EIOPA's Bernadino with keynote speech - D'ohs and Don'ts...

Solvency II implementation
- Homer called it...

The latest pit stop on the Solvency II Last Legs tour was in the picturesque, almost-an-anagram, Slovenia, where EIOPA's gaffer joined a throng of hearty souls to deliver a keynote speech last week.

Given that the outside world is seemingly becoming more sensititve to the ensuing changes (at least from a capital adequacy perspective), it has been noticeable that EIOPA's speeches have become heavier in practical tone rather than the flabbier ethereal tones of yesteryear. In particular, conduct risks, conflicts of interest and the importance of an effective second pillar to counter the aggression and self interest of distribution arms/firms have all become prominent features of what is being touted as the Solvency II benefits package. Given what it has cost, we'd better deliver it!

Back to the speech, a few basic soundbites are littered throughout, which might benefit your training packs for the home stretch;

• Solvency II is "EIOPA's top priority", 
• It is a "pretty good starting point", rather than perfect, is "...a must and a true game changer", and "brings a new risk culture"
• It is "a tool to foster a true risk culture in the organisation"
• "It is clear that Solvency II will bring more awareness and transparency on the true risk profile of certain business models"
• It will deliver "intelligent and effective regulation which does not stifle innovation"

A couple of open-ended questions emerge from the text itself;

• Does Solvency II only "encourage" firms to define their risk profiles and risk appetites, as opposed to compel it?
• Is the Solvency II take on ORSA really "best practice at international level" - seems fair, but does anyone else want a shot at the title!
• Why is "overall solvency needs" constantly accompanied by bunny ears - if these guys aren't convinced by the term, what hope does the industry have of driving it into the glossary!
• Is it just executives who need to know that ORSA is a "cultural change", as opposed to NEDs, non C-suite senior management and wider stakeholders. Institutional investors would surely benefit a 101 class, given their demonstrable views on what SCR coverage ratios mean for the plausibility of some firm's strategies, and while Sr. Bernadino comments that "...effort needs to be made" to explain SCR volatility on p8, a dawn chorus with Karel van Hulle on how "ridiculous" the outside world's expectations are doesn't even qualify as an hors d'ouevre.
• That risk culture provides "...an appropriate balance with the natural sales driven culture" - EIOPA have alluded to this before, but never quite as explicitly as this. If the Risk function's job is predominantly to counter sales activity, can it ever be seen as value adding?

And a couple of specific themes are given special treatment for everyone's benefit;

Prudent Person Principle and the investment strategy of insurers

• PPP emphasised as not giving insurers a freebie to hit the roulette tables with their asset book, and will be "...closely monitored".
• Current environment encourages aggressive monitoring, with the "search for yield" quote now ubiquitous in supervisory speeches which touch on macro matters.
• "Asset risk calibration in Solvency II should not be used to privilege or incentive any specific asset class" - not convinced on this front, given the remit of your friendly local CIO must contain an element of maximising gains within appetite, and the calibration can surely influence that.

Product availability

• "Solvency II does not intend to unduly penalise specific products" - evidently does though, hence the sprint to the door from Ergo et al in the guaranteed interest rate product space (not unduly though to be fair, given the Teutonic pleas for transitional mercy!)

ORSA and Risk Culture

• The section somewhat labours the point on coverage of all risks, assessment of all mitigation techniques, and the role of the Board in driving the associated cultural changes, but I guess given the geographical location of the speech, some of the nearby countries may benefit from the encore un foi approach - no names naturally...
• "Capital will never cover up for the lack of proper governance"
• "ORSA is based on the companies' DNA - their strategy"
• "The key role in the implementation of ORSA belongs to the top management"
• "It is up to the Boards to set, communicate and enforce a strong risk culture..."

Insurers and Supervisors in general

• Talks of Risk Functions needing the correct skills to assess risks in asset classes - is there an implication here that functions will be light on quantitative skills post-2016?
• Squares the circle of prudential and conduct risks on p7, talking of mitigating conduct risks "since inception" in one's product development, design and marketing processes.
• That Solvency II "...requires an increased degree of supervisory judgement" in order to intervene at the right time, and the new supervisory requirements represent "...an upgrade in the quality of supervision". I'm sure some countries might take that as something of a slight, given the maturity of their existing processes, but probably fair for the majority.

