ORSA's Head? International Actuarial Association on ORSA Value

Unknown unknowns
- just say it one more time...

A rather verbose piece from the International Actuarial Association, or AAI if you are inclined comme ça, on Delivering Value From ORSA. Always worth a glance over these at this stage of proceedings, regardless of which side of the Atlantic you are currently rocking (with both Canada and the States keeping noisy on the topic in recent weeks).

As one might expect from a publication from an actuarial representative body (and one which aims to cover all IAIS bases, rather than the specificities of US/Canada/EU ORSA), it struggles for semblance once it needs to cover non-quant, and is therefore heavily flannelized.


The definition used by the IAA is:

ORSA provides a declaration of the company’s assessment of its position in terms of profit, risk and capital, both now and in the future, under different scenarios and relative to the company’s appetite to risk.

The purpose of the paper is to provide Board members with "insight into the value of the ORSA Process", which is a noble aim in itself, and a few nice touches can be found throughout, in particular:

• The word “profit” features on virtually every page, almost unheard of in the EIOPA Guideline world where being able to “enhance the management of the undertaking” is King. Heaven forbid anyone makes a quid or two out of it!
• The coverage of how insurance companies tend to profile risk is clean and rational (p3).
• The concept of mitigation through company policies, overseen by good governance structures, as opposed to either holding capital or purchasing mitigation, is also expressed with clarity.
• “A company’s risk appetite, once determined by management and approved by the board, can be treated as a budget”. Lovely concept, though it needs more flesh to provide the 'insight on ORSA Process value' that the paper is intended to.

A few contradictions emerge in the document;

• ORSA “needs to consider and be consistent with an insurance company’s business strategy” – does the process not need to as good as set it? Indeed, they go on to say on page 2 “The true value of ORSA can only be realized when ORSA becomes integral to management’s strategic decision making”!
• Does ORSA “help build/maintain risk awareness throughout the company” – it would be a struggle to say it could do that any further than the relevant staff which EIOPA ultimately allude to. 
• Concept of “Solvency Risk Profile” is borderline unintelligible (p3)
• Terminologically, the section on risk appetite and risk profile on p3 is heavily quant-based, and feels country miles away from similar materials published by the CRO Forum a few weeks back. Specifically, it talks of “acceptable levels” of solvency risk, “minimum and maximum bands”, and that in aggregate across risk categories “This band of acceptable risk is referred to as the risk appetite”. Given it doesn't appear to veer to far away from the FSB's take on Risk Appetite, perhaps this is more of a step forward than EIOPA's 2013 back pass to the AMSB on the matter (p59-60)
• That models used should be “subject to independent validation” – is it that important if you are not using your model for regulatory capital purposes (i.e. just for ORSA)?
• The residue of Rumsfeld, which I had hoped had been resigned to the Noughties dustbin, reappears on pages 7 & 8, specifically “A complete ORSA would include the assessment of unknown unknowns”. Pacino said it best in Godfather III…

Deloitte on 'regulatory uncertainty in Europe' - embedding a new modus operandi (?)

In a wonderful example of predicting the present, Deloitte have released a white paper (sign-up required) giving their take on regulatory uncertainty in the European insurance industry, and how the volume of new regulations (and their inability to land on time) is driving emerging best practices in the consideration of regulatory risk at Board level.

New Modus Operandi - alloy wheels optional?

Of course, it is always best to wait for such matters to emerge before proselytising, and the current cup of omni-postponed over-elaborate regulations is running over (Sol II, IFRS 4 Phase II, FATCA, etc), naturally causing difficulties for all those responsible for preparing for them, as well as the execs who take the topics into the boardroom every quarter, only to say "it's been delayed again, can I have more money"...

