PRA Pillar 3 Working Group - testing commences

Bit of activity on the Pillar 3 front, with the PRA's industry working group publishing minutes from their 'recent' meeting (i.e. 2 months ago).

Rather than another bleat about late delivery in contravention of their Terms of Reference (bottom of last page!), let's enjoy the content for what it is, which is incredibly useful.

Data Collection and xBRL
A few basics were formally tabled, such as the PRA completing their vendor selection for a data collection system, and a note that the xBRL process chosen across the EU has "some commonality". Of particular interest is the commencement of a testing sub-group which has been charged with assisting the PRA in getting their technology up and running with sample data, and that work is apparently ongoing as we speak.

They have planned to allow selected submittors to dry-run their facilities in Q1 2015, before opening it up to all other firms obliged to submit material in the preparatory phase in Q2. Not sure how much lag this set-up allows, so let's hope they get happy before Christmas!

External Audit and Pillar 3
Another sore point has been the potential inclusion, on a short or long-term basis, of external auditors in the preparation and delivery of Pillar 3 reporting (raised on the Solvency II Wire last month). The PRA opine that external audit requirement guidelines "...are not scheduled to be included" in the forthcoming ITS, and that EIOPA has not decided when to issue public consultation on the matter, though they will at some point.

Clearly the PRA have ambitions to continue their existing requirements for the external audit of regulatory submissions, as evidenced by their preparatory phase approach to gaining comfort on Solvency II Balance Sheet components of all IM applicants and larger SF firms, which will pad out a few partner's wallets at the Big 4 (though perhaps for the right reasons).

Lobbying and questions
Effectively told the attendees to direct more questions to EIOPA rather than them, and in particular to wait for EIOPA's second set of ITS, due any day now. On the basis that ITS will (probably) be accepted by the Commission as delivered, the PRA are reminding firms that this is effectively the only window for the industry to bleat.

Board sign-off of QRTs
A huge bugbear across the industry was the implication, reinforced through the PRA's Pillar 3 Q&A document (Q20, last page), that June 2015 would see piles of QRT material tabled at Board meetings across the UK for them to formally approve. They confirmed at this meeting that the Board "...may choose to delegate aspects of the process for operational reasons" - CFO sign-offs all round!

Asset Data, and interaction between Asset Managers and Insurers
A slightly odd, but very relevant point was raised regarding Insurers interacting with their asset managers to ensure they get the right quantity and level of granularity in their asset data to populate the QRTs. The PRA are naturally concerned about this, given the shortening timeframe, and given that the asset management industry themselves appear to be making some voluntary efforts, it feels like the insurers have some work to do.

The PRA Consultation on EIOPA's Preparatory Guidance - priorities for 2014 and 2015

After 10 years, it's finally getting interesting - the PRA today have dropped out a consultation paper on applying EIOPA's preparatory guidelines to PRA-authorised firms (CP 9/13). You can get at the EIOPA materials through this post for convenience.

The content will, subject to any intense lobbying by industry, be adopted as a supervisory statement (section 233) to cover the 2014 and 2015 calendar years, with the expectation remaining that 2016 is our "go-live" date. It covers the following aspects of the preparatory phase;

• The PRA's expectations of firms as they prepare for Solvency II;
• The PRA's approach to implementing the guidelines; and
• The PRA's interpretation of aspects of the guidelines.

They are at pains to highlight that these are "preparatory" guidelines, and provide the traditional spiel on "nature, scale and complexity", so incremental progress is to be expected during the period in question. What that means in practice is perhaps another thing - can you show measurable 'incremental progress' for materials which are only on an annual review cycle, for example? - but that aside, it's worth picking the bones out for your respective programmes, and perhaps most importantly, getting your feedback in by November 15th if you don't like it!

Perhaps the most noteworthy aspect of this CP is that in no way is it suggestive of the PRA rejecting any of EIOPA's guidance (remember, they have until the end of November to voice any protest). That of course makes preparatory work much easier to plan for, as the UK will seemingly be doing it all!

