Insurance Banana Skins in 2015 - PwC and CSFI

PwC and the CSFI guys have teamed up for another Insurance Banana Skins publication, a particularly useful doc for the BAU Risk world, and one which I have covered on the blog in years gone by (well, 2011's and 2013's anyway).

In particular, I always found it useful as a means of digging out the kinds of awkward cross-bred expressions which would invariably end up rolling out of 75-year-old INEDs’ mouths at the next Risk Committee meeting, probably due to someone trying to sell insurance cover for it, or a business journal doing a centre spread about it. On this basis, I was delighted to see “Cyber Risk” given prominence this time around, which is the highest new entry, and apparently a “new risk” - here’s the sales forum, and here’s the HBR white paper!

Sarcasm aside, given this pulled in over 800 responses from around the globe, and across the distribution and provision side of the industry, the content is worth poring over and briefing colleagues on if this is your day job. There are also plenty of quotes from the great and good wrapped up inside as well.

I’ve only jumped on a few of the findings below;

• Regulation remains the top risk for the 3^rd survey running, and for the 4^th out of the 5 actually held. It did take a ‘world’s end’ scenario for investment returns to knock it off the top in 2009 though, which suggests that those surveyed are happy to bleat about regulatory concerns, regardless of the rest of the exogenous threats to insurance firms.

• Much of the top ten is focused on investments and returns, whether it be interest rates, investment performance or guarantees.

• Governance and management of insurance companies seen as an area of declining risk – does it therefore warrant the Banking industry-inspired whip that SIMR is about to introduce in the UK?

• Similarly, Business Practices, incorporating misselling, is falling down the list – not sure a UK-only survey would be so generous!

• Cyber Risk itself was only #6 on the list for Life Companies, while #1 for Non-Life – wonder why the guys who are selling cover rate it so highly? Of more interest, North America had it as #1 “by some margin” – this suggests the wave will be coming across the Atlantic in the next 12 months (a nice precursor of how that will emerge here)! It is written up nicely however, with cloud storage, and the richness of data held on customers, being elements which make insurers prime targets. It doesn’t dwell on the proliferation of legacy systems in insurers however, which always felt to me a good reason for criminals to ‘have a crack’.

• Europe considered the interest rate environment, regulation and guarantees to be the top 3 banana skins, which given the aggressive tailoring applied to Solvency II in the drafting stages to negate country-specific difficulties in these areas (MA/VA/Transitionals), is no surprise.

Oh, to have a day job again…

Central Bank of Ireland speeches - "and there's more"...

Solvency II-ready?
"It's the way I tell them"...

I rejoiced on Friday at the sight of more speech material emerging from the Central Bank of Ireland directorate, if only due to the Frank Carson* gag I could wheel out due to the volume of their recent speech-giving...

As an industry we should always be happy to hear the regulator on lead vocals, so I gave the pair of speeches released a once-over to see what Irish concerns have justified the recent bounty of public addresses.

Deputy Governor Cyril Roux was very targeted in his speech, delivered to PwC's Annual CEO Dinner. It apparently gave him "great pleasure" to be in PwC's offices, which presumably means they weren't on the meter...

Some of the statistics and comments served to highlight that Ireland is something of a special case in the context of Solvency II, in that two-thirds of Irish gross premiums are to cover 'foreign risks', and that many insurers under their auspices will not have proximity to or oversight of much of their distribution network.

A few messages jumped out from the rest of the speech;

• A lot of positive messages had a caveat implicitly wrapped with them - "...we are in the main satisfied with your engagement with the Central Bank"; "On the whole international firms generally file returns on time..."; "I also commend your general adherence to our Corporate Governance Code..."
• Goes as far as using the IMF's recent review findings to tell firms to stop poaching regulatory staff while simultaneously complaining about turnaround time!
• Nice point about keeping focused on current risks through the PRISM framework, rather than drifting into Solvency II mode before 2016.
• Having recently been complimented by Sr. Bernadino on Ireland's reserving governance (p12), he reinforced that assumptions pertaining to reserves are expected to be "critically debated".
• On ORSA, that the CBoI "...expects to see Boards actively directing the use of risk management tools...such s stress or scenario testing"
• On Internal Modelling, he not only expects Boards to "...have sufficient knowledge and skill to challenge the model outputs", but adds that they "...like to see a Board direct the modellers in their firms to run specific stresses and scenarios prior to an item being discussed at the Board" - a big advance on previous murmurings on use test from supervisory bodies.
• Pulls up firms who are seemingly not tailoring their model's parameters for the Irish-specific business.
• Similarly a message of insisting that cross-border distributors tailor Group-driven materials and processes for the Irish market such as "...group policies and output, such as the ORSA, and internal model...".
• A cute but important distinction that "embedding" Solvency II, rather than complying with it on paper, is still going to take considerable effort.