Plenty of fuel for your respective Board and Senior Management briefing fires, so go forth and propogate!

Insurance Banana Skins in 2015 - PwC and CSFI

PwC and the CSFI guys have teamed up for another Insurance Banana Skins publication, a particularly useful doc for the BAU Risk world, and one which I have covered on the blog in years gone by (well, 2011's and 2013's anyway).

In particular, I always found it useful as a means of digging out the kinds of awkward cross-bred expressions which would invariably end up rolling out of 75-year-old INEDs’ mouths at the next Risk Committee meeting, probably due to someone trying to sell insurance cover for it, or a business journal doing a centre spread about it. On this basis, I was delighted to see “Cyber Risk” given prominence this time around, which is the highest new entry, and apparently a “new risk” - here’s the sales forum, and here’s the HBR white paper!

Sarcasm aside, given this pulled in over 800 responses from around the globe, and across the distribution and provision side of the industry, the content is worth poring over and briefing colleagues on if this is your day job. There are also plenty of quotes from the great and good wrapped up inside as well.

I’ve only jumped on a few of the findings below;

• Regulation remains the top risk for the 3^rd survey running, and for the 4^th out of the 5 actually held. It did take a ‘world’s end’ scenario for investment returns to knock it off the top in 2009 though, which suggests that those surveyed are happy to bleat about regulatory concerns, regardless of the rest of the exogenous threats to insurance firms.

• Much of the top ten is focused on investments and returns, whether it be interest rates, investment performance or guarantees.

• Governance and management of insurance companies seen as an area of declining risk – does it therefore warrant the Banking industry-inspired whip that SIMR is about to introduce in the UK?

• Similarly, Business Practices, incorporating misselling, is falling down the list – not sure a UK-only survey would be so generous!

• Cyber Risk itself was only #6 on the list for Life Companies, while #1 for Non-Life – wonder why the guys who are selling cover rate it so highly? Of more interest, North America had it as #1 “by some margin” – this suggests the wave will be coming across the Atlantic in the next 12 months (a nice precursor of how that will emerge here)! It is written up nicely however, with cloud storage, and the richness of data held on customers, being elements which make insurers prime targets. It doesn’t dwell on the proliferation of legacy systems in insurers however, which always felt to me a good reason for criminals to ‘have a crack’.

• Europe considered the interest rate environment, regulation and guarantees to be the top 3 banana skins, which given the aggressive tailoring applied to Solvency II in the drafting stages to negate country-specific difficulties in these areas (MA/VA/Transitionals), is no surprise.

Oh, to have a day job again…

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… 

Solvency II - things what happened in the last couple of months...

She might not be singing yet, but just like my nana at Pilates, the Solvency II fat lady is taking some deep breaths. As I have spent the last couple of months at home in au-pair mode, gladly leaving the rest of the world to waffle about ERM and Solvency II, I thought I would throw together a catch-up post, given that applications for some of the Solvency II goodies have been open since 1st April.

Starting at the top, the UK Government managed to stay sellotaped together long enough to get the fundamental Solvency II legislative work pushed through Parliament before they disbanded for the General Election. The documentation is available in full here, with synopsis here. Interestingly, this formally obliges the PRA to review capital add-ons "at least" once a year, as well as to provide specific reporting to EIOPA on the topic. There is also a little more meat around the sticky issue of firms who breach their MCR, then look unlikely to rectify the matter.

The Government also released the findings of their Regulatory Policy Committee (RPC) in assessing whether Solvency II was going to be a blessing or a curse for Britain. This is actually a very handy drop-in document for your NEDs/peripheral programme figures, and is worth pushing on to them.

They do make the rather controversial statement that on top of the estimated £2.6bn cost to the industry of implementation (!!!!!), the ongoing costs of c.£200m a year will be due to reporting obligations (fair enough) as well as the need for a remuneration policy (hmmm?). Rather disparagingly, the Treasury merely estimate "un-quantified administrative benefits" off the back of improvements in risk management and governance arrangements.