My thoughts on the specifics were as follows;

System of Governance (SOG)

• Emphasise that the SFCR requirements around SOG are also catered for in EIOPA's work (3.7), so a smart move would be to factor that into your drafting plans during 2014
• General governance requirements "largely consistent with SYSC", though individuals holding key functions might expect a personal visit in the next two years (3.10)
• Similar position for Risk Management Systems (3.12), stressing the commonality of requirements with existing PRA obligations, but stressing in particular that firms should be "...including suitable mechanisms and methodology for connecting to their ORSAs and for carrying out regular stress and scenario tests" during the preparatory phase.
• That Prudent Person Principle is not a new concept to the PRA, but firms would be expected to review investment strategies in line with PPP over the next couple of years. A concession is seemingly made regarding the provision and review of third-party data by investment functions for smaller firms. 
• On the (new) requirement for a Capital Management Policy/Medium Term Capital Plan (3.16), they are not moving, despite the howls of protestation - "The PRA regards the development and implementation of such policies and plans as an integral part of sound risk and capital management for all firms, especially as their management and Boards assess the implications of the forthcoming Solvency II own funds and capital requirements"
• On internal controls, they appear to be fishing for firms to analyse whether their existing framework is Solvency-II ready, and then piggy-back of that self-assessment (3.17)
• Same for Internal Audit function readiness! (3.18)
• Actuarial function get a more bespoke treatment (3.19), with all firms asked to "carefully consider" the functional structure to avoid conflicts of interest. They also reserve the right to "...review firms’ analysis of the areas required for improvement, and understand the actions the firm is taking to resolve these".
• Outsourcing similarly gets additional treatment by the PRA (3.22), who are "particularly interested" in changes made specifically with Solvency II readiness in mind

Useful quotes

...the PRA articulates its expectations of firms in the preparatory period, including that firms should read, assess and implement the substantive provisions of the guidelines in order to achieve the intended outcomes (2.5)

The guidelines and this statement are designed to work towards a consistent and convergent approach in preparations for Solvency II and not its early implementation (2.6)

 The PRA expects firms, when asked, to be able to explain what governance changes they need to make to satisfy the guidelines, how they plan to make those changes, what progress there has been to date and any particular difficulties they face (3.4)

The PRA expects firms to be able to document their overall approach to outsourcing, including contingency plans in the event of a service provider failure, to ensure that the efficiency of the service remains unimpaired and uninterrupted. (3.22)

During the preparatory period, the work of the actuarial function will now focus on co-ordinating the calculation of technical provisions, providing an opinion on the underwriting policy and reinsurance arrangements and contributing to the development and performance of the internal model in the pre-application stage where relevant (3.19)

During the preparatory period, the PRA encourages firms to consider how to manage the transition to the new regime and to assess the impact on existing asset portfolios of Solvency II requirements. This need not necessarily mean that changes have to be made to firms’ investment strategies or portfolios but firms are encouraged to work on an incremental basis towards demonstrating that they meet the requirements of the PPP (3.14)

During the preparatory period firms should review their existing policy for assessing fitness and propriety and whether it needs updating in advance of Solvency II (3.11)

FLAOR/ORSA

• PRA only planning to review assessments "...on a proportionate basis" during preparatory phase - they elaborate further by stating "Due to the high number of ORSAs which will be submitted, the PRA expects that it may have to stagger its review of these during the preparatory period in a way that is risk based and proportionate". Does that mean "Top Ten & Lloyds & IMAP" get the works, with everyone else getting a lite-touch?
• Expectation that improvements are identifiable between the 2014 and 2015 FLAORs - the PRA will contact firms individually if they are within the threshold limits which enact guidelines 14-16.
• On ORSA documentation, "...firms should recognise the need for effective documentation and record keeping", for both Policy and Report (4.7)
• Note that the Board's involvement in ORSA is "...far more extensive than setting risk appetites and tolerances", and leave an open threat to go through Board packs/agendas to ensure this is the case (4.8)
• Smaller firms get permission to use their internal ORSA Report as the ORSA Supervisory Report, provided it has enough detail. Larger/riskier firms may conversely be asked to supplement whatever they submit. (4.10)
• PRA actually considering issuing a "summary sheet" to firms in order to help gather information consistently (4.11). Here comes the ORSA Template!
• Expectation that 2014 projection work is done on existing basis, and 2015 (ideally) on Solvency II basis (4.15)

