Pillar 3 implementation phase - "I can change, I can change"...

There has been a bit of noteworthy activity on the Pillar 3 side over the last few weeks, which I will cover below if I can keep awake long enough.

Pillar 3 Deadlines - "take it easy fella"

Pillar 3 was shouldered in to the NED briefing at the end of March (slide 19), and in a style similar to South Park's Saddam Hussein charicature, they effectively told the audience to "relax guy"...

Were those calming words justifiable? Given the PRA's admin function was seemingly on a "no uploading" break for Lent, we have in the last couple of days seen a whopping 3 months worth of minutes from their Regulatory Reporting Industry Working Group (or "Pillar 3 whingepit" as it more commonly known) made public. Interesting snippets include;

Jan 2015 - PRA full working group

• Publication of example reporting schedules for anyone without a December year-end
• "Early May" appears to be the starting point for any Category 1-3 firms who need to test out the PRA's QRT recepticle handiwork
• Firms "must submit data in XBRL" from July of this year, in case there were any chancers out there
• No additional information about the spectre of external auditors poring through your reporting efforts until Q2 2015 (i.e. now!). This will be in the form of EIOPA Guidelines, from which the PRA will "determine its position".
• About 20% of firms responded to the PRA's readiness survey that they are behind the curve
• Sourcing asset data still noted as an "issue", as well as vendor limitations, which would be of some concern for anyone who has splashed out on a software solution.

Feb 2015 - PRA testing sub-group

•  Problems around compatability of firms' earlier efforts appear to emerge every time EIOPA apply a hotfix to their taxonomy
• EIOPA filing rules and guidance were scheduled for Q1 2015 release - I can't seem to see them (though I haven't looked hard), so their timeliness maybe a victim of the EIOPA budget cuts?
• Firms are directed to the draft ITS to distinguish between preparatory requirements on Reporting and "live" requirements. This seems to be a repeated message, so presumably firms are not reading this document properly. 
• First testing cycle kicked off on 27th Feb, with (9) firms down at the PRA's offices. Second cycle scheduled for soon/now in April, performed externally to "test connectivity"
• Firms were effectively encouraged to sent in any old tat in XBRL, which the PRA would feedback on.

March 2015 - PRA testing sub-group

• Initial testing of the PRA's facilities doesn't appear to have been discouraging
• Less that half a dozen firms will be kicking the tyres in the second test phase
• EIOPA effectively overrule the PRA by allowing old and new taxonomies to be used in the preparatory phase.
• The PRA's (unpublished?) validation rules will not be applied during the preparatory phase, which will be light relief to some firms.

This information seems to support rather than contradict the more general yet widely reported Grant Thornton survey which suggests there will be a good number of firms who will struggle with their 2016 obligations, let alone 2017's. They made the following points;

• GI and composite firms seemingly the most worried
• Half of firms are planning to create their own reporting solution (based on T4U?), mostly Lloyds and GI firms. Are these "have-a-go heroes" the hidden issue for the PRA, given their restricted testing group.
• Around 20% are behind schedule on QRTs
• A third have done little if anything on the SFCR/RSR front – the PRA have stated that these are required "in year 1" (Q17, and yes, both of them!)
• Compared against an earlier survey they conducted, the one topic which hasn’t alleviated any concerns is the ability to extract data from internal IT systems.
• Majority of firms are having a single dry run for quarterly and annual QRTs

Should anyone be worried given the granular information above, or is Pillar 3 still tomorrow's problem?

The PRA's take on EIOPA's Interim Guidelines - far from a 'Tragedy'...

The Prudential Regulatory Authority have celebrated their second week in office by hosting a number of industry briefings regarding EIOPA's Solvency II Preparation Guidelines. One Blogger keenly dripped some of the materials discussed out yesterday, but I've had a look through the briefing materials released today on the PRA's site to see if there are any messages worth amplifying.

Steps - appropriate?

From a calendar perspective, the PRA are planning some technical workshops with "industry representatives" in early May, to be followed by an industry briefing later in that month. The output from the workshops appears to be a major influencer on whether the PRA will "comply" with EIOPA's guidance or "explain" why they won't.

With final versions of EIOPA's guidelines expected by September/October 2013, the national regulators have an additional 2 months from publication to formally confirm their "comply or explain" position.

Reading between the lines this looks (for now at least) as a foregone conclusion however, with this comment from the internal model pre-application slides;

"We expect firms to have regards to the interim guidelines and take appropriate steps to prepare for Solvency II" 

Three slide sets have been released - anything new, or worth reiterating, below;

Internal Model Pre-Application

• Model change - to be monitored throughout pre-application.
• Colleges - Evidently notable divergences in assessment practice across the union which the Guidelines hope to fix, but "no direct implication for firms".
• IMAP - while EIOPA's guidelines "will be considered as part of IMAP reviews", they don't (in the PRA's mind) touch on anything which wasn't already part of existing L1/Draft L2/pre-application L3, so no surprises on that front. They do however highlight the elements on Expert Judgement and Validation as providing more clarity on supervisory expectations.

ORSA and System of Governance (combined)

• No PRA expectation of  a full/'live' ORSA or Solvency II-compliant systems of governance by 2014
• Neither are there any expectations for firms to make changes in investment strategy/capital strategy/outstanding Pillar 1 elements - at least not due to Solvency II in its current form.
• For System of Governance, the PRA's slides highlight areas where EIOPA's guidelines exceed expectations of the PRA Handbook - these include Board MI; revisions to control functions; revisions to Risk Management Policy; Prudent Person Principle; and calculation of TPs.
• For ORSA, the slides clearly indicate that dry runs and ORSA process development should be the immediate focus, and it should serve to reaffirm best practices that already "underpin the ICAS".

