Elderfield speech to Insurance Day summit in Bermuda - equivalence, model approval and "hub and spoke"

Very informative speech delivered this week by Mr Elderfield from the Central Bank of Ireland to the Insurance Day summit held in his previous stomping ground of Bermuda (certainly a more welcoming climate that last month's summit in not-so-sunny London!).

He mainly covers equivalence, internal model applications and, as one might expect from the Emerald Isle, the potential for Hub and Spoke operations and the potential capital benefits of this technique (which has a sniff of Group Support about it in all but name). I noted the following;

General

• Suggests Solvency II provides "...an incentive for investment in risk management, including the use of internal models" - I would substitute "incentive" for "compulsion"!
• Singles out "small firms" as those which will "certainly" struggle to assimilate and implement Solvency II in its current guise
• Notes that "...the current target is that member state governments will domestically implement [Solvency II] by 30th June 2013" - I have emphasised the "current target", as the very wording suggests that there is an implication it is not the "final target"!

Model applications

• "...it is important that approval process doesn't get bogged down in detail such as endless documentation reviews" - cue some raised handbags down at Canary Wharf I suspect!
• Highlights expert judgements around correlation and diversification (as he has done this time last year) as being much more significant around challenging the solvency requirements calculated by the models, in particular the "swing" these elements have on the final numbers. On that premise, he puts these "...at the forefront of the regulatory approval process", as well as expecting them to generate the most challenge in the boardroom.
• Elaborates on the extent of Board challenge by commenting that "...boards should be expected to challenge vigorously the amount of diversification benefit being claimed in internal models, even if they don't know the internal plumbing of copulas or correlation matrices". Very telling comment, and clearly one to heed, bearing in mind he is on EIOPA's management board.

Hub and Spoke

• Seeing "considerable interest" in using Ireland for the "hub" of the "hub and spoke" business model - one may have said this was for regulatory arbitrage purposes 5 years ago, but I'm guessing corporation tax, falling wages and underemployment may have kept it in play even after the recent beefing up of the CBoI
• Comments that "...it will be interesting to see whether [the hub and spoke] model will grow as Solvency II gets closer to implementation - implies that not only does he think the existing corporate structures are not settled yet, but that Ireland is actively open for business in this regard.

Equivalence

• Not sure if he was just being polite to his hosts, but he commented "...Bermuda is very well placed for [the equivalence] assessment process" - again worth heeding in the context of his position at EIOPA, as well as Bermuda coming off worst of the 3 countries which have been assessed in wave 1.
• Suggests there should be some sort of early adopter's premium for Bermuda which makes it worth being ahead of those countries who may come in in wave 2 (no mention of one of their competitors Guernsey in this context, who continue to bang the IAIS ICP drum while stating categorically that they will not seek equivalence).

Good intelligence all in all - PS must try and swing an invite to one of these things when they go tropical!

FTSE Insurers - Q3 results and a Solvency II whisper...

Busy week on the IMS front for all the UK Q3 guys - Standard Life, L&G, St James Place and Royal London all coughed up with some pretty underwhelming stuff (though it was nice to see the Isle of Man-based 360 keeping the Royal London numbers honest!).

Normally Solvency II stays low on the agenda in the odd quarters, however Aviva threw a Christmas bonus in with their news on the legal restructure of Aviva UK's general insurance business, which is freeing up a whopping £200m in IGD surplus, halves the number of entities and will reduce in a "significant reduction" of Solvency II capital required.

Hub and spoke - its the way to go

Capital Management in the new regulatory environment - Towers Watson

A cracking piece from TW on capital management in Solvency II context, highlighting a number of critical areas for consideration as we approach ORSA public consultation. I noted;

• Experience of the Swiss Solvency Test on capital, which TW suggest caused such an immediate shift in capital strategies to accomodate (i.e de-risking Asset/Liability mismatches and purchasing additional reinsurance), that one's current capital plans should be revisited for future-state appropriateness , and not just taken as read.
• A suite of 7 key questions on capital management - all of these worth asking at any juncture, but even more so now.
• The capital management toolbox depicted is worth considering in the context of potential management actions in the ORSA
• Big section of branching and redomiciling, in the context of (publicly commented on by the head of the Irish regulator) "hub and spoke" approaches to reducing capital requirements, in the absence of the Group Support elements of early Solvency II drafts. The Central Bank is having to think specifically about the practicalities of supervising such arrangements, I guess on the premise that, with 12.5% corporation tax, they might be the main landing area for such schemes!

All in all a very good, and very timely effort