two thirds settling for 3 years - supports the anecdotal trend of 3-5 years as par for the course
• 20% reported that their internal models allow for multiple year calculations to project for the ORSA - not sure if that is stochastic or deterministic though, didn't think any of the kernel technologies out there could do multi-year projections
• Half of companies have 50% or less of the data required to populate their QRTs
• Extraordinary perceptions on staffing requirements for both project and BAU, which even KPMG are drawn into calling "excessively pessimistic and indeed unrealistic" - it may be led in some respects by subsidiaries using shared Group services, but is still shocking in its naivety.
• Three quarters would like "more interpretation" from their regulator on Level 1 and 2 texts - not sure what there is to "interpret", so maybe its the Pillar 2 and 3 elements that they are struggling with (the other stats here would certainly lend weight to that).
• More than half of model applicants strugglinbg with Validation, highlights assumption setting and expert judgement as problem areas (no surprises there)
• 70% looking to define "new roles and responsibilities" around Data Governance - as referenced in my earlier post, not convinced that will end happily. Over a quarter don't plan to compile their data dictionaries until mid-2013.
• Only a third looking to do full SCR calculations quarterly, and over 50% look like they will struggle to generate the SCR calculation faster than 8 weeks.
• 20% have a dedicated Solvency II team - explaining a lot of the shortfalls in preparedness relative to Western Europe, but given the delays and uncertainty, a financially astute move.

What should worry EIOPA is the results around control function preparedness, or lack of it. If Sr Bernadino thinks that the low hanging fruit of Pillar 2 is ripe for picking before 2016, a quick review of those stats would suggest that a decent number of the 27 countries are in no such state.

KPMG on Solvency II - Progress in an uncertain world?

Handy survey from KPMG pushed around today touching on technical practices of UK Life firms (35 responded to the survey, so a decent enough sample). Appreciating the irony of the title in the same week as the rumour mill on an extension of Solvency II go-live to 2015 went into overdrive, the content is still valid on the benchmarking front, so worth a comb through.

Of particular interest I noted;

• IMAP remains top priority for those in the application process, though KPMG highlight that firms are closely reviewing the advantages of the IM versus standard formula due to FSA fussiness, implementation costs snowballing and less-than-attractive results coming out of the model (i.e the fabled 20% reduction guess-timates are perhaps out of reach!). Some comfort there for anyone struggling with the same issues.
• Documentation second priority for IMAP and non-IMAP firms - concerning at this stage, bearing in mind the FSA will have had plenty of opportunity to feed back on the big ticket items. If the industry still doesn't have a handle on regulatory requirements (or it does, but is not meeting them!), then perhaps it's a good job there is an extra year in the offing! 87% of the IMAP respondents said IM documentation specifically is causing challenges.
• Pillar 3 also high on priority lists - might we expect that to slip back on the agenda with the extra year? Particularly around software solutions, which may have previously been the only way for some laggards to populate QRTs etc within the proposed timeframes, some may decide to do something a little more ad-hoc for 2013 rather than full dry-running. Two-thirds of respondents note that turnaround time is a concern, and unsurprisingly 'achieving sign off' is a concern of around half, with the tight timescales naturally impacting on the likelihood of getting an executive to confidently put pen to paper.
• Only a third of respondents have dry-run their ORSAs - feels instinctively light, with those yet to run spread across the next 5 quarters. Natural areas of concern are later highlighted in this area, with ability (or lack of) to project across the business planning period, and plugging the ORSA process into the BAU strategic decision making process troubling around half of respondents. Bearing in mind only a third of respondents have performed any on-to-one training (with group training/workshops seemingly the preferred route), they may find that one will facilitate the other!

Some other noteworthy points;

• Only 80% think Solvency II will "significantly" impact the wider business - struggle to see how it could not frankly, but appreciate their are non-IMAP firms in the mix here
• Disturbingly large number of IMAP candidates appear to be behind the curve on P&L Attribution and Validation - interesting to know on the latter whether that is in respect of their internal findings or the FSA's view.
• Two-thirds of IMAP candidates using external assistance for validation - wonder how long that gravy train stays on the tracks with a shift to 2015?
• 20% don't have TPs in their IM scope - is that a bit chancey at this stage? I thought the FSA view on scope was a bit more onerous than some applicants may wish for.
• Datawarehousing seemingly moving towards being the preferred route to meet Pillar 3 obligations where an existing solution has not already been implemented prior to Solvency II

Good intelligence for both IMAP and Non-IMAP firms, and should provide some programme managers with crumbs of comfort when they see what's eating their counterparts right now.