Useful quotes

The preparatory period is a time of development for firms in designing, compiling and trialling these assessments (4.3)

To help capture [ORSA] data and information in a consistent way from firms and facilitate review the PRA is considering whether it may be beneficial to provide a summary sheet to firms (4.11)

The PRA does not intend to prescribe when firms should submit their ORSA...Firms should inform the PRA when their ORSA will be submitted well in advance of the submission date (4.19)

The PRA expects the Board to play an active part at various stages, providing initial steering on how the ORSA should be designed and documented, challenging on risk identification and mitigation along the way and culminating in the Board approving and communicating the finished product. (4.8)

The PRA expects all firms to develop a qualitative process to develop an ORSA which can be documented and reviewed by the PRA in line with its overall proportionate approach.(4.6)

Submission of Information

• Confirms that XBRL is required prior to 2016 as submission format for QRTs (5.7)
• Suggest that policies and procedures around reporting in firms may need "potentially significant revision" in light of Solvency II. (5.15)
• Rather obscurely, they write, "The PRA does not expect that preparatory reporting will be subject to a requirement for external audit but it may draw upon audited inputs" - as I recall the participation of external auditors in QRT-type reporting has been a massive bone of contention in Brussels (indicated within these IRSG comments from last year, but I'm sure there's a more recent story), but potentially not a welcome development.

Internal Model Pre-Application

• They isolate the Model Change policy as an example of something which should already be tested for its appropriateness (6.5)
• Still expect firms to come forward and brief them on "significant" changes during pre-application.
• Surprisingly, very little else,

Useful quotes

...it is important that where models are sufficiently stable, firms are beginning to demonstrate their use and continue to refine their models with the benefits of experience (6.5)

I may fire some feedback in, but ultimately I suspect this lady is not for changing...

Reporting/Submission of information to NCAs - EIOPA's FINAL preparatory guidance for national supervisors

And last, but not least, EIOPA have produced their final preparatory guidance to NCAs regarding the submission of information by firms to their supervisors, covering both quantitative reporting templates (QRTs) and narrative reporting. The consultation paper (summarised here by the PRA) caused quite a stir due to the volume of requirements during what is purported to be the 'preparatory phase', and even EIOPA's own Insuarnce and Reinsurance Stakeholders Group (IRSG) put the boot in on a number of elements.

It was of course natural that a combination of parallel running, legacy system horror-shows and potential ambivalence from third party information vendors was going to make this consultation the most controversial, but that said, the outcome appears to be pretty fair insofar as concessions have been made by EIOPA while still keeping the pressure on over-reluctant firms to construct the required processes in a timely manner.

One attempt at quarterly reporting is therefore retained (set for Q3 2015) as well as one run at completing annual templates, based on YE 2014.

The preamble borrows from the other preparatory guidance documents without anything new, so ignoring that, the following items jumped out at me thematically;

Concessions
3.54 Despite the gibberish in paragraph a), this effectively allows for some simplification in the quarterly reporting during the preparatory phase
3.55 Captives are excused for the quarterly run in Q3 2015

Parallel run costs/strains
3.58 As with other papers, EIOPA don't care!

Template changes
3.62 A change log covering amendments between the original template release and those now available has been included to help firms level any work already done in this space. A surprisingly large number of changes made, magnifying the difficulties faced by firms, NCAs and ultimately EIOPA.

Legal entities which are below the threshold
3.72 If a legal entity is below the reporting threshold in isolation, but forms part of a group which is above it, the LE will still have work to do

Annual reporting
3.76 An extra two weeks added to the submission deadline (now 22 weeks for solos, 28 for groups)

Quarterly reporting
3.81 As above, the requirement to report on Q4 2015 has been removed, a practical attempt to manage the myriad other reports expected from firms in early 2016.

XBRL
3.83 Up to each NCA as to whether they demand firms use XBRL in submissions - I think some of the supervisors may already favour it or have indirect experience of handling it (UK, Ireland, France)
3.84 EIOPA will provide a tool to aid firms in doing this, should they want/need to

Internal Model applicants obliged to complete Standard Formula templates
3.94 Confirms that IM applicants will need to complete both, though their SF template work will be governed by the pre-application for internal model guidance (due to the different timescales applicable to that work)

Narrative reporting
3.102 Not negotiable - get it done!