The PRA have recently released the Policy Statement covering their final rules for Solvency II implementation, which on paper should contain no surprises (other associated materials available here). Generalist media chatter (here and here for example) was pretty underwhelming, and while Mark Carney emphasises in the statement that Insurers must be "robustly supervised", Andrew Bailey stated merely that while the "...new regime will not be perfect...it is a welcome step in the right direction"

On a lighter note, the European institutions got a bit beefy over the new year when the newly installed Commissioner Hill had his ears chewed by ECON's new Chair regarding a range of issues or unanswered questions regarding the Delegated Acts. Having given himself a couple of weeks to digest, he pinged out a reply thanking ECON for pointing out three typos, and otherwise defending his corner. Much of the background noise in this correspondence regarding infrastructure investment and EIOPA funding has had a life of its own for some time now - indeed, EIOPA's dummy was definitively spat on the matter last week when they "reprioritised" their 2015 work plan to account for budget cuts.

B-ABI - got back?

NEDs have recently been the beneficiaries of a webcast featuring the juicy double of Huw Evans and Paul Fisher discussing the implications of Solvency II's progression for NEDs. For anyone struggling to get their NEDs to read overinflated board packs these days, a diversion to this footge would be a smart idea (video 1 is more chatter, so start at video 2).

A parallel release for NEDs came from the PRA in the form of a slide pack and a monster 1hr 30m recording of the presentation which it accompanied. Clearly the PRA have seen enough gaps in the efforts of NEDs to date to go to these en-masse tutorial lengths, but the material on validation and ORSA in particular should be swallowed whole.

Myners briefing on Governance at the Co-op - working class barred from the Board?

Wolf - step away from the door...

A corporate governance story that will echo in the eternity of MBA classes for years to come, the unravelling of the UK's Co-operative Group from the benign grocer-cum-divvy machine into a ying and yang shotgun conglomerate of opposites is proving to be a watershed moment for UK plc, with stakeholders attempting to balance myriad legal, political and ideological considerations in order to both keep the wolf from the door, and preserve the principle of mutuality for its membership.

There are no surprises that the crux of the Group's issues lies in its banking arm, nor that being acquisitive during the financial crisis (here, here and here) has proven to be poor strategy. Keeping the wolf from the door has therefore largely been delivered through the tried and tested combination of begging and borrowing, which the recently departed CEO appears to have delivered with some aplomb.

Governance structures
- choices choices...

However, the Group's hiring of Paul Myners back in December, a man with an extensive collection of t-shirts and hats, to independently review its governance arrangements, seems likely to deliver to the membership a menu of choices as unpalatable as a Sunday skip-dip.

Lord Myners has hurriedly delivered a briefing on his findings to-date, as well as performed some mainstream media duties (here and here), following the Group CEO's resignation last week. This early sighter was seemingly unscheduled, but the manner of the CEO's departure ("a tragedy" in Myners' words) meant that his findings to-date could not wait until May for its full publication date.

Myners has therefore naturally delivered a ruthless and scathing take-down of the governance structure and processes within the Co-operative, while calling out the Board member who are clearly well schooled in how to game the system, as well as the playground tactics/rabbit-in-a-hat tricks that turn "one-man-one-vote" into "one hundred men-all votes"!

Killer quotes

• The group endures a significant "democratic deficit"
• The future of my recommendations lies in the hands of around 100 elected individuals on the current Group and Regional boards, few of whom have any serious business experience and many of whom are drawing material financial benefits from their positions
• There is a phrase frequently used in Co-operative Group circles that the Executive should be "on tap but not on top"
• ...the Group Board has spent far too much time on transactions such as Somerfield and Britannia which have been breathtakingly value-destructive

Observations

• The "exceptional skill and tireless efforts" of the Executive team are cited as the reason for the Group's survival in its current form
• The current governance framework is variously referred to as "flawed", suffering from "acute systemic weaknesses" and having "consistently produced governors without the necessary qualifications and experience to provide effective Board leadership". Ouch...
• That the Groups social goals are not aligned with its strategic and commercial objectives. This is of course less of a worry for its financial services competitors.
• The the Group's "massive scale and complexity" means that a man-off-the-street approach to electing Board members, which may be sufficient for a farmer/grocer co-op, is not suitable.
• Shatters the "myth" that the Group has always been run by lay members, as opposed to those with commercial experience.
• The thought of creating a board of INEDs and lay members is disregarded due to the potential for creating "second-class citizenship"
• Highlights that Co-op's core business of groceries is savagely competitive at the moment (just look at Morrison's and Sainsbury's), so continued ineffective governance could be devastating
• Notes that there have been previously (disregarded) reviews of its governance architecture, which is "long known for its labyrinthine complexity and its disfunctionality"
• Stresses that, due to the current voting structure, acceptance of  his recommendations "...potentially lie[s] in the hands of fewer than 50 elected members". It sounds like they haven't been shy to remind him of that either!