KMPG - Economic Capital Modelling in the Insurance Industry survey

Just when you think things will be quiet while the normal world goes to the beach for a month, KPMG chip in with a survey on EC modelling, polling 43 of the world's largest global insurers, with a nice spread of continents and insurer-types represented. Over 90% of respondents were Chief Actuary/CCO/CRO etc level.

With this subject being a hotter potato right now than a Jersey Royal locked in a sauna, in a tank top, in Bangkok, I've had a trawl through and found the following highlights:

• Most reasonable business uses of EC metrics appear to be applied or planned by respondents (pricing/underwriting decisions being the straggler)
• 40% of respondents said management understanding of EC is still limited - schematic on p9 showing the differences between 'sophisticated' Europe and 'savage' RoW hints at some kind of Solvency II dividend, though the results are not flattering across the board.
• Interesting schematic on implementation difficulties (p12), broken down by continent - data quality seems to have topped the list of implementation problems, which is no surprise I guess, but they neatly connect it with potential for over-reliance on expert judgement, simplifications and approximations to fill the gaps (all of which are to the detriment of a pure EC approach, at least in theory).
• Curve fitting is the majority-used approach (58%) to deliver model outputs quicker (i.e. 'lite' modelling), with replicating portfolios and LSMC less favoured
• Understanding around fungibility and dependency higlighted as areas for improvement
• Two-thirds still not allowing for sovereign debt risk in their EC calcs - I admire the persistency!
• Very interesting bit towards the back on effectively projecting EC, the holy grail for anyone in the ORSA space right now. While they loosely refer to the business planning horizon as "typically 3 years" (I've seen longer than that before breakfast, lads!), the point made is perfectly valid, namely that methodologies for this kind of projection are in their infancy.
• Finally, a nugget on Operational Risk Modelling (which I only touched on yesterday!), by some distance the least effective part of respondent's EC frameworks. They do note that 60% of EU respondents have moved to stochastic-based Op risk models with all bar one using expert judgement to calibrate them! They also bemoan the lack of credible data and subjectivity around cause/effect/latency of op risk events.

I guess the most surprising element of the document is how cagily it is written, as if EC modelling of risk profiles still has something to prove against, say, arbitrary and aimlessly prudent margins - the authors acknowledge that, if done badly, EC modelling is an accident waiting to happen, which supports the "rigour" being applied by the FSA when pre-assessing the UK insurance industry's model applications.

Also surprised that more reference to ratings agency demands wasn't made, particularly with that element seemingly influencing EC calibration points in the EU right now (hands up if you're at 1-in-2,000!)

KPMG on the Solvency II Reporting package

You can always rely on one of the big 4 to do the admin around EIOPA's releases, formatting and paginating it into a handy A4 slice of pure Gauguin - KPMG to the rescue this time, breaking out EIOPA's work on the Pillar 3 reporting and disclosure package into something slightly more edible for Boards and senior management.

Really one for the specialists on reporting templates content, rationale for why thing dropped out or emerged pre and post-consultation, and outstanding issues from a practical perspective - I am slightly divorced from this element at the moment, but have certainly heard the rumblings around look-through requirements, quarterly balance sheets and detailed asset lists etc on various grapevines, and with time ticking on, these kinds of materials can only help to aid prioritisation of the required BAU activity to populate the things!

The introduction of data requirements for EIOPA around financial stability (particularly Lapse information) seems very controversial - I have always found it the most closely guarded, and indeed requested information from interested third parties (analysts in particular!).

You should enjoy the sectioned material towards the back, which includes some free KPMG comment - if that is the house line, you may be able to save yourself a few quid!

KPMG - Solvency II and Insurance Groups thought paper

One for all you "groupies" out there, released by KPMG on how the group supervisory regime is likely to work out ('with lots of international bickering' was my immediate thought!).

I suspect anyone who is knee-deep in the minutiae of the matter may find this a touch specious, particularly around the transformational effects of Solvency II, but on the whole this is a decent introduction to the practical requirements for Groups over and above solo entities (p16 in particular) and remaining sticking points around the supervision of groups (Solvency II Balance Sheet issues on p28, group ORSA on p30, and restructuring options on p38).