Sylvia Cronin's speech (well, the Solvency II aspect of it) stayed along the same lines as she pursued at the Industry event in late April, where she was harsh on a number of specific elements in preparatory phase ORSA Reports which had been observed.

In a section of the speech covering "challenges to be overcome", a number of pieces of insistent ORSA direction are given, for example;

• "Your Board must use the ORSA to more fully align business strategy and capital"
• "You also need to use it as a lever to discharge your core responsibility not to take on risks and exposures which the capital base does not support".
•  "...there is a lot of work yet to do by firms to get this element of the new regime embedded to the extent we required" - I add here that, given they will have only reviewed 2014's preparatory phase ORSA Reports and Processes, is this not a given, particularly after CBoI sponsored a template-filling approach for the smaller firms?

On the wider world, the speech covers;

• That Solvency II sets out "clear standards and expectations around your internal control and risk management" - agree on the latter, but the former?
• Believes that the "scope for subjective judgement" may open up regulatory arbitrage opportunities, and that "a number of iterations" will be required before EU-wide consistency is achieved, in a sly dig at, errrr, everyone in mainland Europe! 
• Similarly, the volume of cross border business HQd in Dublin poses a problem due to the geographical boundary of CBoI's "prudential remit"
• Reinforces the message fro April that Pillar 3 readiness is a growing concern
• A large suite of views on Conduct Risk, where "culture" and "conduct" are hogtied together as the grimmest twins since DeVito and Schwarzenegger - that message won't be changing in a hurry, so I strongly recommend your work in that area caters to the supervisor's tastes.

Useful insight from what appears to be a supervisor with their sleeves rolled-up - keep up the good work.

* PS I know the connection is tenuous as he's a Belfast man, but give me a chance!

PwC and CSFI's 2013 Insurance Banana Skins survey - "Conduct Risk" firmly a la mode

Following on from the 2011 version, PwC and the Centre for the Study of Financial Innovation have pumped out another version of their Insurance Banana Skins survey, identifying how well the insurance industry feels it is prepared to handle a list of pre-identified risks. The average response on a scale of 1 to 5 was 2.97, which rather unrevealingly suggests the industry is averagely prepared to manage its collective risk profile.

EU Legislative process - not for vegans

This survey was conducted during March/April 2013, and elicited 662 responses from 54 countries, with two-thirds of respondents coming the insurance industry (the rest consultants/brokers etc). Almost half were European, so no surprises that the risks emerging from the regulatory environment were top of the pops for the second survey in a row. Solvency II gets a particularly flavoursome mention, with reference to its struggles to get through the "Brussels Sausage Machine"...

Bearing in mind the exquisite pressures being applied by the EU machinery to quantify risk, this publication is a welcome return to horizon scanning, qualitative assessment and emerging risk, all of which is handy for the ORSA posse, who according to recent surveys, should be all over this during 2013.

Some very interesting snippets emerge from the report, in particular;

• "Conduct Risk" - if ORSA was the new boy in 2012, then its 2013 counterpart is surely Conduct Risk, which I suspect didn't warrant a category of its own in many risk managers thinking until the return of twin peaks regulation in the UK. Conduct Risk has shot up the charts in its significance for insurers, now sitting 4th (from 18th last year)! Specifically, the suggestion that insurers are now "...looking beyond conduct risk as simply a compliance exercise" makes you wonder what some firms through were acceptable products in the last 10 years!
• "Guaranteed Products" - was not listed last time around, now jumps to number 6
• Actuarial Assumptions (which can easily mask the emergence of a number of the risks listed) unchanged at 12th
• Capital availability down from 2nd last time to 16th this year - interim period been spent squirrelling capital away, or happy that the onerous elements of Solvency II are (thanks to Germany) in the distant future?
• Reputational risk still in mid-table, at 14th

And sectoral/country specific;

• Surprisingly, the Life sector doesn't have actuarial assumptions in its top ten concerns
• Equally surprisingly, the non-life sector doesn't have regulation in its top ten concerns - clearly happy with their proposed Solvency II lot!
• That reputation doesn't feature in reinsurer's top ten - with customers likely to be eager yet more discerning  under Solvency II, one would think this is an area for enhancement in order to stand out from the similarly-rated crowd
• The quality of risk management appears to have spiked as a concern largely due to the emergence of emerging market firms into the space playing catch-up (on paper at least), as well as concerns that some firms are playing at risk management without making necessary adaptations to the prevailing risk culture.

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'!

