Solvency II Updates and Corporate Governance in Financials - PRA "Back for Good"?

A few releases of note out of the UK regulator over the last working week or so means I had some catching up to do - sometimes it feels like "All I do each night is PRA"...

They started off with a Director's Letter just before the bank holiday weekend. A general unwillingness to crack whips was present throughout this doc, even at this late stage, with a few references to "inform your supervisor" as opposed to "just do it".

The letter states that the PRA were due to publish some of their findings from their balance sheet review work by the end of the month - not done as yet, hopefully turns out to be money well spent

Regarding Standard Formula appropriateness:

• They stress that firms must identify deviations from Standard Formula from their risk profiles, and include an assessment of the significance of that deviation in their ORSAs (emphasised in their October industry presentation from p6)- is the implication here that firms are not doing this at all at the moment, or just not reporting it in ORSA?
• Highlight that "supplementary information" used to explain such deviations will also be assessed by the PRA. Does this add significance to one's qualitative commentary around Standard Formula/Risk Profile deviations? Can a good explanation be the difference between having to IM/PIM at the earliest opportunity against being given a couple of years of capital add-on breathing room?
• The PRA note that, "...where a firm's conclusion on this question is not appropriate", it will intervene. It is not clear how a firm's conclusions about its deviation between SF and its Risk Profile could be considered "not appropriate", but I imagine that anything which attempts to dodge USPs/PIM/IM ONCE the divergence hits the limits in the Delegated Acts (276-287) would be frowned upon. There is certainly no appetite at the PRA for renewing capital add-ons in perpetuity (slide 13), which given the UK's familiarity with ICA and ICG, might be a desperado's first chance saloon.
• The PRA are planning "specific interventions" on this front (detailed here), but not necessarily in time to correct before 2016.

Regarding Internal Models

• Not happy with "wide variation in quality of IM Change policies. Sounds like firms are doing their best to avoid change criteria that results in frequent submissions for reapproval, which one would expect!



IMAP Submissions
- Everything Changes

• PRA seemingly expecting firms to have not only taken on board their feedback, but also had their IMs revalidated, before submitting their IM application. Given that validation will be chalked down as a 'once-a-year' job at the moment (despite the IRM's efforts), that seems highly unlikely. They give themselves a get-out-of-jail-free card though by stating that firms must be confident that any changes in their IMs both address PRA feedback and meet the tests and standards for model approval.
• They appear to advise against submitting applications if you have a material change in the pipeline.
• Heavily critical of Board involvement in validation. Here they look for evidence of Boards "overseeing and influencing" the validation process, whereas previous PRA presentation slides  did not have such expectations of Boards (slide 8 here), or indeed expected more (slide 9 here)!
• The expression "internal management loadings" appeared in my life for the first time, which sounds to a non-technical person like myself that firms are effectively "dumbing-up" the capital requirement currently delivered by their IM in order to plaster over mathematical or data weaknesses. PRA certainly not impressed by industry suggestions to date.
• Given the number of firms who must have dropped out of looking for Day 1 approval, they still shake the pineapple tree here in order to remind applicants that contingency plans should be ready in the case of application failures. "Many firms still have a considerable amount of work to do" sounds to me like some applicants are being pre-warned of their imminent failure!

The PRA also released a consultation paper entitled Corporate Governance: Board Responsibilities, which has the rather light ambition of identifying "key aspects of good board governance to which the PRA attaches particular importance in the conduct of its supervision".

A few straggler items in it;

• That failures in governance and/or risk management have been a key factor in "many" financial sector failures - as opposed to "all"
• That they consider the FRC's Corporate Governance Code, amongst others, a "comprehensive guide to good corporate governance" - given the firms experiencing the financial sector failures were most probably complying with it, not a great advert!
• "Culture is the collective responsibility of the Board" - a bit of a nowhere comment, but instinctively, I don't see how this can be right. They can be accountable to both supervisors and shareholders/members for cultural failings, but where could such a responsibility materialise into demonstrable actions? 
• "...the Board is responsible for the oversight of, but not for managing the business" - in relation to my comment directly above, can both statement be correct?
• "The Risk Control Framework should flow from the Board's Risk Appetite" - I'll work on the premise that this is missing the word "statement" at the end of the line
• Section 11 on remuneration expects that incentives are aligned with "prudent risk taking" - what if prudence is too conservative for one's risk appetite?

Into some of the expected themes;

• Strategy to be "owned by the Board as a whole"
• They wed Culture and Remuneration "...to encourage and enforce the kind of behaviours the Board wished to see"
• They want a "well articulated and measurable" Risk Appetite Statement which can also be "...readily understood by employees throughout the business". Doesn't seem feasible, given the metrics commonly used in risk appetite statements are not exactly Finance 101 (Solvency/Liquidity/Earnings-related),
• "It is the responsibility of the Board to ensure that the effectiveness of the Risk Control framework is kept actively under review" - has at least an air of COSO about it, don't think it was deliberate
• Big section (6) on responsibilities and accountabilities of exec and non-exec directors.
• Followed in 7.1 with "...non-executives should not simply delegate responsibility for major decisions to individuals among them who are considered specialist in the area" - this has internal models written all over it (p5-6)!

Happy to see this second document, though I don't know what it adds to firms' understanding about what is "good and bad".




IRM on Internal Model Validation - Red Card or Green Card?

Cyclic Validation - Quelle horreur...

Just back from Paris, where I spent a weekend queueing behind selfie-taking tourists before taking out a second mortgage to buy bottled water. A beautiful place, though I found Depardieu was much quieter off-screen...

Onto the topic in hand, the PRA were pretty vicious back in the day on Validation efforts in their infancy, with Julian Adams lambasting both progress ("significantly behind") and validation scope ("narrow"). Given that the Solvency II sabbatical which bridged half of 2012 and all of 2013 gave firms time to catch up and widen, you might think that those with internal model ambitions would be pretty tidy by now. The PRA have even told firms how they believe "good" model application paperwork to look, carving out for themselves and the Validators of the world an easy-to-read "model reviewer" level of detail (p1).

In those salad days, Internal Model Validation felt to me like it would be the chernozem of the nascent Risk Management profession in insurers; a skill set that a quant or a non-quant could acquire, apply, and ultimately ease through the promotional path within insurance entities, given the depth and breadth of technical and strategic information the process challenges...

...but the moves never came. Despite the actuarial world themselves happily disassembling the complexities of quantitative modelling into easy-to-digest IM Validation themes, the non-quant world has waited patiently to see if anything of substance would emerge from one of its representative bodies.

And this week it arrived! The Institute of Risk Management has delivered, as part of its Internal Model Industry Forum (IMIF), a white paper on the validation cycle.

