Solvency II Industry Forum in Ireland - Clint and Chocolate

Having treated the speech by EIOPA's Chair as the main course a few days ago, I'd better take a look at the hors d'ouevres and pudding. At the CBoI's industry event in late April, a couple of their biggest hitters delivered speeches of their own, with a similar tone to the PRA's effort in October (i.e. a considered yet firm rollicking).


Solvency II Marathon
- no Snickering...

Sylvia Cronin's speech, in which she referred to Solvency II as the "Marathon of Marathons", shone some light on how Ireland plc has dealt with ORSA during the preparatory phase. If you remember, the CBoI kindly provided ORSA templates for the entities lower down the PRISM spectrum, which I felt at the time was fully justifiable, and a tactic other NSAs should have adopted.

It wouldn't appear that the industry has performed exceptionally in their 2014 efforts, with Ms Cronin drawing attention to the following flaws in execution

• Variances in ORSA Report content between firms in similar sectors  "cause for concern" - a slightly worrying comment, given that some firms will be over-elaborating with content with the help of their friendly consultancy firm.
• Boards were aggressively called out on the "ownership" front. If your Boards have been ambivalent to-date with regards to participation in the ORSA process, they will seemingly get a hard time from now on.
• ORSA Process "...as important as the document itself" - music to my ears, and still a surprisingly difficult concept to convey
• The "so called use test" is referenced around ORSA, and not in the context of internal model applicants - no idea what that is about, so will assume it was a clumsy turn of phrase, rather than a new element of legislation
• Stress testing seen to be "too benign", with firms ignoring key risks and hard-to-quantify risks. Given that the UK firms received similar feedback on their 2014 ORSA stress testing efforts, it doesn't appear to be a country-specific failing.
• 'Local' (i.e. Irish) ORSAs which filter into wider Group ORSAs have not been adapted to fit the business model of the Irish entity. Good issue to pull firms up on, if they are relying Head Office to provide them with process and reports in template format 
• Business plan and forward looking time horizons not considered plausible, possibly a by-product of the lack of Board involvement in the ORSA Process

On the Pillar 3 front, she noted the following

• Pillar 3 is now a "cause for concern" - decisions by firms on architecture and expenditure "now overdue".
• Only half of High or Medium PRISM firms have participated in external user testing on Pillar 3. This still feels proportionally more than the PRA have tested out, though it is still viewed as a negative by the Bank.

"Problematic Applicant"?

Cyril Roux on the other hand wanted to reflect on "the good the bad and the ugly of Solvency II" in his address. While most executives paying for Solvency II programmes in EU insurance entities would suggest that "A Few Dollars More" is a more apt Clint Eastwood hook, he took a more macro view during which he;

• Patted the Irish regulator for its "good work" putting the house back in order after the laissez-faire approach at the start of this century. 
• Also reiterated that Pillar 3 preparations are light in the country, urging firms to "...devote the resources necessary"
• Dwelled heavily on the subjects of investment risk appetite and prudent person principle
• Pointed at "problematic applicants" who can now seek approvals to do business in the EU regardless of the supervisor's thoughts about their business models
• Called Solvency II's quantitative requirements "ill conceived" and "overboard" and "clearly too complex"
• Commented that SCR is "unlikely, unreliable tool to manage capital" - "...certainly the supervisor will not be using it for more than its worth".
• Gave short shrift to the abolition of prudential reserving under Solvency II, and indeed Bernadino referred glowingly to the Irish approach to reserving governance (presumably to counteract this grievance?) in his keynote speech.

A lot to be taken from these speeches if you have any dealings with Irish insurers, and with the clock ticking, I can't imagine there will be better steers than these during the preparatory phase.

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!

FSA Speech - Adams at Insurance Day Summit on Internal Model Progress (or lack of...)

Another day, another bum-kicking for the IMAP candidate firms, who have been the recipients of some public words of 'encouragement' from the FSA's Julian Adams in a speech to the Insurance Day Summit yesterday, coupled with a "Dear Firm" letter which went to all internal model applicants this week.

The same themes which have pitched up in recent presentations (here and here for example) are still for all to see - model change, model scope, validation and expert judgement/rationale all feature heavily in the speech - but perhaps the elaboration on both assumption/dependency setting and documenting and Use Test embedding are breakout features from those already tabled as being insufficient.

Useful for those outside of the UK to see exactly what is twisting the FSA's tail at the moment, while for all you UK readers, the letter is clearly a laundry list which will require immediate attention and prioritisation in your work plans. Good luck...