Solvency II "Where are we now" - summaries from Milliman and PwC

Some useful "where are we now" materials have emerged over the last couple of weeks which you may find helpful, if only to validate your own interpretations of the current state of play:

PwC Ireland preparing for solvency II

Predominantly covers summaries of EIOPA's preparatory guidance, with some nice touches around;

• Differences between Irish Corporate Governance code and L3 system of governance demands (p15)
• Insisting that "an automated solution is required" for the reporting to NCAs, no doubt in the hope of drumming up some work out of such projects now that Pillar 2 work is largely done (p27)
• Comprehensive Use Test schematic (p39)
• General problems encountered meeting data requirements (p47)

In addition, PwC appear to be facilitating the set-up of a CRO Network over in Ireland, which will allow "all the different professional skills that feed into risk management" a place to swap Solvency II risk function-related war stories. First meeting at the end of the summer, can't wait to hear the outcomes.

Milliman - Solvency II Where are we now?

This very detailed slide package was released last week, and like the item above, covers all of the timeline-related activity around EIOPAs L3 work. It goes into updating readers on the latest position on;

• Economic Balance Sheet - noting similarities and differences in IFRS Phase II/Solvency II approaches to valuation, and a large amount of detail around technical provisions
• Data Management - retreads some of the FSA's findings from last year
• SCR - Covers latest standard formula position, as well as partial internal models and generic IMAP issues (again, retreading FSA letter content from last year). Particularly nice IM schematic on slide 21
• System of Governance - Basics on general requirements, function requirements and risk categories (which they have as 'risk management areas'). ORSA piece is fairly generic, but the schematic on Risk Appetite Frameworks (p35) is quite handy.
• Supervisory review - covers circumstances around capital add-ons and how they see the PRA identifying and assessing such instances.
• Supervisory disclosure - SFCR, RSR and QRT content and timetables for submission. Particularly useful to have this summarised, bearing in mind EIOPA's expectations for the interim period are for a subset of the full QRT suite previously published
• Insurance Groups and Equivalence are also covered at the end

Plenty of substance between the two (around 100 slides), so if you have an hour to kill, sers toi tout seul!

PwC paper - Solvency II Pillar II "operational issues of risk management"

Following on from KMPG's efforts, the PwC crew have released their own aide-memoire for Pillar II specialists, which at the very least should be handy for CRO/Head of Risk etc amongst us for board training/briefing ideas as we approach the home straight.

At 60 pages, it's not exactly a comic, and while a great deal of the introductory material is 'Pillar 2 101', it does contain material (either text or schematics) which should be of immediate use, so I would recommend checking out;

• First line of defence and reasons for risk ownership (p26)
• Definitions of Risk Appetite/Risk Tolerance/Risk Profile/Risk Limits/Risk Budget (p35) - I haven't cross referenced these against IRM definitions for example, but may be worth doing for consistency. An accompanying schematic is on p36.
• Internal Model Scope (p40) and Validation (p48) should be extremely topical after Mr Adams's speech on Thursday.
• Communications and training plan ideas (p53-54)
• ORSA schematic, and some talk around process industrialisation (p56)

Perhaps the main weakness in the text is that there are no references to the Commission's draft Level 2 text, which is now clearly a document in a lot of people's hands (not least the FSA, who have made it clear that this plus the Directive text is what IMAP is based on). I also wasn't mad keen on the reference to P&L attribution being "the real risk profile" (p48) - there is already enough flab around this term without additional mis-steers.

All in all, well worth dissecting, even if like a Roast Pigeon, you end up throwing away more than you consume!

PS - Far be it from me to suggest a document from one of the Big 4 has a whiff of Google Translate about it, but this was authored almost entirely by PwC France it would appear, perhaps explaining the odd COSO-ERM reference on p17, the rather oblique title, and of course, the whopping 60 pages...

PPS - Wife is French, so allowed the odd cheap gag around bureaucracy!

ERM Speciality papers - PwC on "Black Swans"

A couple of speciality ERM benchmarking papers were released in the last week which are worthy of comment.

The first, from PwC, touches on the well trodden path of Black Swans, as well as giving the concept of ERM as a whole a bit of a black eye, suggesting that alignment of risk and strategy is infrequenctly achieved. I can certainly sympathise with the comments relating to the inflexibility of ERM frameworks and the onerous nature of running them in a way that contributes to wider boardroom debate. There is also some salient comment on how malfunctioning ERM can blur the lines of responsibility in an organisation, as well as the old "risk appetite is not explicitly defined" chestnut.

It does however lean heavily on the AIRMIC research from last year for content, and contains some startling generalisations (from an insurer's perspective at least);

• "In most organisations" risk is grouped into three main categories - operational, strategic and financial?
• "Under current risk management thinking, a risk that cannot be identified cannot be managed"?
• Audit committees cited as complaining that they receive too much risk information (as opposed to their job of financial statement scutiny and internal controls adequacy)?
• ERM "currently used by most major corporations" and has "a focus on providing stronger control over operational and financial risks"?
• Some critics claim that ERM "can encourage a box-ticking, process-led approach to managing risk"?

