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.

Omnibus II and the inevitable delay - why it's not so clear cut

Fantastic work over on the Solvency II Wire from Gideon on the meat and potatoes inside the eternally-baking Omnibus II pie, illustrating why the trialogue parties haven't just rolled over and declared 2015 as the new 2014.

While it would appear that the lobbying arms at Insurance Europe, AMICE, GCAE etc haven't piped up on industry preference yet, it looks like we have two deeply unpleasant alternatives to look forward to; hard launching a year late (i.e Omnibus II would only get signed off after the recently requested LTG consultation but 2015 would be the definitive "go-live"), or soft launching with 2 years parallel running (i.e. Omnibus II can go through before the LTG consult is finished, but with the sword of Damocles hanging over its contibution to the regulations until 2016).

My guess would be that there is little appetite in the firms for parallel running Solvency I/Solvency II to 2016 based on the administrative burdens this would currently place on the UK in particular through the current ICA process. A 'hard' 2015 and some more effective leadership in Brussels would be welcome relief to Solvency II Programmes from a planning perspective, though the knock-on effect on the model approval process and other scheduled supervisory work is yet to be seen.

Oddly, the EIOP-ians of the world pushed out the 2013 Work Programme this week which of course skips over any of the practicalities around such a delay - so having "already achieved a great deal" in Solvency II prep, they will "finalise the [53] standards and guidelines" currently required of them, set up an "internal model support expert unit", and "finalise the preparation of the [supervisory] Colleges" - and all of this while Rome burns!

It is a perverse situation when a subject as politically divisive as capital requirements for long term guarantees across the union is not as complex as trying to get three well-briefed parties around a table to agree on an implementation date. At a time when the Commission wants an inflation-busting funding rise (which Parliament have 'ole'd through) and EIOPA have grown in headcount and cost by 50% y-o-y, the alarming regularity with which national self-interest and horse-trading has derailed a project of such significance makes me long for the jingoistic certainty of the Corn Laws - I'm guessing that's not a good thing...

Allianz CFO and Solvency II

Few nice nuggets of truth from the Allianz CFO on both Solvency II and IFRS, where he candidly stated that he has "expressed his concerns several times" on Solvency II from the perspective of onerous treatment of long-term guarantees.