The IRM have been active in this area prior to the formation of the IMIF. I have covered an ERM in Insurance event at the start of 2014 here, while this more volumous slide pack featuring a number of the Billy and Betty Big Biscuits of the field emerged from summer of last year, when the IMIF seemed to come to fruition. This white paper itself appears to move along the concepts and ideas inside an IRM slide deck from last Christmas.

Given that the IRM is not-for-profit, there is always a likelihood that sponsors will unduly influence the products (indeed the IRM Chair notes in this that they rely on "enlightened industry support" to knock these documents out).

Sadly in this case, the sponsors include Three of the "Big 4" (with the fourth on the IMIF steering committee) , leaving the document dripping with consultancy hallmarks rather than pragmatic solutions to execute the tasks in hand.

That view is reinforced somewhat by this follow-on presentation to the IMIF from last week by this white paper's workstream lead and supporting consultant - one selected industry comment on slide 8 (presumably from a chocolate bar shortly before it ate itself) reads, "validators should really be experienced modellers"!

A few general points jump out of the white paper;

• That a firm's IM is "...at the heart of risk and capital evaluation" - I thought it was supposed to "inform" this evaluation, not dominate it (slide 3 here, as well as Julian Adams's speech from a couple of years ago [p4]).
• Is the insurance industry "...increasingly reliant on sophisticated models" - maybe in terms of AUM/Market Cap, but given the UK IMAP queue is down to approximately 40 firms out of over 400 (p4), and that number has steadily reduced over the last 3 years, feels a touch disingenuous. I've no doubt the firms represented on the Steering Group are "...increasingly reliant" though
• The document claims to set out "best practice principles" - not sure if "practice" and "principle" share the same bed, but that aside, would anyone find it remotely acceptable to have the consultancy world fund a document which details "best practice" on IM Validation?

And a few stand out elements from the proposed Validation Cycle, which is heavily influenced by EIOPA's guidelines:

• "Best practice now requires firms to demonstrate, with evidence, that the cycle...[is] being actively and effectively carried out" - how can best practice "require" anything from anyone?
• "...resulting best practice that is emerging" (p4)  - how is any practice considered "best" at this stage of proceedings, when we are literally practising! Against what criteria?
• References to "model risk impact assessment" and the "model risk assessment process" (p5) seem to come from nowhere. Alluding to something formal, but not very clear
• Lot of coverage of "triggers" of IM Validation, which feels like a fishing expedition for the paper sponsors, rather than direct address of L2 Art 241 - the number of areas of "change" to consider as IM Validation triggers covers pretty much any change, anywhere, both inside and outside of an insurer (p8)! Most would also be ad-hoc ORSA triggers in my experience, so this potentially sets up insurers for a bucketload of work every time they hear a pin drop.
• Formulaic and periodic IM Validation a "needless cost"? Surely periodic validation, no matter how badly executed, is compulsory (L1 Art 125)?
• The Trigger Impact Assessment stage (p10) is barely legible - "The trigger impact assessment against model risk appetite stage" - and terminologically it is all well above legislative requirements.
• "Unexpected triggers" (p12) get a mention. Again, not making sense to me - you either know your triggers or not.
• "Model validation is complex" and "less than black and white" (p16) - certainly is if you try and follow this process! A focus on plain questions and less quant can only help the models non-expert users (slide 7).
• If the validation cycle, processes and execution are "continuously evolving" (p18), are they reliable? Feels difficult to meet L2 Art 241.3, at least from a planning and execution perspective, if the process is constantly being tinkered with 
• "Developing a communications strategy" (p20) as part of the validation scoping and planning stage feels terribly over-elaborate.
• "Robust planning" expected to be common (p22), which doesn't necessarily marry up with the expectation of dynamic rather than cyclic validation in future (p10)

I think it is right to take the hump to a certain extent here. The PRA have been cunningly silent on capital add-ons to date, but given the implication that they will not be applied and renewed ICG-style (slide 13), there is likely to be many more less monied Partial IM applicants to follow over the next couple of years. Having the most influential consultancy firms decide on what is "best" in the validation world (and for it to have this many bells, whistles and legislative off-roads) feels like setting those firms up for either a fall, or another bill.

The PRA actually delivered something with much less padding to the IRM back at the end of 2013, so I'm struggling to see why that has justifiably been turbo-charged. Given they have three of their finest involved with the IMIF, but are continuing to be directly vocal on this topic (as recently as March 2015), it sends a worrying message to the capital add-on brigade that the IMAP early birds will be setting disproportionately high bars for 2017 and beyond when they deliver their PIMs.

Ultimately, I was disappointed by the publication, which reads more like a flannel manual, and is certainly not the kind of Risk Profession contribution that the topic so badly needs if the PRA's dreams of Board's "directing" and "owning" the IM valdiation process (slide 9) are ever going to come true. The 200 page novella world of Validation Reporting feels closer than ever...

Towers Watson's Global ERM Survey - Knowing ERM, Knowing You...

A couple of treats from two of the powerhouses of the 'writing things down' industry on the practical use of ERM to drive decision making, rather than simply accompany it.

Towers Watson are targeting the Solvency II audience (at least on this side of the Atlantic) with a timely release of the results of their 8th Biennial Global ERM Survey. I say the results, as there is no sign of the full survey itself - any closer to their chest, it would be an areola's backpack...

As ever, these kinds of publications oscillate between flannel and insight, so while I cover those below, feel free to read the infographic and call it quits!

General observations from the main press release include;

• Three-quarters of (the almost 400) respondents say they are viewed as "important strategic partners" by the Board and Executive - I'm less inclined to see that as a mark of superiority, given that risk functions in some firms won't have the ambition or aptitude to achieve that status
• Implication that some respondents do not have a risk appetite framework in place - very worrying, unless this is just bad wording.
• Some firms said to be only "...using ERM for regulatory compliance". It may depend on jurisdiction, but I'm not inclined to agree that is even possible.
• The "ultimate vision" for a firm's ERM capabilities is referred to, which is a brow furrer, even conceptually. TW seem to bundle up risk culture, risk monitoring and risk tolerance into the "Vision" bucket, in case that term takes your fancy.
• The expression "very strategic approach" appears in print for the first time!

Getting Value from ERM?
- "Kiss my Face"

From the more elaborate Q&A document, we find the main granular material which TW were prepared to publish. Fortunately for readers this side of the Atlantic, the EMEA Director Mike Wilkinson holds sway over much of that conversation, including his tale of the firm who recently had an ERM/Business Strategy-inspired "Aha" moment.