Balance Sheet
3.106 Statutory accounts figures must be included

Assets
3.111 Unit-linked assets will not be exempted - also a clumsy reference to "contagious risk", one of many which betray mother-tongue related drafting problems

Particularly telling is that while the IRSG were obliged on some of their issues, they were not able to drive home all of their agenda - they had asked for and additional 4 weeks for completion of all templates for example.

Unquestionably a great deal of work to do for both firms and NCAs on this matter, and with existing reporting teams no doubt working to tight schedules, the sooner 2014 programmes factor in this disruption the better.

EIOPA's FINAL preparatory guidance for national supervisors - it's on at last!

Sporting less change than a busker's flatcap, EIOPA have published their final version of the preparatory guidance for the EU's National Competent Authorities (NCAs) to get themselves ready for Solvency II ahead of the anticipated implementation date of 2016. You can catch my post on EIOPA's consultation papers here if you want to dig out their position prior to the consultation, which saw over 4,000 comments offered.

EIOPA - Thanks for the feedback,
here's your change...

Over the last week, while I have been recuperating from yet another rugby injury, there is plenty of chatter recently about the kick-off date, Omnibus II's progression through trilogues (and hopefully parliament before the May 2014 elections), etc elsewhere, so I've just had a run through the final guidance to see what got lobbied out, and whether that is a win for all stakeholders, or just the industry. As the PRA have already made it clear that should the go-live date move, their expectations on supervisory reporting will also move (p3), whether it is 2016, 2017, etc. is kind of a moot point.

The mainstream press has trumpeted the big wins as being in the reporting space which, judging by the IRSG's scathing take on that topic, should be no surprise to anyone. However, it would appear that EIOPA have refused to bend for much else, adopting a relatively sniffy tone in response to stakeholders concerns/complaints.


Below are links to separate blog posts covering the more contentious highlights for each of EIOPA's 4 hot topics, while Mike Claffey and the Milliman crew have quickly summarised the changes here;

System of Governance - Final Guidance (EIOPA Doc)

ORSA/Forward Looking Risk Assessment - Final Guidance (EIOPA Doc)

Reporting/Submission of information to NCAs - Final Guidance (EIOPA Doc)

Pre-application for Internal Models - Final Guidance (EIOPA Doc)

FTSE and European Interim Reporting - Solvency II off radar

So it's Interim Reporting time again for Europe's beleaguered insurers and as far as internal models go, another one has apparently bitten the dust - Old Mutual formally withdrew from the PRA's Internal Model Application Process in early 2013 "...as a result of delays in Solvency II implementation" (p14), joining Resolution on the sidelines.

Solvency II - 'Time of your life'?

This time around there appears to be a conspicuous absence of comment on Solvency II and indeed Omnibus II, unlike this time last year, when every firm had an opinion about Solvency II's legislative progress and its financial cost.

This is not so unusual for the mainland Europeans such as Allianz, Axa and Munich Re (all of whom had nothing new to say at the half year), but the UK firms have normally used the Interim Report as an opportunity to sound off. With Old Mutual (above) and  Legal and General so far only offering minor comments on "delays" and "uncertainty", have both the industry and the legislators given up forecasting the end game, and put the Solvency II "baby in the corner"?

Hopefully the remaining big hitters such as Pru, Aviva and Standard Life will have something to say over the next couple of weeks.

Lloyds of London on Validation - testing and reporting enhancement ideas

Lloyds of London delivered a presentation around model validation last week to its 80-odd syndicates which anyone in the world of IMAP would benefit from picking through the bones of, bearing in mind the rather unique position of the Lloyds application (i.e. in the door of the PRA, and seemingly well received!).

They had noted in that presentation linked to above that they had found some weaknesses in 5 areas in particular, so this presentation is a deep-dive examining the strengths and weaknesses of validation - one may expect the other 4 'weak' areas flagged may receive similar treatment in coming weeks.

While their 2013 programme aims only to close the gap between full compliance with Solvency II tests and standards and today's position, it's worth flagging some fundamentals;

• Only half of syndicates felt to meet tests and standards in full - a third are 'pending' positive assessment, the rest have not passed.
• 'Fails' seem to be centred around following up on test failures and documenting findings in the summary report, rather than anything broader.