Recommendations

• Halve the size of the Group Board, which will be subject to annual re-election
• Independent Chair, with no previous association with Co-op
• 6-7 INEDs and 2 Executive Directors
• All with qualifications of a similar ilk to its (listed) competitors
• Create a National Membership Council (NMC), with a 12-person executive committee to effectively represent the membership and co-operative principles and values
• The Board to be subject to scrutiny by the NMC, who have the right to be consulted on "key strategic and operational intiatives"
• "Arrangements" to be made to safeguard the confidentiality of information shared between the Board and the NMC (certainly not the case with current arrangements!)

The entire document feels drenched in class warfare and spectrum politics. That rather hideous take from the existing Board on their executive team ("on tap, but not on top") feels like the inspiration of Myners' recommendation for a professionalised, appointed Board, rather than the beer and sandwich brigade which currently exists.

That said, there is thought on the left-wing (here and here) who feel that mutuality and co-operation should remain unsullied by the commercial world, who remain unable to affect much in the way of democratic change in Boardrooms even after the raft of FRC-sponsored guidance released over the last couple of years (though PIRC are trying!). Is one failed attempt to democratise stakeholders best replaced by cherry-picking from a similarly deficient model?

On the basis that I have banged the drum for background diversity in Boardrooms (not just gender or race), and the existing Co-op Board is "diverse" in that respect, I'm left to wonder if I've been barking up the wrong tree. The Board delivered by their existing process is neither fit nor proper, and are able to outmanouevre their executive compatriots armed with little more than a working knowledge of provincial politics and a polyester suit.

Should we therefore use the grey-area of "fit and proper" regulation to ban the contract plasterers, nurses and retired publishers of the world from financial service provider Boardrooms on the basis that they don't have an MBA, and count with their fingers? Or can one make a valid contribution to a financial services Board of directors regardless of the colour of their collar?

Central Bank of Ireland - Corporate Governance Code refresh

The Irish approach to corporate governance in financial services, at least up until the onset of the financial crisis in 2006/07, resembled something of an all-you-can-grasp buffet for a select number of executive golf club pals and octogenarian ex-politico Non-Executive Directors (NEDs), having their voting arms operated a la Weekend at Bernies.

Ireland pre-2007 - Waking NED?

The new FSA-flavoured approach brought in by Matthew Elderfield in 2009 (elaborated on here) fortified by the findings of a devastating 2011 report summarising the truly horrid governance practices in the Irish banking industry, has led to a change of regulatory tack at the Central Bank of Ireland that represents the biggest volte-face in Europe since the Macarena.

Alongside PRISM, a piece of revolutionary work in the assessment of financial institutions by supervisory bodies, the CBoI also made substantial changes in areas such as Annual Compliance Statements, Fitness and Probity of directors, Risk Appetite Statements.

All of this ran off the back of Mr Elderfield's first major gig in 2010, a full revamp of the Corporate Governance Code, which could hitch a ride off the back of the work of the FSA and CEIOPS (at the time!) and deliver a more substantial suite of obligations to a cabal of directors who, after feasting on carrots for years, desperately needed the stick.

This makes the release of yesterday's consultation on the Corporate Governance code a touch baffling, as the ink is barely dry on 2010's effort - it perhaps reflects that the regulator has reached optimum staffing levels if they can review it so regularly! Having said that, the level of divergence from accepted CG practices in the UK was flagged by Grant Thornton back in 2011 as being substantial, so a point-in-time revamp should not be so unwelcome, regardless of the proximity to the last one, and of course, all of this activity was too late to prevent Quinn Insurance from going down.

They emphasise that this review takes into account developments in the Solvency II space, as well as on-the-ground experience and publications from other parties of interest. Of particular note was their emphasis that, where national regulations are not as stringent as relevant EU or international one (or indeed vice versa?), the most onerous one should be complied with. In a number of instances around corporate governance, this will mean the CBoI outranking Solvency II as the more onerous of the two!