That session contains a fair bit of contention, such as;

• Asking the questions "What's the purpose of risk management" or indeed the "purpose of your ERM Program" in the Q&A - if these had been directed to the respondents themselves, it would have contextualised a number of the seemingly negative responses i.e. If the purpose of your ERM Program is "don't get shut down", you are probably less bothered about being a "strategic partner"!
• That the business should "...challenge the risk group to create reports that help them make decisions" - Excel Jockey is hardly the work of a strategic partner...
• In a similar vein, that insurers are "drowning in data, drowning in metrics" - hardly a new phenomenon, and doesn't give any credit to the critical faculties of employees to filter what they do have.
• "...many [internal capital] models have matured" - a sharp intake of breath can be heard down at Moorgate!
• That "...an ERM Program can't properly be assessed until it has been in place for a while" - pretty sure the S&P crowd wouldn't hold off assessing you while you "embed"

Mike in particular does manage to keep a good focus throughout the Q&A on maximising trade-offs between risk and return being the big differentiator between Risk functions who are capable of influencing strategic decision making, and those who are perhaps more likely to be tabling red-amber-green reports tracking the outcomes of decisions which have already been made.

Other strong points include;

• In the context of Risk Tolerance, how to cater for the discretion required by an insurer's asset managers in handling investment portfolios.
• Touches on a couple of pieces which stood out in the CRO Forum's Risk Appetite publication last month, namely around the increasing number of measures being used to run businesses other than capital, allowance of movement within risk tolerance levels, and whether firms have effectively articulated their organisation-wide Risk Appetite and Risk Tolerance limits down into its subsidiaries/departments.

One aspect which gnawed at me throughout this reading is the constant referrals to "ERM Programs" - I don't think I am bathing in semantics to suggest that Programs normally start and end, whilst ERM would surely constitute a Framework. You might choose to redecorate the Framework periodically with a Program (Solvency II a prime example), but you wouldn't expect a Program to "mature" or "evolve", you expect it to conclude!

Nitpicking?

Central Bank of Ireland speeches - "and there's more"...

Solvency II-ready?
"It's the way I tell them"...

I rejoiced on Friday at the sight of more speech material emerging from the Central Bank of Ireland directorate, if only due to the Frank Carson* gag I could wheel out due to the volume of their recent speech-giving...

As an industry we should always be happy to hear the regulator on lead vocals, so I gave the pair of speeches released a once-over to see what Irish concerns have justified the recent bounty of public addresses.

Deputy Governor Cyril Roux was very targeted in his speech, delivered to PwC's Annual CEO Dinner. It apparently gave him "great pleasure" to be in PwC's offices, which presumably means they weren't on the meter...

Some of the statistics and comments served to highlight that Ireland is something of a special case in the context of Solvency II, in that two-thirds of Irish gross premiums are to cover 'foreign risks', and that many insurers under their auspices will not have proximity to or oversight of much of their distribution network.

A few messages jumped out from the rest of the speech;

• A lot of positive messages had a caveat implicitly wrapped with them - "...we are in the main satisfied with your engagement with the Central Bank"; "On the whole international firms generally file returns on time..."; "I also commend your general adherence to our Corporate Governance Code..."
• Goes as far as using the IMF's recent review findings to tell firms to stop poaching regulatory staff while simultaneously complaining about turnaround time!
• Nice point about keeping focused on current risks through the PRISM framework, rather than drifting into Solvency II mode before 2016.
• Having recently been complimented by Sr. Bernadino on Ireland's reserving governance (p12), he reinforced that assumptions pertaining to reserves are expected to be "critically debated".
• On ORSA, that the CBoI "...expects to see Boards actively directing the use of risk management tools...such s stress or scenario testing"
• On Internal Modelling, he not only expects Boards to "...have sufficient knowledge and skill to challenge the model outputs", but adds that they "...like to see a Board direct the modellers in their firms to run specific stresses and scenarios prior to an item being discussed at the Board" - a big advance on previous murmurings on use test from supervisory bodies.
• Pulls up firms who are seemingly not tailoring their model's parameters for the Irish-specific business.
• Similarly a message of insisting that cross-border distributors tailor Group-driven materials and processes for the Irish market such as "...group policies and output, such as the ORSA, and internal model...".
• A cute but important distinction that "embedding" Solvency II, rather than complying with it on paper, is still going to take considerable effort.

Sylvia Cronin's speech (well, the Solvency II aspect of it) stayed along the same lines as she pursued at the Industry event in late April, where she was harsh on a number of specific elements in preparatory phase ORSA Reports which had been observed.

In a section of the speech covering "challenges to be overcome", a number of pieces of insistent ORSA direction are given, for example;

• "Your Board must use the ORSA to more fully align business strategy and capital"
• "You also need to use it as a lever to discharge your core responsibility not to take on risks and exposures which the capital base does not support".
•  "...there is a lot of work yet to do by firms to get this element of the new regime embedded to the extent we required" - I add here that, given they will have only reviewed 2014's preparatory phase ORSA Reports and Processes, is this not a given, particularly after CBoI sponsored a template-filling approach for the smaller firms?

On the wider world, the speech covers;

• That Solvency II sets out "clear standards and expectations around your internal control and risk management" - agree on the latter, but the former?
• Believes that the "scope for subjective judgement" may open up regulatory arbitrage opportunities, and that "a number of iterations" will be required before EU-wide consistency is achieved, in a sly dig at, errrr, everyone in mainland Europe! 
• Similarly, the volume of cross border business HQd in Dublin poses a problem due to the geographical boundary of CBoI's "prudential remit"
• Reinforces the message fro April that Pillar 3 readiness is a growing concern
• A large suite of views on Conduct Risk, where "culture" and "conduct" are hogtied together as the grimmest twins since DeVito and Schwarzenegger - that message won't be changing in a hurry, so I strongly recommend your work in that area caters to the supervisor's tastes.

Useful insight from what appears to be a supervisor with their sleeves rolled-up - keep up the good work.

* PS I know the connection is tenuous as he's a Belfast man, but give me a chance!

EIOPA Chair's speech in Ireland - Nothing Compares to U2...

The huff has concluded it would appear – EIOPA’s gaffer has returned to the speaking circuit after a few weeks where the institution’s communications had been reduced to Post-It notes on the fridge after the EU butchered their budget.