Around the production of Validation Reports, they noted negative findings around;

• Uncertainty about how to progress when something 'unacceptable' is found during validation testing
• Content of validation reports being statistic-heavy (i.e. indigestible to any non-quants who need to make decisions off the back of the findings)
• A lack of sophistication in the testing of material risks in some instances.

The last one is particularly interesting, as the central team at Lloyds has devised a schematic (slide 11) to show the kind of testing they expect to see on the more material risks (RST, P&L attribution) versus less material (going as far as qualitative tests).

It is also worth highlighting for any benchmarkers out there that Lloyds appear to advocate around 5 pages of Validation Report per risk factor, leaving their overall expectation of reports to be 30-40 pages, with 5-10 pages of appendices (p16). Bearing in mind these reports will I suspect be some of the first to go through the PRA's hands, the frame of reference may help encourage you to bulk up or slim down your own versions!

A large amount of this presentation (from p19 onwards) is devoted to fairly granular examples of how a validation test may be 'failed', and what action would be performed in order to gain a 'pass', so for those in the test design/conduct game, you may find something to support your approaches in that detail, regardless of the risks shown in the example (premium and reserve).

NAIC's ORSA Manual for US Insurers - a helping hand?

"Tired and Emotional" - European
Insurance industry in 2013 

After the self-inflicted Solvency II transformational pressures of 2011 and 2012 resulted in more wobbly legs than a teenage disco at midnight, the relative calm of 2013 (to date) will have come as a blessed relief for European regulators and industry alike. Not so over in the States though, as they crack on with their take on the Own Risk and Solvency Assessment, releasing their industry guidance manual a few weeks back, in preparation for a proper crack at implementation in 2015, the driver of course being IAIS ICP obeisance rather than Solvency II equivalence.

They have kindly summarised the changes made since their 2011 version of the same manual on p9, which focus on accounting basis, scope (for groups) and ensuring certain year-on-year changes are appropriately flagged. 

Generic ORSA content - what
regulators "really really want"?

Unlike in the UK where there has been a marked reluctance to offer anything in the way of meaningful assistance to smaller insurers, such as a report template or checklist of suitable content/processes, the NAIC, just like the Spice Girls before them, are happy to "tell ya what I want", regardless of the potential for genericism.

That said, a recent Towers Watson survey suggested that there is still plenty of work to be done and staff to be hired in order to get with their ORSA programme.

The NAIC clarify that the US ORSAs are expected to be conducted no less than annually, with insurers documenting the process and results. After that, a high level "ORSA Summary Report" is to be submitted to the lead/state regulator once a year, which "should contain";

1. Description of the Risk Management Framework
2. Assessment of Risk Exposure (we would read as "risk profile" from what I can see)
3. Assessment of Risk Capital and prospective solvency

The Manual states that "[it] is intended to provide guidance for completing each section of the ORSA Summary Report", which should therefore make the job a doodle!

Some interesting bits jump out, not necessarily in contrast to reported/observable differences from the EU approach, more the fact that they are specified in the manual rather than taken as given;

GENERAL

• Chief Risk Officer/executive head of ERM Framework must sign the ORSA Summary Report
• Timing of supervisory reporting may move to match up to strategic planning cycle of an insurer
• Internal documentation expectations seemingly not as exhaustive as EU "repeatable by independent knowledgeable third party", simply to allow a more in-depth look at a given are at supervisor's request

DESCRIPTION OF RISK MANAGEMENT FRAMEWORK

• Specifies in principle what an "effective ERM Framework" comprises of (p18) - includes our old friends 'risk appetite', 'risk tolerance' and 'risk limits' in this, though they are isolated and defined in a passable manner on p25!
• Asks for various descriptive texts around processes
• Specifies that weaknesses/omissions found in the report here may change the supervisor's approach to the insurer!

