Guy Carpenter briefing - succeeding under Solvency II

Nice all round document from the guys at Guy Carpenter on Solvency II, which touches (naturally) on impacts on the reinsurance industry, but also covers broad trends across the insurance industry, particularly in the world of cost-effective/capital lite risk mitigants. The following aspects stand out;

• Benefits of transparency and security felt to be outweighed by the challenges of Solvency II
• Nicely merges the added cost of compliance for reinsurers with the additional business which will be generated by market demand for reinsurance as mitigant.
• They feel Solvency II will help with consistent analysis of reinsurer strength
• ILS market again cited as one which benefits from Solvency II pressures on capital bases
• Stress the drawbacks of the current standard formula for cat risk, which pretty much forces carriers of non-EU cat risk to apply for internal model approval due to the capital charges as currently calibrated
• Strange stats on UK multinational Solvency II costs (£100m quoted as being set aside) - I am assuming this is non-Lloyds reinsurers only, as that barely covers the last 6 months for the Tier 1 companies.
• Section entitled "costs may be exacerbated by potential regulatory inefficiency" made me chuckle!
• COver the main mitigants available (and of course where their expertise can help!) such as reinsurance, ILS, hedging, diversification techniques and M&A
• Good material on the underwriting cycle and how the standard formula simplifications work contrary to it.

Irish Corporate Governance Code for captives

The Central Bank of Ireland pushed out the Corporate Governance Code for Captives this week, which is to all intents and purposes a lightly abridged version of the main event.

My particular interest was their approach to governance and risk appetite, and there is no let-up from the obligations on insurance undertakings in this regard.

• Full qualitative and quantitative documented Risk Appetite required - argued against by some in the industry on the basis of "natuire, scale and complexity"
• Material deviation from Risk Appetite to be reported CBoI within 5 days - regardless of whether parent company or captive manager identifies it
• "Where appropriate", the board may consider a risk committee
• Internal Audit function required, but may use Group resource, or indeed outsource

Handy FAQ document accompanied its release - unlike in the consultation for the main code (in which almost every suggestion was ignored save for tiering supervision between 'big' and 'little'), they have actually made a few tweaks in response to the industry, which is very healthy. They have increased the transitional period by an extra 3 months, dropped the requirement for a deputy chairman, and permitted non-directors to aid in the development of captive strategy.

I am by no means an expert in the area, but they seem like proportional, tailored solutions to retaining a presence in this market, and the Central Bank ought to be applauded for the effort, even if judging by the number of "no's" in the consultation, the industry wanted more!

Equivalence, captives and Solvency II - different strokes...

A subject close to my heart as a Manxman, I keep an eye on equivalence-related material, and this has been a relatively busy week. Guernsey have had a nice soiree in London to emphatically support their captive industry by confirming there would be no Solvency II equivalence sought.

For a captive-heavy country this makes sense - Ireland (who like a bit of captive themselves) have been prominent in catering for some element of proportionality at national level, and at a Solvency II presentation in the Isle of Man (where we are also partial to captives) in November 2010, the locals were equally vociferous on the problems it could cause them, so were delighted to hear that equivalence was not on the agenda.

This contrasts to the Bermudans, who are seemingly happy enough to trod the path to equivalence as early as possible. However, there seems to be a desire for a specific carve-out to put some meat on the bones of the proportionality concept which, at this juncture, is most certainly not a given.

Four captive-loving islands, four different approaches - whoever's approach is ultimately victorious, I hope it is for the right reasons.

Guy Carpenter briefing - jumped the gun here guys?

I was quite alarmed to read this document from the Guy Carpenter crew on Reinsurance and Counterparty risk thoughts under Solvency II.

In particular, they are assuming the transitionals will actually materialise and be applied at their (currently draft) stated limits (bottom of p2) - "Allowed up to 10 years to fully implement areas of Solvency II such as the fair valuation of assets and liabilities"!

I still think I must be reading this wrong, as that would be a hideous and, according to the EIOPA Chair, utterly inaccurate way to interpret the purpose of the transitionals.

They do however give a nod towards the obvious regulatory shortages, as well as an intriguing piece about a conference call with the French regulator about the potential of a "trial year" with parallel operation of Sol I and II