Bernadino - dodgy stand-up

 

A recent Solvency II industry event was held in sunny Dublin, with Sr. Bernadino providing the keynote address. He chose to start and conclude with U2 jokes, which were as lame as a constipated flamingo (I would have thought Ben Folds Five or Lulu would be top of his playlist right now…)

That aside, the meat in this musical sandwich was pertinent to the whole industry, so I've picked out a few highlights;

General

• Wants to outline EIOPA’s move “from regulation to supervision” (p2), though goes on to say that “…EIOPA does not replace NSAs. The responsibility of the day-to-day supervision…rests with the NSAs” (p10). I think this subject warrants clarification from NSAs and EIOPA in concert, given we can see how having a remit-less overseer is putting the PRA on the back foot
• Acknowledges that the result of the mathematical squabbles is “…perhaps a too complex SCR formulation” (p3)

ORSA

• ORSA considered to be “…best practice at international level” (p4) – not sure if he means ORSA in general IAIS terms, or the ORSA concept he has curated within the EU!
• While he drops some of the usual ORSA bluster in about it being a “game changer”, he beefs up on the Board’s obligations, citing their "fundamental role to play", and stating in particular that "they need to set, communicate and enforce a risk culture".
• Of particular significance to his Irish audience was his emphasis on risk culture as "..an appropriate balance with the natural sales driven culture". This is perhaps the first instance where I have seen insurers' distribution arms formally considered by a supervisory body to be the enemy of 'risk culture', and for EIOPA's chair to choose Ireland, a country which has for years marketed itself as a cross-border sales centre on the right side of General Good provisions, is shown at the end speech to be a pre-emptive strike.

Internal Models

• Like his associates at the PRA, he notes that the use of internal models on the banking side "has been subject to increasing scepticism" in justifying the rigour of the Solvency II approach to modelling
• Worried that models will become a "capital optimization tool" - the PRA's NED briefing (slide 8) paints a similar picture if you read between the lines regarding missing risks and experience not reflected in parameter setting.

EIOPA's workload

• "Current different supervisory cultures" in the EU are creating work for EIOPA, noting that "our feedback can sometimes be challenging". Wonder who they're getting at there, France!
• They appear to be developing a Supervisory Handbook of good Solvency II practices. Chapters are already written on Risk Assessment, Boards and Governance, PPP and proportionality in Key Functions to name a few. Something to look forward to no doubt

Ireland-specific

• Go out of their way to applaud the onerous reserving governance in Ireland (here?), considering it practice which other countries should emulate.
• On the other hand, "...in the specific case of the Irish insurance market" he targets the country from a conduct risk/General Good perspective as one of the main cross-border players in the Union.

One can't help but feel the latter part of the speech was deliberately laid at the feet of the Irish, rather than aired in a more generic manner, given the country's continued corporation tax-related appeal to cross-border distributors. I guess when it comes to identifying the perfect audience to sketch out EIOPA's inevitable foray into Conduct Risk regulation, Sr. Bernadino found what he was looking for...

Jurassic Talk - enhanced NED challenges during Solvency II preparations?

 Britain's youngest NED

Given that there won’t be a heck of a lot more briefing done on the Non-Executive Director front, I’ve given the PRA Industry Event slide pack published the other week a bit more of a going over to see if the left and right hands are pushing the Solvency II wheelie bin in the right direction. I haven’t gone as far as watching the 1h 30m video of the event yet – if I wanted to watch a room full of fidgeting old men in ill-fitting suits I’d just go to Bridge Night at the bowling club…

I can’t say I was massively enthused by the read of the slides as an individual who is frequently delivering material to the very audience the presentation was aimed at. I would highlight the following oddities;

Internal Model-specific (slides 6-12)

• That Solvency II “sets a high bar” for model approval – that feels a little disingenuous given that the PRA has had the whip hand in the IRSG’s internal model committee for years, and has evidently driven their CAT. Fair to say that the PRA set the "high bar" on behalf of the rest of Europe.
• From the “lessons learned” section they suggest that some IMAP/CAT firms have used assumptions which are not matching their experience. Is that not bravado bordering on criminality? Doesn’t feel like small beer, so unless the PRA are splitting hairs with that comment, I trust the protagonists had a strip torn from them.
• Some models ignoring “Key Risks” faced by a firm – how can this be? If this is about cheeky risk selection (i.e. let’s use SF, but model Market Risk as we get a good number from it) all well and good, but to say that firms are ignoring them is not a good steer, and if they are, then how is punishment not already being dispensed?
• For Use Test purposes, NEDS told to have “belief” but not “blind faith” – this feels like Bank Creep, given that the PRA  have been vocal (here and here) on firms blindly following models after the banks got caught with their trolleys down a few years back (nice PRA summary here). Doesn’t feel especially fair to tar insurers with exactly the same brush in advance, even if it is smart!
• “Boards need to own validation design” – just sounds meaningless when you read it back. If you want them to “do” the design (which Andrew Marshall’s later slides deriding the efforts of the validation contracting community suggest also support), then just say it.
• The “Key Questions” slides contain some very ropey gear. “Does the output of the model give a credible answer”? “Can the firm survive on the Standard Formula”? The terms used are so flimsy that one could spend hours arguing the toss about their definition – “so what is survival – EC+, SCR+, MCR+ with recovery plan” etc.

ORSA and SoG (slides 14-18)
Starts with a bit of good news – some generic industry feedback is seemingly due within the next couple of months (pertaining to our 2014 ORSA efforts?). The slide summarising findings to date is also a useful yardstick for those who can’t wait that long.

For System of Governance, the executive world should prepare themselves for NED questions regarding whether or not they (as opposed to their underlings and contractors) are reading EIOPA's Guidelines. Let's hope they have!

On the gnarlier side;

• Seems to be an obsession with assigning named individuals (as opposed to roles or teams)  to perform mitigating tasks relating to anything ropey uncovered during the ORSA
• “ORSA should be holistic” – at what point is that breathtakingly grim term going to be put to pasture? For a NED briefing, the use of plain English should be considered par for the course. It is followed two slides later by “top-down/bottom-up” which is equally non-specific.
• “ORSA is not a compliance exercise resulting in a report to the PRA” – I think you meant to say “not ONLY...”!

The final slides from Ian Marshall’s presentation are revealing more due to the clumsy terminology often used at the table with NEDs (“Key Drivers” and “Key Correlations” for example – if you mean “most money riding on it”, then say it!). Also, the idea that Risk Appetite is “no longer an aspiration” is worrying – I would have given the insurance industry credit that it ceased to be aspirational some time ago, and doesn’t need a 2015 ‘tick’, but then I am a trusting fellow.

Does anyone think, off the back of these slides, that their NEDs will be chomping at the bit at the next Risk Committee/Board meeting using the ammunition supplied here?

Maybe I’d better watch the video after all… 

EIOPA's Implementing Technical Standards on Internal Model Approval - ready to "submit"?

EIOPA have kicked into life at the end of October like Freddy Krueger on laughing gas, releasing a swarm of consultation papers and summaries. While the releases on Colleges of Supervisors or the calculation of the risk-free interest rate will be of interest to some, my own interest was in a subset of their draft Implementing Technical Standards on Solvency II Approval Processes

I have tried to cover the distinction between ITS and the other weaponry in the hands of EIOPA and legislators here. The aggregated feedback received by EIOPA on the suite of Solvency II approvals covered by ITS is neatly summarised in this doc, with EIOPA adding dollops of proportionality into the summary, to effectively remind supervisors not to treat the applications of giants and pygmys with the same vigour. Given the audience reaction to the UK regulator's industry event a couple of weeks ago, I think 'proportionality' may need to become the PRA's middle name (though it probably works better as its first name...)