KPMG - Solvency II paper, "Beyond compliance towards optimisation"

Another titbit from the Big 4, this time covering the benefits that are available off the back off the legislative delays, specifically around optimising the Finance and Risk functions. If you are one of the Tier 1 companies, this comes across as a bit of a "Where's Wally" paper (or 'Waldo' for my American pals!), as it borrows of their extensive 'experience' on site with clients over the last few years. Despite that extensive experience, this is pretty light at a fistful of pages.

I would struggle to distinguish between 'capital minimisation' and 'capital optimisation', which they start off with, but they go on to describe a world of risk and finance "centres of excellence, which utilise the good work currently being done on the data warehousing front by Data teams to populate the various regulatory reporting requirements as well as management information needs, and that all sounds plausible.

The Risk section is naturally a little flannel-y, but suggests the best functions will be able to predict cash flows better, ultimately improving risk, capital and business planning and as a by-product, RAROC comprehension and enhancement.

Not a lot else, but some ideas around communicating future value of today's expenditure at the very least.

KPMG Paper - Solvency II still fit for purpose?

A handy survey from one of the Big 4 on some of the biggest challenges remaining on Solvency II. Small sample (20 people), and is GI-flavoured, but that doesn't make the experiences any less relevant to you 'Lifers' out there. The following was noteworthy;

• A good half of respondents expect their capital models to be a key driver in their business planning process post- Solvency II, with the remainder using it as a "reasonable consideration" - this contrasts with a quarter who use them to a negligible degree if at all pre-Solvency II.
• Suggestion that, with Solvency II accounting being viewed as a "regulatory exercise" for non-lifers, there is plenty of transitional work to do in order to align the GAAP/IFRS view with the Solvency II accounting view
• Concerns around reporting lines for different strands of actuarial activity (pricing, reserving and capital) potentially going into one executive, with those assessing risk versus those taking it being the primary issue.
• Suggestion that the increased requirements around actuarial staffing may drive some work offshore in order to reduce the costs
• Concerns around calculation of Risk Margin, specifically around what the Finance function will demand versus what the Actuarial function can provide.
• Comment that, as the internal model is expected to change as a business's risk profile changes, that current best practice ensures this is done at least annually, though monitoring of new business (therefore plan against portfolio) agaist forecast is done more frequently - no lead on size of divergence that might drive a model change however, which was one of Mr Adam's bugbears from the speech last week.
  
• The provision of Actuarial opinions regarding the adequacy of reinsurance and underwriting arrangements appears to have split the respondents, with a decent number taking a wait-and-see approach - KMPG are similarly guarded when providing their own view, highlighting concerns with the impact of opinions on decision making and how they are worded.
• Further areas of collaboration between Risk, Actuarial and Finance functions are expected around Capital Management, Performance Management and ORSA, with devolution of previously shared responsibilities made to first line functions, and the second line becoming a multi-skilled "centre of excellence" - nice schematic to go with this on page 18.

KPMG Survey - Solvency II Benchmarking Survey

Decent piece released by the guys at KPMG covering Solvency II benchmarking. No difficulties in picking out the salient points, so just serve yourselves, but I've hauled some out for my own benefit (NB at 18 in the sample, its a tad light).

For my money, the 40% who feel their budgets are not on track feels instinctively light, but then the survey was taken in September before an extra year was stuck on it! The priorities and areas of concern (documentation, ORSA and governance) all seem fair in relation to other media, and the difference between small company projects (two-thirds resourced internally) and larger insurers (over 90%) in their staffing shows where the extra year's project costs may disproportionately fall. Also 56% feel they still have a lot to do on Pillar 3 (bit easier after last week's papers were released by EIOPA).

On the actuarial front, some very varied responses to Risk Margin calculation, and they flagged ORSA as the main area of cross-functional collaboration. They have also flagged Strategic, Liquidity and Reputational Risk as the main non-modelled risks going into ORSA.

The last section on validation is perhaps the real eye-opener - KPMG advise separating validation from production, and even with this small sample, a range of routes being used (on validation responsibility, ownership of the validation team, and responsibility for producing the validation report, including for the first time in my experience, the roping-in of Internal Audit)!