While these are proposals rather than stitched-on changes at this point, the CBoI doesn't have a great track record for backtracking these days. Highlights for me were;

Risk Committees

• Require a majority of NEDs on Risk Committees, and must be chaired by a NED

Committees in general

• Require the Risk Committee and Audit Committee chairs to sit on each other's committees
• Require the Remuneration Committee chair to sit on the Risk Committee
• In High Impact firms, the Risk Committee and Audit Committee Chair may not be the same person
• Must be at least 3 members of Risk Committees and Audit Committees

Chief Risk Officers

• They note that it is "Generally accepted best practice" to have a CRO who, amongst other tasks, is charged with "...facilitating risk appetite setting by the Board". In addition;
• All "High Impact" firms will be required to appoint a specialist CRO
• Firms with a lower PRISM rating may have a CRO who is shared with another control function, "...provided that there is no conflict of interest between the two roles". Can't help but feel that this might rule out CRO/Chief Actuary dual roles, but allows for CRO/Head of Compliance and CRO/Head of Internal Audit, which would be to the chagrin of the Society of Actuaries in Ireland!
• CRO to have direct access to the Chairman of the Board

Board Meeting frequency

• Seem to acknowledge that the compulsory 11 meetings per year for High Impact firms may be a touch much, so are looking for comments
• Also acknowledge that compulsory 1 meeting per calendar quarter is a bit constrictive for the smaller firms, so may relieve this to be pragmatic

Chairman and CEO

• Some of the restrictions around number of roles held at any one time to be relieved for smaller firms, but seemingly only to populate inter-Group roles.

Board Diversity

• Acknowledges that, while the debate in the EU is gender-centric, that diversity of all types is a worthy target for Boards, but falls short of compelling firms to do anything at national level, choosing to seek comments and wait for the supra-national activity to drive any compulsion. This seems to fit with the thinking of Irish directors published back in 2011 i.e. no "Golden Skirt" quotas.

Random

• "...appropriate Risk Culture" makes its way in (6.3), perhaps cognisant of the FSB's proposals
• Built in a piece which allows for video-conferencing rather than physical attendance at meetings (7.5)
• Board responsibilities updated (13.1)
• Compulsory Board skills matrix (14.9)

The aim of Solvency II is...

As Solvency II implementation stubbornly drags its heels like a legislative bull in the Plaza del Toros of European bureaucracy, I noticed a few mutterings about the 'aim', 'purpose' and 'objective' of the Directive and its companion texts as the main protagonists play for time.

Aim of Solvency II - could be better

This is particularly frustrating as a practitioner, where consistency and brevity of message is vital when one generally has limited time with AMSB members (most notably Non-Executives), and therefore may find the messages being offered to the press differ from those previously communicated to clients.

In addition, EIOPA's status as "super-regulator" (Omnibus II pending!) now allows for further demarcation of message between those who currently determine the adequacy of senior management/director fitness, propriety and Solvency II knowledge, and those who will be co-ordinating the revised approach from 2014.

Finally from the bottom up, the stealthy creep of Solvency II into the general public/intermediaries worlds surely makes it imperative that the overriding purpose of the Directive (as well as the expense and delays!) can be explained in unequivocal lay terms - though maybe not as haplessly as the PRA's top man the other week when he tried to price Solvency II in terms of unfinished tunnel projects...


Regulators and industry tend to be focusing on policyholder protection when justifying the Solvency II approach to supervision, though in a rather long-winded manner in the CBoI's case!

Regulators

Bernadino to Croatian press, March 2013

Purpose of Solvency II is "...a harmonized prudential framework in the EU"

Bernadino to German press, April 2013

"The purpose [of Solvency II] was to increase policyholder protection and incentivise better risk management"

The Prudential Regulatory Authority

"[Solvency II's] main objective is the adequate protection of policyholders and beneficiaries"

Central Bank of Ireland

"Solvency II is a risk based approach that aims to provide the basis for a more ‘root and branch’ review of the overall financial position of an insurance undertaking. It represents a new system of supervision that assesses the overall financial position of an insurance undertaking or group. The new supervisory system is concerned with, amongst other areas, highlighting the importance of holistic risk management and prudential standards. Solvency II also aims to reduce the possibility of both insurance undertaking failure and, in a wider sense, of disruption to the efficient operation of the insurance market"