Clearly, two big moans have been common threads in the responses received, and both have been rebuffed. The concept of supervisory requests for supplementary information "stopping the clock" on one's approval window has been retained, while the idea of "no answer in 6 months equals approval" has been firmly rejected.

Internal Model approval
- "Easy, Easy"

Of more interest to me than the other approvals covered by the consultation is the Big Daddy himself, Internal Model Approvals. From a UK perspective I have covered this in multiple posts previously (here, here, here and here for a start) , and was interested to see if any more whistles and bells had been added to what is already an area causing serious fatigue within the UK's potential applicants, not to mention a few dozen corpses from the c.100 interested parties back in 2011 (slide 4 here).

I thought the following was worth highlighting;

• Given that the Delegated Acts are already loaded with granular Documentation requirements for IM applications (articles 243 & 244), the ITS insists on a few more pieces! Having cross-referenced between the DAs and the ITS, I reckon the items listed in Article 3 d, h, j, p, q and r are all new requirements, though none would be a stretch to produce.
• Expectations that your model has been in use prior to application (Art 2 (3 a ii)), and is integrated into your current system of governance (Act 2 (c)) - perhaps this is the effort which firms with capital add-ons will be compelled to do in 2016 & 2017 in advance of model applications?
• Results of your "last" Validation Process must be submitted in a Model application (Art 2 (m)) - again, suggests there will need to be a year's worth of "live" modelling in advance of making an application
• The supervisors have 30 days to assess the "completeness" of an application - this feels weirdly generous, given those 30 days count towards the overall 6-month assessment window (provided the application is complete).
• Despite the PRA's firm assertion on Oct 17th (slide 8) that conditional approval for Model applications is not available, Articles 3 (8) and 5 (4 b) both suggest otherwise, namely that proposed "adjustments" or "terms and conditions" can be accounted for in their decision. 
• As much prominence being given to Model Change process and Model Change policy as the initial Model Application process - applications can actually be rejected on the strength of the change policy (Art 5 (2)). Despite that, the articles designated for these areas (Arts 7 & 8) are relatively straightforward.

There is no real reason why these ITS for IM approval won't sail through at the Commission, so best to prepare accordingly. However, UK applicants with 2016 modelling ambitions will of course need to wait further for EIOPA's Common Application Package before they can finalise this montagne de papier.

PRA's Countdown to Solvency II Implementation Event - When I Need U(SPs)

PRA Implementation countdown
- "Feel like dancing" now?

So along with the entire UK Solvency II sticky-beak brigade, I had the unbridled pleasure of attending the PRA's 'Leo Sayer' on Friday, confidently titled Countdown to Implementation, despite going on to list a range of matters which have probably given both Internal Model and Standard Formula firms plenty of enthusiasm to try and turn the clock backwards rapidly!

Paul Fisher, Julian Adams' replacement as Executive Director of Insurance at the PRA, kicked off with a set of Solvency II vox-pops;

• Solvency II is the "main game in town"
• "The end is in sight"
• The PRA are "not gold-plating the Directive"

A nice bit of reassurance at kick-off time then - unfortunately, the clarity which was to follow from the technical specialists on a range of topics was probably not what everyone wanted to hear, given the tone of some of the audience questioning that followed! In particular (and with everything in full quotation marks below having been said by a PRA rep on the day);

• That the PRA will "have to prioritise" if everyone in the IMAP queue for 'from 2016' approval drops their applications in at the end of June, and that applicants should be "striving to submit" sooner. Suggests to me that the smaller firms in IMAP may get bumped to squeeze in the big boys.
• The reinforcement of Mark Carney's message from the other week that they will have no problem refusing permission to use models, though this was couched by Fisher in the more appropriate context of failure to meet any of the TSIMs simply "cannot be allowed".
• That, although over 90% of the UK industry was down for using Standard Formula, the PRA will be equally aggressive when challenging their preparedness as they will for IM firms.

I didn't hang around for the afternoon sessions as I had a hot date with BA, so pull whatever you can out of the Other Approvals and Regulatory Reporting slideshows. However, I would draw attention to the following from the earlier sessions:

Implementation and Policy overview

• The Old Lady of Threadneedle Street protested through multiple speakers about how they recognise that bank and insurance internal models are different, and how Insurance Supervision is now "embedded into the Bank" - I would assume to justify the credit crunch-influenced aggression now being taken by the PRA on assessing capital models (visible from Adams's speech around the time of BOE/FSA merger right through to Bailey's speech at Mansion House on Thursday night).
• An interesting slide 3 about how much more work Solvency II will generate for the PRA from go-live!
• Referred to FLAOR only once before switching to ORSA, suggesting that this disposable acronym is as much of a pain in the neck for the supervisor as it is for firms!
• Highlight what "Good" and "Bad" ORSAs have contained to-date. Clearly some firms are box-ticking, leaving an unusable report which is only skin-deep compliant as output. They were particularly scathing on Stress and Scenario Testing efforts, and implored that Reports should not be written for the PRA's benefit (though naturally must cover what the DAs and EIOPA have already set out).
• A nice piece was discussed around the expected depth of director-level knowledge of their internal models. Andrew Bulley made a useful distinction between "conceptual" and "technical" knowledge, where your dithering 80 year-old INED from the fishing industry might not be expected to understand correlation matrices, but should probably know their significance, and alternatives to them.
• For model applications to date, far too big ("encyclopedic" in cases), with too much process description, and not enough on assumptions and expert judgements.
• That it is a firm's responsibility to "ensure compliance" with the Delegated Acts, and given their lessening proximity to the legislators, the PRA flag in advance that they will not be able to give "concrete advice" to firms in future.

Standard Formula

A particularly good ground-setter, given the dearth of work published previously on Standard Formula firms and the PRA's expectations. Calendar included on the slide pack, which will be of massive use to your PM/PMO staff!