ASSESSMENT OF RISK EXPOSURE

• Quantitative and/or qualitative assessments of risk exposure, in normal and stressed environments, for each "material" risk. Noticeably don't list Strategic/Frictional risks in the examples of "material" risk, though do mention Reputational risk as one for which "quantitative methods may not be well established"
• "Simple stress tests or more complex stochastic analyses" may be used in assessing the stressed environment
• Potential for supervisory intervention in the levels of stress assessed (in deterministic scenarios) or  even parameters in the ESG (for firms with stochastic capability)
• On risk correlation, "History may provide some empirical evidence of relationships, but the future is not always best estimated by historical data" - not sure where that leaves everyone!

ASSESSMENT OF RISK CAPITAL AND PROSPECTIVE SOLVENCY

• Provide a non-exhaustive list of considerations that an insurer/group will need to cover when assessing the adequacy of capital over its business planning period, which touches on many of the areas prominent in the EU's work (time horizon of assessment, valuation basis, definitions of "Solvency")
• Defines that this part of the assessment should identify "...the capital needed within a holding company system to achieve its business objectives"

Is this the type of demi-prescription that the smaller EU insurers are looking for? Is it too much to ask for national regulators (Ireland a notable exception) to take a similar stab at communicating what they want to see?

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.

Deloitte on "How to conduct the ORSA" - facts and apocrypha

While our pals at the FSA, EIOPA, the CRO Forum, 3 of the Big 4 (here, here and here), the Little 3 (here, here and here), the IRM,  the Irish SoA, and even the guys in the stars and stripes have deemed to recommend to all and sundry what ingredients will make a good ORSA, Deloitte have chipped in this week with a 50-page whopper that tells us everyone else was wrong and they are right...

...well OK, not quite! Deloitte's release about this "important yet enigmatic" area, which seems to have a mainland Europe-flavour to it, works its way through EIOPA's reformulated opinion on L3 ORSA guidance released in July, summarising what changed between the Nov 2011 and July 2012 versions. I of course managed this feat two months ago, but I couldn't quite pad it to 50 pages! They then embellish a section-by-section analysis of the two documents with some charming apocryphal tales of what "many companies" or "the industry" are struggling with currently (i.e. their clients' problems!).

As with most things generated by the behemoths, it is a really useful piece of material despite on the face of it not adding anything new to the knowledge pool, so from an ORSA consultant's perspective, I've made the following notes;

• Emphasises that supervisory intervention will come from lax ORSA processes, as opposed to ORSA Report content (which will drive the US approach)
• Notes that, given the opportunity for the ORSA and the SCR calculations to to be conducted on different reference dates, that this may allow organisations to keep any existing strategic planning processes where they already are in the calendar, rather than unnecessarily shift them to, say, follow financial year-ends. The proviso of "no material change in the risk profile" may of course discourage that, if only due to the need to define "material"!
• Some rather controversial free text around risk appetite ("intuitively simple" as a concept) and risk appetite frameworks ("very much a work in progress" at insurers) - appreciating progress is somewhat inconsistent across industries and the inter-body squabbling on the matter, I can imagine many practitioners would argue the opposite of both points - it's complex, but we're well on the way!
• Highlights difficulties with performing obligatory entity-level ORSAs if risk appetite is expressed in regions/products/funds, which seem perfectly reasonable anchors for risk appetite statements on the face of it.
• "Most organisations" defining AMSB as parent company Boards, plus entities if applicable - no evidence provided though.
• "Many firms" struggling with the "cultural challenge" of getting Boards to drive ORSAs - this I found odd, as many ORSA processes will already be in place to a greater or lesser extent, and most would feature in their individual crystallised reporting form in a BAU board pack. They go on to suggest that getting AMSB input into stress and scenario testing is one way of evidencing ORSA "driving".
• Comment that "In general, the ORSA guidelines were seen as too prescriptive" [my emphasis] - I generally recall the clamour from the industry over the last 3 years being that there isn't enough!
• Common (unevidenced) theme identified that ORSA policies have tended to be signed off by Risk Committees, which may not satisfy the AMSB sign-off requirement
• "Some organisations" electing to split out record of the ORSA Process from the ORSA Report to trim the document size - makes perfect sense, as there's no danger of the co-ordinating function not retaining those records for repeatability purposes.

Plenty of other clutter in there on risk quantification and capital management, but nothing controversial, just nice to read. Bon appetit...

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!

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!