Submission of information to supervisors

• Only a subset of the full package recommended by EIOPA in July 2012
• EIOPA want to see at least one round of annual submissions, and two rounds of quarterly submissions before Solvency II goes live, with 2016 seemingly the preferred year.
• On that basis, firms will have 20 weeks (26 weeks for groups) after year-end 2014 to submit annual template obligations.
• They will then have 8 weeks (14 weeks for groups) after quarter end Sept 2015 to submit their quarterly template obligations.
• As per ORSA, firms which are involved with internal model pre-application will need to perform both standard formula and internal model work in this area.
• Also as per ORSA, thresholds for participation based on TPs (Life firms)/Premiums (Non-Life).
• Narrative reporting requirements are "significantly reduced"compared to final requirements - however, there is plenty of crossover between what one might document during ORSA processes and what is expected to appear in RSR/SFCR, so firms shouldn't struggle in this regard.
• The concept of a "Reporting Policy" document (guideline 33 in the consultation) covering who will be responsible for what in the submission of information to supervisors, is referenced in these slides. This hadn't featured on my radar before as 'compulsory', so documenting this early, even just as process steps/maps, seems like a move that the PRA would appreciate.

Ernst and Young on Solvency II Pillar 3 - a likely story (sadly)

Time for a walk (actually more of a sthaager for a Manxman!) into the less familiar territory of Pillar 3, or "the output" as some traditionalists may label it.

E&Y dropped a Pillar 3 preparations survey out to a relatively small (53 respondents) but nicely spread (8 countries, and roughly split into Life/Non-Life/Composite) sample, and as one might expect, preparations were found to be slightly underdone by the majority.

They note that even for companies who have completed their gaps analysis between BAU and Solvency II demands, there remains some meaty outstanding issues such as reporting granularity; capturing synergies for other requirements (namely ORSA); policy drafting and implementation around data governance, and process redesign. Appreciating that some of these matters are still up for debate, some aspects of this gap list should be closed by now, and I suspect that the regulators will not look favourably at firms who continue to nudge this topic into the 2013 space.

Other aspects which jumped out include;

• Only a third of respondents have completed a gap analysis of QRTs against capabilities
• Less than a fifth have mocked up an SFCR/RSR, despite the prescriptive nature of Level 2 on the reports
• Interestingly, two-thirds have designated their finance functions as primarily responsible for Solvency II reporting - some have parked it with Risk which, while appreciating a three lines of defence model is not compulsory, seems very wrong regardless of the function's skillset.
• Three quarters expect to achieve reporting compliance only after "significant" or "fundamental" changes to their existing processes
• Some firms were identified as planning to speed up their existing processes to meet the proposed reporting deadlines under Solvency II, which seems an excellent idea

Pillar 3 is likely to be an even more bountiful smorgasbord after EIOPA released their feedback statement on their consultations around the Solvency II reporting package today. I suspect I don't have the ambition to swallow the 88 pages today (or perhaps any other day!), but Will Coatesworth neatly tweeted the big message earlier which the industry tried to avoid, which is that quarterly balance sheets look like they are here to stay as part of the reporting package.

Good news for regulators, consumers, and anyone who is punting round Pillar 3 software solutions I guess!

FSA interpretations and Q&A on ORSA, Supervisory Reporting and transposition

Couple of very nice Q&As out today from the FSA (well spotted by Gideon on the Solvency II Wire) which cover last week's releases from EIOPA on ORSA and Supervisory Reporting.

The ORSA Q&A gives a detailed interpretation of what the regulator thinks the processes and reporting entail. Stand-outs for me were;

• Process of recalibrating one's internal model from economic to regulatory capital purposes must be included (difficult if your EC measure is not a straightforward read off a later point on the PDF?)
• National supervisor "cannot act" if actual capital is below EC, and it "cannot be used as an intervention point" - not really sure why they need the information then!
• Sadly don't elaborate on the potential for the ORSA Report to form the basis of the supervisory report - would have been ideal comment
• IMAP does not require ORSA output - I had heard this on the grapevine, but nice to have confirmation
• Confirms the expectation that the ORSA Process must include a process for recalibrating one's internal model to the standard formula SCR

Also has a handy "what you should do now" list - would hate to think anyone has not ostensibly done any of these things by now, but reassure yourselves by having a look! Q&As on the last page may be handy to show your project managers/execs/NEDS, but they are a little light.

The piece on Pillar 3 reporting is more concise, and probably worth running by your execs - however, it is a little 'scattergun' without much opinion, and you may find the summaries from the big consultancies of more use

Finally, The FSA's documents on the legal transposition of Solvency II into their Handbook is probably of little use to anyone outside of the UK (fascinating though it is!), so grab what you can if you're based elsewhere!

Business Innovation and Skills department – “Strategic Report” – anything to borrow for SFCR/ORSA/RSR?

This came out in the week from the Business Innovation and Skills department in the UK - the recommendations clearly impact on the presentation of materials for listed entities, with a "Strategic Report" replacing the various patches of random guff that normally turn up in statutory releases to the market (boiler-plate and pretty offensive in its lack of stakeholder appreciation).

I'm thinking along the lines of Pillar 2&3 in the context of this, particularly if there are some economies of scale which can be generated by sharing information between the Strategic Report and ORSA/RSR/SFCR for insurers - one for your project plans maybe?