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.

Economist Intelligence Unit and Blackrock - Asset Allocation trends and Solvency II

Another nice freebie for the benchmarkers out there (you do need to sign up with minimal data changing hands) from the EIU and their sponsors Blackrock, predominantly around asset allocation trends in light of Solvency II.

I haven't exactly gorged on this due to a swollen in-tray, but the population size is pretty decent at over 200 (other stats in the back on size, country etc), and some of the trends are worth considering in the context of one's own balance sheet, particularly;

• Almost all respondents have at least made plans for allocation post-Solvency II, but are waiting until closer to implementation to exercise those plans
• Concerns around "look-through" data requirements on certain investment types (FOHFs etc) and potential impact on asset selection
• Concerns around most areas of data in terms of Pillar 3 preparedness (quality, timeliness, completeness)
• Anticipating aggressive pricing around guarantees, driving consumers into unit linked offerings
• Very interesting granularity around respondents by country on their bond strategies
• Strong support for expectation of downward pressure on equity prices due to lower demand post-Solvency II
• Bit behind the times on the suggestion to review "risk free" assets, which was announced in Omnibus II revisions at ECON, but we'll let them get away with that!

Sign up and dig in, very handy indeed.

Solvency II and asset allocation - mixed messages

There seems to have been a suite of materials on Solvency II and predicted asset allocation impacts recently, from the great and good (Gideon on the Solvency II Wire has kept on top of these, and I took a look at the Oliver Wyman/IIF document last week - much of the materials pointed towards a drive towards short term EU government debt (capital-free, and no duration penalties) ahead of where an insurer may traditionally have invested for policyholder benefit, corporate (and specifically bank) debt.

There were some left-of-centre views that I spotted, one from a representative of Markit opining that, in the current climate, government debt was now being viewed as riskier than Western European corporate debt. Another covered the potential for Insurance Linked Securities demand to increase under Solvency II, thus necessitating more issuance to be EU-based (as opposed to traditional homes Bermuda or Cayman). The third came from Union Banque Privee, with research cited in the FT that, with appropriate asset selection (cheeky derivatives used as examples), asset arbitrage will allow insurers to obtain exposure and performance without necessarily holding onerous amounts of capital as prescribed under Solvency II.

The first then indicates that the weightings may need a genuine re-examination with the Eurozone debt issues as the backdrop, while the other two suggest there are investment options to counter the new requirements. Is the IIF research therefore much ado about nothing, or perhaps is the mighty banking lobby having one last "flex of the guns" before its emasculation over the next few years?