Industry

Lloyds (whose CEO has been a touch vocal on the threat of Solvency II early implementation recently) have the objectives bullet-pointed on their site as;

• Improved consumer protection
• Modernised supervision
• Deepened EU market integration
• Increased international competitiveness of EU insurers 

Others tend to get "protection" somewhere in the mix;

"[Solvency II] should bring consistency to the way in which EU insurers manage capital and risk with the aim of enhancing protection for consumers" - Standard Life AR&A 2012 p6

"[Solvency II's] objectives are to establish a solvency system that is better aligned to the true risks of insurers, and aims to enable supervisors to protect policyholder interests as effectively as possible" - Aviva AR&A 2012 p129

"The purpose of Solvency II is to unify a single EU insurance market and to enhance policyholder protection" - IPB 360 AR&A 2012 p69

"The aim of Solvency II is to introduce EU-wide regulations that match capital requirements as closely as possible to the risks incurred." - Munich Re

Expert lobbyists

"The overriding aim of Solvency II is to bring a common, risk-based approach to capital setting, supervision and disclosure to the whole of Europe" - ABI's Tim Breedon, 2010 (original speech text unavailable from ABI site)

"The primary purpose of Solvency II is consumer protection" - FERMA executive board member 

Naturally, the consultant/vested interest world generally prefers to keep it fluffier to justify the invoices (Thomson Reuters a notable exception);

Consultancies

"Solvency II represents an opportunity to not only improve insurers' operations, but also develop significant competitive advantage in a challenging market" - KPMG's Phil Smart

"[Solvency II] is expected to provide a catalyst to transform the way insurance companies run their business" - E&Y

"[The Solvency II] project aims to create a more harmonised, risk-oriented solvency regime resulting in capital requirements that are more reflective of the risks facing insurers" - Towers Watson

Vendors/vested interests

"The aim of Solvency II is to gather all risk together in a holistic way" - FINCAD

 "[Solvency II] will ensure that insurers are protected against financial collapse, which is rife in today's unstable financial environment" - Xactium, clearly not big readers of the SIFI materials currently doing the rounds!

"The primary aim of Solvency II is the creation of an effective single market in insurance services across all 27 countries, creating the conditions for an adequate level of consumer protection." - Thomson Reuters

"[Solvency II's] aim is to ensure the financial soundness of insurance companies to not only protect policyholders’ interest, but also increase competition in the EU insurance market" - SAS 

Saddening really to see how a decade of malaise and false starts can even start to erode the fundamentals...

Did we learn from Equitable Life? Professor says "No"...

A cracking thought paper was released this week by Professor Roberts from Kings College regarding the lessons one could reasonably have learned from British mutual Equitable Life's demise in early 2000s, and more importantly, did UK plc actually learn them! (simple timeline of recent events here for our non GB readers, but anyone whose website starts with a banner exclaiming "recreating value for policyholders" has clearly had a lean few years!)

This document works nicely as an aide-memoire for anyone working in a financial services risk function as to what one should be wary of in the day-job. Professor Roberts ties in some of the most recent work in this space (leaning heavily on the Cass Business School/AIRMIC Roads to Ruin research and its conclusions in particular), and comes to the inevitable conclusion that lessons are well publicised, but never learned.

My main concern as a risk specialist is that certain recurring themes in the failure of financial services firms appear to remain outside of the Risk function's control or indeed influence, notably;

