InsuranceERM round table on Solvency II and Capital Management

Nice freebie from the InsuranceERM guys, covering a CRO/ERM Head roundtable touching on economic capital, internal models and Solvency II - the first of this double header is here. With representation from from all sides and sizes of the insurance industry spectrum, the views tabled should be useful for most practitioners in this space, even if some of it is not exactly new news.

They are relatively benign on controversial areas such as industry cost, and even positive when talking of Solvency II having provided an incentive to improve both risk and model governance in the here-and-now, regardless of the necessity from a pure compliance perspective.

Between the two, the following noteworthy views were tabled;

On Solvency II

• "...has to be considered now if, not necessarily when"
• "...from a non-life risk and capital perspective, Solvency II just does not work" - citing reserve risk specifically as inherently flawed 
• The UK's ICA+ regime "...pushes [Solvency II] back towards a more sensible view of capital"

On Internal Models

• "The main issue with the models is spurious accuracy and detail masking big assumptions, which is possibly a systemic risk"
• Regulators in some European countries think internal models are "unnecessarily complicated"
• In response to the suggestion that internal modellers could be "gaming the system" to reduce capital requirements regardless of risk profile, Aviva's ERM head noted that the FSA have identified through their own research that the ICA regime appeared to have done just that back in 2004
• It is "...inevitable that [the Bank of England wearing their PRA hat] is going to take a far more sceptical view of internal models", particularly where Internal Model SCR is lower than Standard Formula SCR
• On Use Test, "...potentially 3 or 4 years before the model is truly bedded in"

On Ratings Agencies and their capital requirements to maintain target ratings

• "...many people, especially in Bermuda, see ratings agencies as de facto regulators"
• "...may take internal models less seriously in the short term" off the back of Solvency II
• Ratings agencies capital requirements are "the worst common denominator" alongside SF SCR and IM SCR

I've personally been relatively well shielded from the extent of the discontent on the non-life side, but judging by the confidence intervals used by high profile insurers as their EC targets (frequently observed at 99.9-something/A or AA rating space), it's no surprise that ratings agency requirements are in many cases paramount - that business could potentially be dragging three or four capital measures to their respective Boards for the next 3 years (agency capital, IM SCR, ICA and SF SCR) is a grim prospect.

Perhaps of more immediate concern is the view that the FSA/PRA have the potential to be more cantankerous around internal models once they move into their new office - something to look forward to in 2013?

Deloitte with more on the US-of-ORSA

Billed as a "regulatory guidepost to the future", Deloitte in the States have published their thoughts on ORSA developments, following on from recent activity in the space, most notably the NAIC's adoption of the RMORSA Act a few weeks back.

Hard to tell whether Deloitte have borrowed much from their European counterparts, who ponied up with the EIOPA-compliant equivalent document last week, but both documents ultimately point at the same end goal, namely getting the ORSA Process and ORSA Report content right.

Confidently declaring the first regulatory filing of an ORSA Report to be precisely, errr, "Sometime in 2015", the stateside plans are anchored more to ERM and, I guess by association, ratings agency implications. The document does help identify a couple elements which, with the Solvency II hat on, are easy to forget;

• IAIS ICP 16 is bringing ORSA to the table of all signatories at some future juncture (which means I may get a job back home one day!)
• Existing techniques for monitoring solvency, even in a jurisdiction of this size, are seemingly past their sell-by-date in terms of both content and turnaround time (p2) - holds true for many of the Solvency II-covered countries as well (plenty on that topic in here).

The rest of the document draws out the preparatory work which firms should be undertaking, despite the relative lack of certainty at this point in time, such as increasing real-time data availability and changes in reporting, management and governance structures. It also touches on suggested content, process implementation (more like formalisation from experience), and a checklist of operational considerations, resourcing (or even briefing/coaching) being highest priority in my mind in 2012.

Good document for you statesiders to pass round your friendly non-executive directors anyway, as an early socialising of the concept in this format goes a long way when you have tiny windows to educate them on the topic over the next 3 years - looks like you will be filing ORSA Reports before we are!

Interesting footnote is that AIG have been labelled as a potential SIFI today - ORSA may be 5 years too late to have saved the behemoth it once was, but let's hope it can help its slimmed down current-day version.