• PRA will review ALL firms ahead of 2016 for SF appropriateness - "priority" firms assessed by Q1 2015, everyone else by end of 2015.
• While SF SCR is apparently close to current ICG numbers for GENERAL insurers in the UK, it is noticeably larger in LIFE firms 
• PRA is "not promoting" SF ahead of internal models
• Vigorously directed all attendees to EIOPA's Underlying Assumptions of SF Paper - expectation that some firms won't read it, and just expect SF plus any add-ons?
• Very vocal on the "significance of the deviation" between SF SCR and one's own Risk Profile - as we know, the Delegated Acts quantify what 'significant' is in the context of capital add-ons
• An expectation that ORSAs will be used in the assessment of SF appropriateness - qualitative for sure, possibly quant elements as well?
• Range of examples of where significant divergences are being found, by Risk Category, and by Life vs General Insurer.
• A lot of emphasis on Capital Add-ons being used "only as a temporary measure", which will ultimately allow firms to PIM/IM or de-risk. They are however "patient and realistic" on how quickly that change can be done, so it sounds on the face of it like 2016 and 2017 will be targeted for Capital Add-on elimination.
• In the following session on models, a piece came up on Capital Add-ons, where the PRA confirmed that their process for handling these in future is "still developing", though they expect them to be "a lot, lot rarer" than the existing regime of ICG.

Internal Models

Calendar also provided for IM firms (slide 4), showing how tight their schedule is, and explaining why they threw the earlier curveball about all firms expecting to drop their applications in on 30th June 2015. They also touched on the following:

• Highlighting weak areas identified to-date such as over-optimistic (new?) business plans being used in capital calculations; ENIDs; omission of certain "Key Risks", and suspiciously low correlations
• That Use Test is "fundamentally important", and is an opportunity for firms to "put their money where their mouth is". They do not expect to see either end of the use spectrum i.e. no use, or blind use!
• Too much technical actuarial validation seen. Usefully suggested that validation questions may be better posed as "where might this model be inadequate", rather than "why is it OK".
• Confirmed that the PRA's SAT has now been replaced by EIOPA's CAT, which won't arrive until the back end of this year - surprisingly, no-one laughed when they said this "might create some work" for existing IMAP programmes!
• Importantly, they stressed that their powers are to Approve or Reject applications, with no "conditional" powers whatsoever. Attendees were therefore encouraged to delay applications which were thought to be unlikely to succeed, both now and in future.

Though they instinctively feel like they could have been supplied sooner, the clarifications provided in the presentations I witnesses will be hugely welcome by programme directors and PM's alike. I would venture a guess that they will be less welcome by executive committees, who may have hoped for more flexibility on the risk quantification front post-2016.

PRA on Solvency II Approvals - One in the "IMAP"

The PRA today released a consultation paper on applying for Solvency II approvals (with the checklists for firms thinking of applying here), covering such juicy topics  as;

• Matching adjustments
• Ancilliary own funds
• USPs
• Group shenanighans (single ORSA for Groups, and excluding entities from Groups)
• SFCR dispensations

And of course the big man on campus - Internal Model Approval.


I had covered on here back in March that EIOPA intened to bring in a common internal model application package (press release here), whilst also noting that while EIOPA "expected" NCAs to accept and use it, it was not compulsory.

IMAP - waste not want not

With the UK being the largest Internal Model application handler by some distance, the stupendous amount of money, management time and administrative effort which had been injected into the IMAP Process since 2011, there was at least a theoretical possibility that the PRA might say "no thanks", and ask its applicants to continue as they were, albeit with an Excel template amended to reflect the Directive and Delegated Acts as they currently stand

Therefore the rather vicious tearing of hair and gnarling of teeth coming from the UK today is the sound of 60-odd internal model applicants finding out that 3 years of IMAP work is now redundant! Section 2.11 of today's CP states;

EIOPA is expected to publish an internal model application template which the PRA will require all firms to use for their formal internal model applications.

...[firms] will be expected to transpose data onto the new EIOPA template when they make their formal application. The PRA will not be updating the SAT to align with EIOPA's application template

Perhaps I am being a touch harsh to call IMAP efforts to-date "redundant". The UK will naturally have dominated EIOPA discussions around what a template should contain, and how it should be structured to assess applications with maximum efficiency, as they have had the Chair of the Internal Model Committee since 2009!

There is an implication in the CP though that the transposition between the two "templates" will not be as seamless as I had imagined back in March, so I suspect that internal model applicants will need to go back to the market looking for expensive IMAP cajolers in the not too distant future. A shame for UK plc, who will rightly feel they have spent a lifetime's money on this topic already.

 

CRO Forum's Principles on Operational Risk Measurement - "Quant touch this"...

Hammer Time?
Current efforts in Op Risk quantification

Despite practitioners efforts over the last few years, Operational Risk continues to live on starvation rations when it comes to considered quantification. Never treated as an alpha-topic by executives inside insurance institutions, it has been treated with similar indifference by legislators, culminating in the  "totally inadequate" take-a-percentage methodology for calculating Operational Risk capital in the Standard Formula.

Internal Modellers on the whole are not likely to be shaming that technique with their efforts either (basic summary of their problems here, while InsuranceERM cover struggles as a whole with a roundtable here). A paucity of operational risk event (and near miss) data within firms may be good news for ORIC as a vendor, but from a parameter and data uncertainty perspective, it leaves internal model operators and validators in an invidious position, particularly due to the quantum of insurers' capital likely to be involved (10%, give or take?).

It's not that the actuarial world hasn't taken a stab at it before (here), aren't fully aware of the data holes (here), or haven't used the word "Bayesian" in a sentence (here). However an activity which was "in its infancy" in the UK as far back as 2005, is surely now old enough to be working in the mines...

I was therefore happy to see the unprolific-yet-important CRO Forum bring a white paper to the table, Principles of Operational Risk Management and Measurement. It is an update to a 2009 version which takes into account Solvency II demands, as well as developing practice within insurers over the period, the suggestion being that 2009's efforts were a little too Banking Industry-influenced.

While this document might feel at outset like an idiot's guide to "quanting" operational risk (and bearing in mind the number of prospective standard formula applicants - 9 out of 10 in UK - one may be needed soon!), the document touches on a number of noteworthy technical matters, in particular;

• The Definition section doesn't read well, but they have attempted to include outcomes other than monetary loss into the Op Risk definition, which from experience will improve discourse within firms. Are they attempting to squeeze strategic and reputational risks into this box though?
• Nice coverage of Boundary Events, and encouraging firms to consider them in their management of Op Risk.
• Very specific treatment of Risk Tolerance throughout, using it in preference to Risk Appetite. This is because it cannot be avoided, and so tolerance levels should be used to trigger "RAG"-type reporting up the chain. Nice work, and well justified, but I have certainly seen the expression "Zero Appetite" used for Op Risk, so no doubt this is not an industry standard perspective yet! (p5-6)
• No problems with their coverage of tried and tested techniques - "Top Down", RCSA's & Loss Event analysis (p9-10)
• Nice turn of phrase regarding emerging risks on p9 - "...assess the proximity of new risks to the organisation". It may need to include an attempt to quantify to be fully useful for ORSA purposes.
• Concept of residual risk arrives quite late in the day, but isn't omitted. Important, given how much qualitative, or spuriously quantitative, material is being promoted as aiding this measurement work (p10)
• Seem to accept at the bottom of p10 that Internal Modellers must do more than curve fit on internal Op Risk Event data - good news I guess.
• Internal Model validation pressures on current Op Risk quantification practices flagged directly (p16 in particular)
• Guidelines on embedding Op Risk monitoring processes highlight just how much work some practitioners are managing to cover (p11). Quite disheartening for those with smaller budgets.