• Hubris of Senior/Chief executives - Almost every example of failure in insurance and banking referenced in Prof. Roberts paper includes a flukey, unchallenged CEO who got bolder as circumstance rather than skill kept their businesses growing. I had flagged a couple of articles in a post last year touching on what makes an executive tick, and since then I have seen psychopathy and leadership (as opposed to cherubic faces!) examined further in a popular mainstream book. The legitimate concern here of course is that CROs are seemingly no nearer to being guaranteed seats at the top table, let alone a veto to keep the most dominant executives in check, regardless of their loud voices, when necessary.
• Poor quality governance from Non-Executive Director level - Risk functions simply must have the NEDs performing at their optimum in order to provide acceptable services to their employers. While the "old school tie" approach to recruiting NEDs may take a generation to phase out entirely (to be replaced by an army of Fembots, so Viviane Reding would have us think), Risk functions are left with tottering old fee-sweepers as their key route to early intervention. The more visceral approaches to documenting risk appetite/tolerance/preference now being supported by corporate governance codes and vocational/professional bodies may make it easier to raise concerns with NEDs in future (probably as it will be colour coded and in Excel...), but until they are actually prepared to risk their comfortable semi-retirement with some probing questions in the C-suite itself, should Risk functions ever think they can overcome such a void?
• Failure of regulation - Should Risk functions be banking on the (inevitable?) failure of the nascent regulatory environment, and reserve for subsequent claims/compensation if one or a number of products are "too" successful, thus providing the necessary quantum of dissatisfied customers for the regulator to act? I would have laughed this suggestion out of the room until a year ago, since when the FSA have made retrospective calls on interest rate swaps, PPI, and TLPs, all of which would have been presented as "compliant" products in the Boardroom.

For the Solvency II fans, it also notes on page 11-12 that Equitable Life featured in the research which grew up to be Solvency II! Maybe we did learn something after all - if we smash up the affordability of long-term guaranteed products, we can all go unit-linked and never have to worry about another Equitable...

KMPG survey on Solvency II Board Training - "Do more!"

Been slack the last couple of weeks while doing my final preparations for the Isle of Man half marathon, which I "tore up" last Sunday in, errr, 1h 36m, coming in just ahead of Brian the Snail and Albert Steptoe.

On the basis that I'm now safe from potential Olympic requirements, I am left with plenty of time to blog while my multiple friction-related injuries heal...

Starting with KPMG's latest diatribe on Solvency II Board Training, an admirable attempt to put one of the darkest sheep into the spotlight - anyone who has dragged a Policy, Solvency II briefing note, draft ORSA Report or internal model justification paper through a Board or Board sub-committee will know that getting the membership to take Solvency II seriously is not a walk in the park (particularly when you have to also explain once a quarter why the go-live date keeps moving!).

There is therefore a "comfort in numbers" which one can draw from KPMG's survey (sadly no details on sample size), with an overriding message of "do more, immediately", in particular;

• 80% of boards have received 15 hours or less of Solvency II training - I dare say in many cases this would be accumulated by tacking on Solvency II-related matters to the end of existing Board agendas over a 12-24 month period.
• 57% have covered ORSA in their training
• 30% have covered Use Test
• 44% will be embedding training objectives into their director's PDPs

Outside of those "big hitters", some interesting gaps emerge;

• 10% have not commenced training
• Half have performed 1-on-1 training with execs (perversely, more have done 1-on-1's with NEDs at 56%!). My experience would say they are equally and entirely in need of bespoke training!
• 35% have delivered training on IMAP itself, a pretty sobering number bearing in mind where we are in pre-application
• Over 20% of respondents have nothing currently planned for training around Pillar 3 reporting (22% on the QRT/SFCR side, and 26% on the RSR/ORSA supervisory report) - to have not at least briefed on these matters at this juncture is remiss, bearing in mind the consults were put out last year!
• Only a third have instigated a company-wide training programme

The section around training on the Internal Model however (p7) felt instinctively wobbly to me, with the FSA said to be "likely" to expect all directors to have a "good" understanding of the IM.

While KPMG have purloined the best bits of Article 120 (and 213 in the Level 2 draft) for the purposes of what good might look like, I would still argue that a "good" understanding is not even close to being defined from a national regulatory perspective in a manner that lends itself to effective training planning.
No doubt anyone in the IMAP space will find this useful, but you might want to check the sample size with KPMG in order to put any weight behind the conclusions if it prompts you to change programme priorities/budgets etc. Certainly an eye-opener regardless.

FSA - Solvency II speeches this week from the great (and greater!)

A couple of topical speeches delivered this week by Canary Wharf's finest, both of which are relevant to the Solvency II world.

First, a speech at the 2012 Risk and Investment conference run through The Actuarial Profession and featuring some multidisciplinary heavy hitters from TV and print as well as some C-suite presence from the UK's largest multinationals. The FSA's Kathryn Morgan delivered a speech which covered Pillar 2 and 3 trends in particular, which is covered in this subscription only article at Risk.net. For those who don't have the budget for that, a pruned down version of that content is available here.