FSA and Solvency II - Adams's speech at City and Financial Conference, London

Just in case any of you UK guys working on IMAP are slacking off, a pretty unequivocal rallying call was delivered by Julian Adams late last week in London, letting the industry know in no uncertain terms that the business end of IMAP starts, well, yesterday!
The double thrust of the speech was to cover both the planned "twin peaks" model of UK regulation due to be phased in over the next year or so, as well as implementation of Solvency II. There is a genuinely aggressive tone in the wording, which betrays a certain impatience with what the guys at Canary Wharf have seen to date in Self Assessment Templates and pre-application activity. I extracted the following from it;

• Highlighting that prudential and conduct issues will be dealt with by separate peaks, allowing a more focused approach.
• A PRA agenda which seems to tread on old ground (assessing the vulnerability of business models, and whether they have a run-off plan in place). The main shift is perhaps a heavier focus on that plan's viability during a crisis, learning one hopes from the real-time experiences of the last 5 years.
• A complimentary, but very unsubtle onus on the subject of reverse stress testing, or "what would break the company" which, bearing in mind the relatively light materials available on the topic from the FSA (a few pointers in here being the most recent release on p2), would suggest firms may need to look elsewhere to bolster their RST approach (TW for example have a decent piece here).
• A very surprising revelation that the 'appropriateness' of the Standard Formula to firms who have elected against internal modelling is essentially a 2013 piece of work - what does that mean for anyone who is found to be using it 'inappropriately', bearing in mind the proximity of implementation (are we to understand that this is a lesser crime than having a stab at modelling and coming up short on the documentation front)?
• "Competence and quality" of senior management will be scrutinised from a system of governance perspective - I like this, on the premise that it would be relatively easy to build a technically compliant structure and populate it with unsufficiently trained/briefed staff. Their bullet point list of what they will be asking around (focused on quality of MI provided, understanding of reverse stresses, quantification of risks in risk appetite frameworks, and availability of management actions, modelled and non-modelled, under duress) should be put in front of your nearest directors tomorrow!
• A definition (of sorts) of proportionality as "the amount of work we expect firms to do to demonstrate a requirement has been met", though adding a vice versa to cover how much time they will devote to assessing it.
• No in-depth reviews of SATs scheduled, nor do they expect a piece of evidence for each one of the 300 model approval requirements (god forbid this turns a bit tick-boxy for the sake of administrative convenience!)
• Making "no apologies" for disagreeing with applicants' own assessments of the quality of their submission paperwork, while suggesting there is a grading criteria already in place (adequate|comprehensive|complete) - not publishing the more critical end of that spectrum it would appear!
• Note that the interaction of component parts of models, as well as correlation/diversification and extreme events in the tail, will receive more attention.
• "Much higher degree of feedback than has been the case to date" should be expected by the IMAP firms in near future, with the FSA being "much clearer on [their] view of progress", and potentially "ceasing to work with you and exiting you from the process" - this is seemingly driven off the back of the pre-application work to date and some peer group review work leaving them in a spot where they can separate the wheat from the chaff.
• Note that the transition between pre-application to submission is where they will make a "substantive decision as to a firm's progress" - explains the Lloyd's position I guess, though I'm not certain a less substantial body may have been reprieved judging by the tone of this speech.
• A final flourish around what has been witnessed to date, where they have specifically singled out the following areas of tardiness as signs of a ropey application: falling behind one's own implementation plans; validation workstreams being "significantly behind" and with narrow scopes; expert judgements not being properly documented or challenged; supporting documentation generally weak, and model change policies which have yet to conquer the challenge of "major/minor" definitions, let alone what a "qualitative major change" may consist of. I would add that these themes were covered at the industry briefing at the end of February (from p9), just not as definitively.

They also note that the scheduled Technical Provisions work noted in an earlier speech by Mr Adams is likely to be something of a fillip to the consulting actuarial profession, and any firm in IMAP will need to have been reviewed in this respect before receiving approval.

Well don't just stand there, get cracking!

FSA Speech on the Solvency II Policy Landscape - Omnibus-man's holiday?

Not sure what the delay was on this speech, delivered at the FSA Industry Briefing day on the 27th Feb was (more likely an RSS feed fault rather than regulatory inertia!), from being published. Some useful summarising of the legislative impasse for anyone who needs Board briefing material.

Of more interest was this particular quote regarding Omnibus II's legislative path;

"I would not like to commit as to whether or not I expect that to happen before the summer recess of the Parliament but certainly once we have the voted-upon Parliament text we will have a clearer idea as to how far away the different parties are from reaching a consensus"

I can't be miles away by suggesting that if this isn't through by July, we have a problem! That being the case, does the lack of commitment speak volumes as to the differences between the competing interests in the trialogues?

