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.

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!

FSA - Solvency II speeches this week from the great (and greater!)

A couple of topical speeches delivered this week by Canary Wharf's finest, both of which are relevant to the Solvency II world.

First, a speech at the 2012 Risk and Investment conference run through The Actuarial Profession and featuring some multidisciplinary heavy hitters from TV and print as well as some C-suite presence from the UK's largest multinationals. The FSA's Kathryn Morgan delivered a speech which covered Pillar 2 and 3 trends in particular, which is covered in this subscription only article at Risk.net. For those who don't have the budget for that, a pruned down version of that content is available here.

Ostensibly, the following points were made;

• Don't expect any more FSA guidance on conducting an ORSA - fair point at this juncture, if you don't know your onions by now, there's probably no hope for you!
• Approaching implementation consecutively in 3 pillars is a "worry" - I suspect that worry, misplaced or not, is applicable to most undertakings at this juncture
• "Risk management is the best mitigant of risk, not capital" - I would argue an effective Risk function rather than risk management per se is the best mitigant, but it is slightly more ethereal than a big bundle of cash!
• Perception that "...Risk and Capital are not talking to each other" - true out of necessity at this juncture perhaps (BAU for the balance sheet guys, model applicants or not, and the administrative burden of refreshing documentation suites has impeded comms for some time I would argue, but this will improve in the very near future).
• Number of references to Boards, centred around NEDs participating fully in decisions rather than counting the hours till their taxi arrives, as well as not relying on SMEs to make decisions for them (i.e. Actuarially-minded board members are not left to perform all balance sheet related challenge on their own!)
• With regards to the empire built on sand which is the legislative timeline, reiterates that while some key balance sheet-related issues are yet to flesh out, "...their is a lot of certainty in Pillar 2" - something I have banged on about since the draft Level 2 implementing measures were leaked in November.

While that speech has good insights for you Pillar 2 folk out there, a lecture from Julian Adams on "the impact of changing regulation on the insurance industry" is equally fascinating, if perhaps treading over some Solvency II ground already covered over the last couple of weeks - as a History graduate, I always like a cheeky overview, and the lecture covers legislative developments back to Victorian times.

That aside, a few Solvency II-relevant snippets were also included (or reiterated from prior speeches) such as;

• A definition of what "risk sensitive" regulation actually means (insurers' solvency positions matching their idiosyncratic risk profiles) - something as succinct as that is actually extremely useful for board training purposes at the very least, and I am glad he has communicated it in this manner.
• Also defines "proportionate" from the FSA's perspective on internal model approval - namely, if it is in the Directive or the Implementing measures, it is not negotiable.
• Notes that Solvency II is "influencing" the global regulatory framework - I would argue that strong-arming (in the case of first/second wave countries) and bickering (in the case of the States) is far from influencing, though with the IAIS Comframe draft now open for review, we may see something more resembling dialogue from our pals in Brussels
• Rather worrying comment that, in the context of reporting financial positions, that Solvency II reporting sits in the succession path of EEV and MCEV as "...if perhaps not the final, then the latest step" towards a more transparent and market consistent reporting regime. Anyone for SFCR 2.0?
• A rather ominous note that the standard formula calculation "...would certainly have a distorting effect when considering, say, the London Market subscription business or with-profits businesses" - I hope all you tiny mutuals have got your IMs, PIMs or USPs ready, as it sounds like the FSA may already think SF is not suitable for you!
• Acknowledges that Solvency II is about "maximum harmonisation", and therefore EIOPA will call more of the shots in future (just as soon as Omnibus II gets through...)
• Highlights that the academic modelling around (a lack of) correlation drove many of the banks models' into stupidity in 2006-2008 - an area I would expect fervent challenge around from both the regulator and indeed internal governance structures (and one which Matthew Elderfield at the Central Bank of Ireland has already picked up on as a main area of focus)

Useful stuff from both sources, so keep it up Wharfers!

PS I suspect I won't be posting tomorrow, so I will wish you shoh slaynt and a happy Tynwald Day one day early!

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...