Ostensibly, the following points were made;

• Don't expect any more FSA guidance on conducting an ORSA - fair point at this juncture, if you don't know your onions by now, there's probably no hope for you!
• Approaching implementation consecutively in 3 pillars is a "worry" - I suspect that worry, misplaced or not, is applicable to most undertakings at this juncture
• "Risk management is the best mitigant of risk, not capital" - I would argue an effective Risk function rather than risk management per se is the best mitigant, but it is slightly more ethereal than a big bundle of cash!
• Perception that "...Risk and Capital are not talking to each other" - true out of necessity at this juncture perhaps (BAU for the balance sheet guys, model applicants or not, and the administrative burden of refreshing documentation suites has impeded comms for some time I would argue, but this will improve in the very near future).
• Number of references to Boards, centred around NEDs participating fully in decisions rather than counting the hours till their taxi arrives, as well as not relying on SMEs to make decisions for them (i.e. Actuarially-minded board members are not left to perform all balance sheet related challenge on their own!)
• With regards to the empire built on sand which is the legislative timeline, reiterates that while some key balance sheet-related issues are yet to flesh out, "...their is a lot of certainty in Pillar 2" - something I have banged on about since the draft Level 2 implementing measures were leaked in November.

While that speech has good insights for you Pillar 2 folk out there, a lecture from Julian Adams on "the impact of changing regulation on the insurance industry" is equally fascinating, if perhaps treading over some Solvency II ground already covered over the last couple of weeks - as a History graduate, I always like a cheeky overview, and the lecture covers legislative developments back to Victorian times.

That aside, a few Solvency II-relevant snippets were also included (or reiterated from prior speeches) such as;

• A definition of what "risk sensitive" regulation actually means (insurers' solvency positions matching their idiosyncratic risk profiles) - something as succinct as that is actually extremely useful for board training purposes at the very least, and I am glad he has communicated it in this manner.
• Also defines "proportionate" from the FSA's perspective on internal model approval - namely, if it is in the Directive or the Implementing measures, it is not negotiable.
• Notes that Solvency II is "influencing" the global regulatory framework - I would argue that strong-arming (in the case of first/second wave countries) and bickering (in the case of the States) is far from influencing, though with the IAIS Comframe draft now open for review, we may see something more resembling dialogue from our pals in Brussels
• Rather worrying comment that, in the context of reporting financial positions, that Solvency II reporting sits in the succession path of EEV and MCEV as "...if perhaps not the final, then the latest step" towards a more transparent and market consistent reporting regime. Anyone for SFCR 2.0?
• A rather ominous note that the standard formula calculation "...would certainly have a distorting effect when considering, say, the London Market subscription business or with-profits businesses" - I hope all you tiny mutuals have got your IMs, PIMs or USPs ready, as it sounds like the FSA may already think SF is not suitable for you!
• Acknowledges that Solvency II is about "maximum harmonisation", and therefore EIOPA will call more of the shots in future (just as soon as Omnibus II gets through...)
• Highlights that the academic modelling around (a lack of) correlation drove many of the banks models' into stupidity in 2006-2008 - an area I would expect fervent challenge around from both the regulator and indeed internal governance structures (and one which Matthew Elderfield at the Central Bank of Ireland has already picked up on as a main area of focus)

Useful stuff from both sources, so keep it up Wharfers!

PS I suspect I won't be posting tomorrow, so I will wish you shoh slaynt and a happy Tynwald Day one day early!

Irish Corporate Governance - first forced shift of director?

Bit busy on the UK front at the moment, so not sure if this is the first "forced" change in directorship as a result of the revised Irish Corporate Governance code, but it is very high profile, being a subsidiary of supermarket behemoth Tesco. The latest deadline of obligations to comply with would have been last week (end of June).

Strange in a number of ways - firstly that as an "adviser", he is reportedly keeping the same influence he wielded as non-executive chairman (surely not in the detail or indeed spirit of the code), and more significantly, that a large, well connected company couldn't find it's way around the code (not reported, but I suspect this would be due to the number of other directorships this gentleman holds) - this surely shows that the Central Bank will be taking no prisoners on the board composition front. Well done!