It goes on to descend into some schematic craziness before coming back to reference reverse stress testing (close to insurer and banking hearts already, but this paper is targeted across industries). The concluding recommendations for enhancing ERM frameworks into "ERM plus" all scream "ORSA". All in all one for the non-insurers to consume, as a lot of the Solvency-II world will feel they have this covered.

Next up Harvard Business Review and Zurich!

PwC, Central Bank of Ireland - ORSA Briefing

For anyone who just cant wait for the ORSA public consultation next month, PwC and the Central Bank of Ireland have clubbed together to publish this presentation on ORSA (given last week).

From the CBoI section I would flag;

• Firms already have "some" of the components of ORSA in place - in a country where the Financial Condition Report is alive and kicking, you might expect more confidence than that!
• Most of the rest of CBoI's presentation very plain vanilla - concerning if you are looking for firm guidance.
• Not sure how the Q&A went - if anyone attended, I'd love to know!

From the altogether more monied PwC, I would flag;

• Nice process maps that should visualise the suite of work that will ultimately comprise of an end-to-end ORSA process, including the reporting which spews out of the back end.
• A decent attempt at prescribing an ORSA Report structure (of course, if you have seen one punt from the consultancy firms at an "ORSA Report", you have seen them all, buit this does elaborate on each section).

Useful for anything you can extract from it, most concerning perhaps is the divergence in certainty and standard of presentation between the big 4 consultant and the regulator.

PwC Annual Corporate Director survey 2011 - more time for Risk?

PwC kindly fired out the findings from their (US-centric) poll of corporate directors. Decent sample at 834 respondents, and two-thirds were sitting on boards with $1bn+ in revenue, so worth heeding. Both RM Professional and Norman Marks have taken it to task, so I won't dwell on the findings other than the following;

• 72% would reconsider pay awards in the face of "significant shareholder dissatisfaction" - just wondering what "significant" is.
• Relatively little planned change in reaction to clawback legislation embedded in Dodd-Frank
• Almost 60% of boards wanted to spend more time on Risk Management, putting it third behind Strategic and Succession planning
• Less than 10% plan further than 5 years ahead
• Almost half discuss strategy viability no more frequently than annually
• Amusingly, both racial and gender diversity is referred to as a "Skillset/Attribute" - 23% find it very difficult to obtain directors with the racial "attribute", while 15% struggle to get the "gender" one!

Handy in its own way for the Europeans amongst us as a proxy, a more pertinent document for the statesiders.

Insurance Banana Skins 2011 - PWC and CIFI

A regular publication (free from PWC at this link (fill out short form)), the 2011 Insurance Banana Skins document contains some extraordinily candid insights into the thoughts of the Insurance industry across the globe, with a heavy Solvency II and ERM flavour this year. My summary points on the rankings and quotes below;

• 490 responses, 190 from UK (two from my stomping ground on the Isle of Man!)
• Regulation and Capital fairly in my view occupy number 1 and 2 respectively
• Actuarial assumptions incredibly low at 12, bearing in mind how much they will need to be documented, challenged and validated in the ORSA process under Solvency II. It is higher in non-life companies, and more intriguingly, in Regulator's views!
• Talent is a new entry, and is certainly reflective of the consulting industry
• Highlights fear that Solvency II is not just expensive, but takes smart professionals away from their day job (an excuse used by the Irish Banking industry with Basel II in the recently published inquest). They cite a CRO at a major UK insurer noting it could be "to the detriment of oversight of the commercial challenges" of the industry.
• Risk management well down the rankings, after Insurance outperformed Banking in this respect - I would note that the CEA/Geneva Association et al lobbying on Insurers being classified as SIFI's by the G20 is still ongoing.
• Fantastic consultant quote that "Those entities which do not hold high quality capital and have poor risk management tend to be overly critical of Solvency II" - it wasn't me incidentally!
• Prudential Financial Risk director quoted as saying there is "significant risk" that the industry could "platinum plate" models, rather than company-specific versions, though this isn't substantiated
• Solvency II "Largely pointless" to one Lloyds underwriter
• Comment from Axa COO in Asia that "...some lines of business will suffer due to missing capital"
• On Actuarial Assumptions, divergence shown with quotes like "Are actuarial models...becoming the main operational risk", versus "I'm not sure why this [actuarial assumptions] is a risk".
• Quality observation that "generally, the world is moving increasingly quickly, and so the validity of assumptions is falling" - needs substantiation, but is a salient point
• Aon analyst notes that with the focus on internal models, "risk managers and underwriters may start to place more reliance on the model, and less on judgement".
• Neglected area of reputational risk highlighted by an Australian respondent, who looks at the industry reputation damage caused by procrastination, sneaky clauses, exclusionary language etc, which I really liked (easy to focus on single entity reputation).