FSA and Solvency II - speech from Julian Adams today for IMAP firms

Hot off the press, Julian Adams spoke to the great and good today (i.e. I wasn't there!) regarding those who are in IMAP, and dropped the following hot chat:

• "What [any further delay off the back of March's ECON vote] might do instead is merely compress the period between transposition and implementation"
• "...for the time being we remain of the view that we must plan for a 2014 implementation"
• "...it is vitally important that you stick to the submission slots we have already agreed with you"
• "By sticking to your submission slot you will also be considered alongside a peer group of firms" - this is the first I have heard of submission slots being allocated to groups of 'peer' companies, assuming this was not a figure of speech
• "...we are basing our approach to the next phase [of IMAP] on the stable draft text of the Level 2 material which was circulated by the Commission in November" - which is nice if everyone else had access to it [leaks notwithstanding!]
• "[we] will be publishing later today an updated version of the self assessment template based on this" - you may be able to sers toi at this location (ZIP file) 
• "We appreciate that this change will require some additional work for firms" - nicely played down!
• "...the materials we are launching today do not take any account of the Level three text", but promises to do more once the L3's stabilise
• On technical provisions - "Our view is that we would not be able to approve a model under Solvency II without having reasonable assurance as to the accuracy of the underlying balance sheet, and we will therefore be undertaking a review of the technical provisions of IMAP firms as part of our existing activity with the firm before and after its submission slot"
• "...it is unlikely that we will review the calculation of technical provisions until a point in 2013", while the approach used will be assessed earlier, but "which may include the use of external review"
• "It will be necessary for us to gain assurance that all [300+ criteria in the Directive text] of these requirements have been met before we can decide to grant approval for a model’s use

That may take a while to digest, so let's see what tomorrow brings...

ABI Conference - FSA's Adams speaks on Internal Model Applications

The FSA have just published Julian Adams' speech on Internal Models from yesterday at the ABI Conference.

Worth noting;

On the potential to replace ICA with SCR for 2013 (which Lloyds et al have been lobbying hard on);

“What we are in a position to do, however, is to invite firms to consider how they think their work on their Solvency II model could be used to meet those current rules, thereby removing the need for parallel running of two different models”

“As the current requirements will remain in force, it will be incumbent on firms to satisfy themselves that the Solvency II model, alongside their wider system of risk management and governance, meets the existing requirements in our Handbook. By approaching the issue in this way, we intend to avoid the need for firms to apply for a complicated series of waivers or to seek specific permission from us to make the transition early. We believe this is both proportionate and appropriate, given the amount of review work we will have done with firms following submission of their Solvency II model application to us”

On the basis to be used for internal model applications (the original guidance, or EIOPA's L2 on Tests and Standards for internal model approval)

“It is clear that the Level 2 text – and, in due course, the Level 3 text which will supplement it – is more appropriate to use as a matter of principle, since this sets out much more clearly the basis on which we are expected to assess firms’ applications, and it is the standard against which you and we will ultimately be judged”

“On balance, we feel that basing our application approach on the Level 2 text is the most sensible way to proceed, and we propose to do this is by cross-referencing the Level 2 text in the guidance materials we will be making available to firms in February of next year”

“I am aware that this will mean that some firms may feel that their efforts in following the Contents of Application approach will have been wasted, and I would like to reassure you that this is not the case. We will expect you to submit documentary evidence that you meet the requirements set out in the Directive, and completion of the Contents of Application is likely to go a long way towards demonstrating compliance with the Level 2 requirements, but it is those Level 2 requirements which will be definitive”

Looks like anyone who is going to get pre-approval to use their model to meet existing FSA handbook requirements is going to have to jump through a lot of hoops, and even then may fall short

Solvency II and CRO jobs - speech from president elect of the Institute and Faculty of Actuaries

Some very intriguing words spoken by the incoming president of the IFA regarding the challenges and opportunities for the Actuarial profession in Asia (summarised at the Actuary Magazine). As you know I keep a watching brief on the likely collision at C-suite level between the Risk and Actuarial professions, and so I pulled the following out from the "opportunities" themes in Mr Scott's speech. They were;

• The skills of actuaries helped keep the insurance industry out of the headlines during the "enormous economic storms" (pulling a rabbit out of an empty hat for an encore I guess...)
• Acknowledges that Solvency II does not require an actuarial function to be run by an actuary
• "...Many [actuaries] will expect to be able to find employment in the risk function
• Lines up a few soft skills which will need to be enhanced in this regard (improved comms and decision making understanding, as well as "becoming more risk focused")
• Skills from the CERA qualification "should open up a whole range of career opportunities for those who take up the challenge"
• Looking to define (with CERA) "the distinctive contribution that actuaries provide as practical, mathematically skilled, rigorous and regulated risk professionals"

I guess it is the last statement that would perhaps put one or two IRM/FERMA/GARP noses out of joint* - is the Risk profession itself so disregarded that the Actuarial profession can usurp the established offerings with CERA?

* I say this somewhat reluctantly as someone who, thanks to a rugby players errant knee, literally has his nose out of joint currently!

Guest Post on Solvency II Wire - Expansion on Matthew Elderfield Speech

I have just had a guest post published on Gideon Benari's Solvency II Wire website, expanding on my earlier post regarding Matthew Elderfield's speech a fortnight ago. Click through to enjoy it, I won't replicate it here, least of all because it looks better on Solvency II Wire!

While you are there, I strongly recommend signing up for email and/or RSS feed from Gideon's site, which covers a much broader range of topics than I ever could.