Ther are a few points to make on section B around quantification:

• Pretty scathing on Standard Formula relevance. (p14)
• Scenario Analysis sold as something of a panacea to cure the ills of incomplete Op Risk Event data sets, but no mention of the biases which seem to permeate the creation of the scenarios, which is sadly a hostage to the invitee list. (p14)
• Expand more on scenario analysis, bringing the "severe but plausible" terminology to the table (p15)

As well as the following generic comments;

• Is risk measurement - "a tool for embedding risk culture in the organisation"? I would say so, particularly in the Op Risk arena, where decision makers will need to be involved at scenario-compilation time.
• That said, they then go on to reference "senior management sign-off" of scenario work, which is somewhat contradictory!
• Overweight in references to "culture" and "tone at the top", like most white papers these days (see the FRC's efforts from the other week). Playing with fire as a profession by shoehorning references to "culture" into everything.
• A couple of horror-show schematics used on pages 7 and 8 - the Forum must know how much time risk professionals lose walking non-experts through things like this. They serve no purpose, and detract from surrounding text.
• Attempt on p9 to solicit business for ORIC?

It was Professor Jagger who accurately prophesised "You can't always get what you Quant" - I'd say the Risk profession concurs, based on these very welcome principles.

EIOPA's "Common Application Package" for Internal Model Applications - UK back to the drawing board?

The release of an EIOPA Opinion today may very well raise the heckles of the UK Insurance Industry, regarding a move towards a "Common Application Package" to be used across Europe for assessing internal model applications. This appears on the face of it to be disjoined from the internal model-related ITS already scheduled in EIOPA's calendar (p12) over the next couple of months.

Their "package", to be published after consultation with the National Competent Authorities themselves, will comprise of;

•  Instructions 
•  A self-assessment 
•  Background Information 
•  An inventory of internal documentation 
•  An explanatory document 

Worth remembering at outset;

• This is an EIOPA Opinion. In their own words, "This opinion is aimed at proposing to NCAs the use of such common application package", so their proposal is non-binding (p10 here as well)!
• The UK has seemingly (and based on number of applicants, rightly) been in the box seat on this particular topic within EIOPA, so it is likely that their approach won't be far away from the UK's existing one! The suite of Internal Model Application (IMAP) materials in the UK is available here for example, and isn't far away from EIOPA list, in form at least.

That said, a combination of EIOPA's desire for convergence, and the recently released and revised Delegated Acts may have a particularly destructive effect on existing IMAP efforts within the Solvency II Programmes of UK insurers. I have therefore had a deeper trawl through the Delegated Acts in order find out what the practical implication of any changes in the redrafted Delegated Acts might be.

As anyone who has worked in the UK IMAP space will (un)happily tell you;

• The PRA's approach to assessing internal model applications (inherited from its predecessor) involves deconstructing Solvency II Directive and Delegated Act text into sentences, and in some cases sentence fragments. This created over 300 "requirements".
• Those are transferred into a spreadsheet list, within which firms are asked to list evidence of their ability to address each item (or why the requirement is not relevant).
• That spreadsheet list is housed on an Excel workbook known as the SAT Template, which contains various other worksheets, all of which require manual population of some kind.
• A fully populated SAT Template is required by the PRA for IMAP participants, along with some ancilliary documents (listed here), supplemented by any further documentation which the legislation or EIOPA deem is compulsory.

It's not a tick-box exercise though...

The recent versions of the Delegated Acts which have been creeping around are therefore of some significance to this work. Over the last couple of years, firms will have populated a SAT Template which contained deconstructed sentences from the Solvency II Directive pre-Omnibus II, and the Delegated Act text from November 2011, both of which have now been superseded (without being too presumptuous!).

How do the changes affect the contents of firm's existing IMAP templates, and indeed does it matter? Well, it goes without saying that the SAT Template will need to be amended and reissued by the PRA, regardless of what EIOPA produce. The question for UK firms, having spent considerable money and resource on populating the template in 2011/2012, is whether or not to start from scratch, now that time is something of a luxury, and the end-game is more definitive.

With 2013 being something of a write-off for both Solvency II programmes and the PRA's IMAP campaign (although the costs suggest otherwise!), it is likely that existing SAT templates, crammed with bespoke explanatory text and document references, have either gathered dust for a month or twelve, or received only minimal maintenance.

To see exactly how much of those early efforts will be salvageable, I have taken a look at the Delegated Act articles from January 2014* regarding the Tests and Standards for Internal Model Approval (or 'TSIM', after the acronym allocated to these articles by the draughtsmen), and compared it against the November 2011 version of the same text, and found some significant changes in form and substance, which may render some of your earlier SAT population efforts chocolate-fireguard useful.

The 24 original TSIMs, once deconstructed, respresent over 200 (almost two-thirds) of the "requirements" listed within the SAT template, so any changes in them could massively impact the recyclability of existing content.

IMAP Changes - has EIOPA gone Gaga?

I found, of those 24;

• 6 are unchanged verbatim
• 2 have minor definitional tweaks, but are otherwise unchanged
• 2 have been merged
• 2 'new' articles have been introduced into the section, though neither are labelled "TSIM" at this point.
• All others have been changed in at least form, and in the majority of cases, substance

IMAP candidate firms have therefore been left to contend with more awkward changes than a Lady Gaga concert in a broom cupboard...

Those which have received the most aggressive reworking include;

• Article 225 TSIM 15 - Management Actions
• Article 229 TSIM 18 - Model Validation Process
• Article 230 TSIM 19 - Validation Tools
• Article 232 TSIM 21 - Minimum content of the documentation

It is fair to say therefore that UK-centred internal model applicants may struggle to recycle their existing IMAP drafting efforts without re-engaging Business-As-Usual staff in a substantial way, and that is before we even get to what EIOPA may propose in the "common application package". It also remains to be seen how the other European countries react to the likely Anglicisation of internal model assessment.

If you need help with this on your Solvency II Programme, don't be afraid to get in touch at allan@governance-matters.co.uk


* Just for reassurance, the TSIM text doesn't change between the January 2014 and March 2014 versions, but unless someone published the March version online, you'll have to take my word for that!

