Morgan Stanley and Oliver Wyman - Solvency II "The Long and Winding Road"

I came across a very high quality thought paper from the double team of Morgan Stanley and Oliver Wyman (you will need to sign up, but nothing intrusive), regarding the expected impact of Solvency II implementation on the industry as a whole, looking from an investors perspective in the main.

At 60 pages, it touches on just about everything you might want for Board/Exec and even personal briefing. I particularly liked:

• Unlikely that Solvency II will become a global blueprint for insurance regulation
• Cost of capital is likely to increase for insurers
• Winners and losers will ultimately take longer to emerge, due to grandfathering having less of an effect on strategies in medium term
• Non Life and Reinsurers are likely to be amongst the winners, with traditional life companies losing out.
• Suggesting product pressures will lead to more back-book consolidators and unit-linke/VA products
• The "weak insurers" will take on more reinsurance
• Matching premiums may encourage investment in illiquid classes
• More pragmatism expected around equivalence (for our US pals)
• Nice piece on p6 on attractiveness of different asset allocations
• "...in some jurisdictions the model approval process is proving to be very cumbersome" - Well spotted Sherlock!
• Nice table of Key Debates on p8, and throrough coverage of each of those debates follows, with liability measurement given a lot of airtime in particular (for obvious reasons)
• Good section on the Euro-cracy side of things p28-33, covering Omnibus II, prospective calendars etc
• Nice comment that, while sovereign debt risk may not necessarily be picked up in the regulations, Internal Models and ORSA would certainly be expected to reflect it. In addition, the phenomenon of "domestication" of balance sheets by EU insurers is also touched upon, along with the rationale (p36-37)
• Exploration of the potential for diversification benefits for insurance groups without the provision for Group support (p44-45)
• Decent section on Internal Model vs Standard Formula, and comment on how investors may struggle to compare like with like (p46-47)
• Expectation that local supervisory differences will continue despite increased co-operation required for Group supervision (highlighting IM approval as one particular area where the wheels may be greased better in some countries than others)

As for their choice of Beatles song in the document title, I would have personally gone with "When I'm 64" (which is when it feels like the trialogues will have finished!), or maybe "Help" (no explanation required!)...

KPMG - Solvency II and Insurance Groups thought paper

One for all you "groupies" out there, released by KPMG on how the group supervisory regime is likely to work out ('with lots of international bickering' was my immediate thought!).

I suspect anyone who is knee-deep in the minutiae of the matter may find this a touch specious, particularly around the transformational effects of Solvency II, but on the whole this is a decent introduction to the practical requirements for Groups over and above solo entities (p16 in particular) and remaining sticking points around the supervision of groups (Solvency II Balance Sheet issues on p28, group ORSA on p30, and restructuring options on p38).

AIRMIC and Cass Business School - Study of Major Risk Events

I blogged last week about a number of references at the AIRMIC 2011 conference regarding some research conducted by the Cass Business School. A sneak preview of this substantial piece of research on the origins, impact and implications of major risk events is available here (you may need to do a quick registration).

This is an excellet idea in principle, with a very astute summary in this document, so I cannot wait for the full research to come out in July. My take on this summary document was;

• 18 companies who experience "high profile corporate crises", but thankfully they have selected a range of crises, not just straight-up financial implosions (much better for reverse stress testing purposes)
• Talk of "severe, uninsurable" losses as the effect of the crises, which again will make for good reverse stress testing
• The seven "underlying" risks that they identify as being present across industries all seem fair, some more than others.
• That the risk profession is identified as being unable, through lack of experience, remit or courage, to intervene in the materialisation and occurrence of these 7 types of risk is a bold statement (bearing in mind who commissioned the research!) is also fair to varying degrees. It is not so much that the profession is not cognisant of them, more that one is generally not in a room full of strategists as an equal.
• Strong comment that many of the 7 underlying risks are "taboo", as tabling them as a risk professional is tantamount to questioning a director's professional competence.
• "Risk of self-deception" by not receiving this challenge from either an INED or a CRO-type
• Strange comment that Risk and Internal Audit would not be comfortable questioning strategy and leadership risks without further training/experience - personally, if it is in my remit, it gets done.
• Followed by a more conventional flag that questioning leadership can put careers at risk (true for Risk professionals, but not for internal audit surely.

Concluding points were;

1. Rethink risk analysis techniques to cover non-routine risk
2. Extend skills of profession to be able to analyse risk emerging from ethos/culture/strategy/behaviour
3. Change role and status of Risk to ensure open discussion at all levels, including board
4. Boards need to recognise importance of non-routine risks

Unsackable CRO and robust reverse stress testing should do most of that...