Solvency II Delegated Acts available online (kind of...), plus EIOPA's plans for 2014/15

So let's start with something a bit unexpected - DRAFT DELEGATED ACTS! ONLINE!

I'm not sure who the leaky uploader is (appears to be a Spanish consultancy firm), but the document is very much online. Sadly, it is only the January 2014 version, which as you will see in the rest of the post, has just been superseded, but it definitely pairs up with the version currently doing the rounds, I promise!

I have managed to get a sneak preview of the latest version of this document (dated 14th March) which have seemingly managed to burst the banks of the tightly-knit circle of advisors, and are now no doubt winging their way to a Solvency II Programme Director near you! There are "tracked changes" on the March document now circulating, which only appears to cover changes since the emergence of the January document hyperlinked above.

Lord help anyone who wants to trace it back to the more familiar 2011 (unpublished) draft, you might as well draw a load of foxheads on sticks...

Insurance Europe were obviously part of the privileged few for the March revisions, hence they fired out this missive last week regarding all of the Pillar 1 technical areas which they feel (on behalf of the industry) remain deficient. There are no real surprises in their list - it is the same topics which have been on the whinge-list since EIOPA's LTGA last year, and indeed earlier in the case of the Currency Risk approach and Own Funds classification.

Following on from the draft Delegated Acts being made more widely available, there has been a reasonable amount of noise in the paid-for press (here, here and here for subscribers), as well as Insurance Europe's top man having a lobbying call published in the FT (here).

Being more of a Pillar 2 man myself, I thought I would check to see what, if anything, had been tweaked in my areas of interest. The impression given earlier this year was that little had changed outside of the Long-Term Guarantee elements, and that was certainly true if you compared the November 2011 and January 2014 documents.

However, having examined the amendments in the March 2014 version, I have found is that a few areas of governance (both SOG and Internal Model governance) which were previously untouched have actually received a fair bit of treatment, for example;

• Changes to the requirements for internal audit function holders not to cover multiple control functions (this constraint has been removed). This is presumably to pacify the smaller firms across Europe who have a Risk/Compliance/Internal Audit multi-tasker, so textbook "three lines of defence" have taken a bath in the interests of proportionality.
• The devil remains in the detail though, as the amended text allows someone to "carry out" more than the IA function, but seems to stop shy of them "taking responsibility" for other functions. Not sure how that will work in practice.
• Changes in the IM Validation space, in particular the removal of the requirement for a "Validation Policy". Fair to say most firms in IMAP would have produced one of these at least a year ago now (plenty of industry references here, here, here (p8) and here for example!), and while still a document of merit, does a "validation policy" now constitute gold-plating?
• Changes in the required Internal Model Documentation, targeting a much slimmer set of compulsory documents. This includes replacing a number of "policies" with "descriptions of...", which will no doubt be well received by those supervisors with multiple internal models to assess over the next 18 months!
• The tiered timescales for submitting QRTs, SFCRs and RSRs have now moved into the Directive, via Omnibus II text (as opposed to haveing been deleted, which is what it looks like at first glance!)
• A few of the other TSIM articles (Tests and Standards for Internal Model Approval) have been enhanced. "At least quarterly..." assessment of the IMs coverage of material risks is now specified, for example. Quite how the hard-coding of the regularity cramps your actuaries' style is another thing! 

I strongly suggest you all get back to work and check for yourselves!

PRA on General Insurer Technical Provisions under Solvency II - Taking the "TPs"?

Allow me to take a quantum leap outside of my comfort zone while I pick my way through the PRA's latest Insurance Industry aide memoire, via a consultation paper on the calculation of technical provisions in General Insurers.

This looks specifically at TP calculations with Solvency II in mind, and is aimed specifically at GI firms currently in IMAP. That said, the tone and technical matter covered is an excellent heads-up to Actuarial, Risk and model validation personnel currently active in this space about how the PRA approach to assessing Solvency II compliance is developing.

The document itself reads very much like their last consultation paper release on Deferred Tax Assets, insofar as it is a laundry list of "what not to do" - look at how many times the expression "should not" appears! They have leaned on their findings from both thematic reviews of TP calculations (Life and GI-specific Questionnaires were sent out a year ago) as well as from IMAP and ICAS, so their finding will be well supported by most recent practices in the UK.

The consultation window is pretty short as well, with a mid-April shut-down scheduled, so if you don't like the cut of their jib, you'd better speak soon.

Stand-out points for me included;

Generic


ENID - TP accommodation required

• Expectations of Delegated Acts content are cited throughout, but in terms of the exact date of their public provision, they can only go with "Q3 2014". From what I have seen, there is nothing cited which isn't in the November 2011 draft.
• The abandonment of the term "binary events", replacing it with "Events not in data" or "ENID" - the fait accompli of "binary" (that events which are not in a data set must therefore be extreme and/or rare) is confirmed as unacceptable.  The PRA don't appear to be wedded to the old term in any case, and while the actuarial profession used it liberally in the past (here and here for example), they began a transition away from it late last year (p45 of this).
• "Any data that can have an impact on the outputs of the internal model should be considered to be 'used for the internal model'" (3.19) - important IMAP message across sectors I think!
• There is evidently some concern that firms are thinking of relying on the work of external model providers to meet Solvency II standards, with the PRA confirming that firms may not rely on "...generic validation performed by the model vendor" (3.25). This means that the model validation relationship between IMAP candidates and their third-party providers needs to be much more invasive and aggressive, and needs to start pretty soon!

Technical Provision-Specific

• A large number of points made in the paper relate to over-simplifications, which should help anyone who is struggling with the concepts of materiality and proportionality. These include methods relating to ENID, Risk Margin calculations, Approximations and  the emergence of risk over one year
• Similarly a few tricks of the trade appear to have been scuppered, such as using optimistic business plans for setting provisions, "actuary in a box" methods and assuming improved underwriting performance
• Some substantial focus around the quality and quantity of challenge applied to External Models (focused on third party Catastrophe models in this instance), in particular the challenge of  assumptions used by the provider (3.16-17 and 3.26-28)
• The concept of "cumulative materiality" is introduced in the context of multiple approximations, a concept which I suspect many firms are still struggling with in the context of Internal Model change (2.9)
• An interesting take on the justification of assumptions, with the PRA taking umbridge with firms using "industry standard" or "established good practice" as a supporting argument, rather than using their own risk profile as the basis for support (3.15)
• A section which seems to advocate conservatism, if not prudency, in the setting of sensitive parameters (3.10), as well as advocating the use of stress and scenario testing to make up for ENID when setting parameters (3.2)

Certainly lessons for both Life and GI internal model applicants in here, and the PRA should be congratulated for getting this paper out in good time. I'm not necessarily convinced though that third-party providers of internal model inputs will happily acquiesce with the demands which the industry are being asked to make of them here.