From my perspective, it was particularly interesting to see that proactivity is recommended regardless of nature/scale/complexity, bearing in mind the first time I spoke to a Board of Directors at a tiny insurer regarding Solvency II preparations was in 2009 - only consultants could comfortably suggest that an new executive-level role is established, and Board agenda time is regularly set aside, only to explain the latest delays in multi-jurisdictional regulations (I certainly know what my old CEO would have said to that!)

That aside, they suggest that two major problems need to be overcome; that few insurers have a single view of regulatory risk; and that regulatory insight is poorly represented in the strategic workings of insurers, both of which are easy to agree with purely on circumstantial evidence.

Whilst this frequently reads like a paper written to justify bringing consultants in to compensate for failing in risk and compliance professionals' armoury, Deloitte make the following noteworthy assertions/recommendations in it;

Trends

• That most insurers prefer to 'wait and see' rather than be 'first mover' when it comes to regulatory preparations - after the Solvency II experience, does that surprise anyone?
• That "...Deloitte's view is that regulation can be regarded as a 'structural' driver of the insurance industry"
• That "...Deloitte's considers a regulatory dividend can and should be sought", which is not necessarily my experience of consultancies when on site, who (presumably for legal reasons) prefer to promote a gold-plated complaince approach to regulation-driven projects.
• Cost of compliance is now materially diluting return on equity in EU insurers
• That Conduct Risk is likely to become high profile across Europe over a longer period of time than its current flavour of the month feel, thanks to IMD2/PRIPS/MIFID
• National regulators are increasingly impeding on day-to-day running - examples given (all of which have a whiff of IMAP requirements about them), include documentation improvements and influencing risk appetite/capital allocation work.

Costs and volume

• Regulation prep cost the European insurance industry €4.2-€4.7bn in 2012 - they go on to expand that to €8.1-€9.2bn over the last 3 years.
• UK industry will be subject to 29 new pieces of legislation of the next 5 years (surprisingly lower than the French at 35, and the Germans at 32!)
• That the "cost of doing nothing" while waiting for regulatory clarity may be significant - as significant as consultancy spend preparing for something which never arrives perhaps?
• That compliance functions are naturally struggling to cope with the current volume of initiatives

Solvency II-specific

• They extrapolate an estimated €550m cost of Solvency II compliance preparations in 2012 into a €1.5bn-€1.8bn 'top 40 insurers' number, and a €2.4-€2.9bn figure for the whole industry - feels a bit light, bearing in mind 'UK plc' must have done the best part of £1bn on Solvency II alone in 2012.
• They quote one strategy director as saying that "Solvency II is killing European M&A..." - p10

Their recommendations (from p19) are too woolly in aggregate to help a normal practitioner - they are probably targeted more towards programme directors and managers - but the recommendation  to establish a Regulatory Assessment and Response Executive with a suitable remit is a smart idea, even if from a practical perspective this might need to either be balled in with the responsibilities of an existing executive, or only be a mid/senior management role, in smaller companies. 

These recommendations also include the marvellous suggestion to "embed a new modus operandi" - an expression normally reserved for profilers of serial killers, and perhaps the hardest sell since Isle of Man beach holidays.

PS I apparently missed the memo where the oft-ridiculed speech of Donald Rumsfeld used to support war against Iraq became de rigeur in risk management/insurance white papers. If there is one "known known" in this world, it is that I will never use that expression on the job!

EIOPA Preparatory Guidance - ORSA (or 'forward looking assessment of risks')

Forward-looking assessment of the undertakings own risks (based on ORSA principles) (plus explanatory text)

The ORSA preparatory guidelines* are not a massive burden for anyone busy rolling eggs down hills at the moment, coming in at 34 pages containing 25 guidelines, as well as 29 pages of explanatory text. In this instance, it is probably disappointing to any underprepared supervisors and insurers in that they may have preferred more!

More pointedly, the materials add little to what was already in existence from EIOPA in July 2012, and certainly will required little in the way of adaption in the UK's instance, who are already in a similar headspace and have been advising accordingly.

Of course the world and her husband have piped up with their opinion on what ORSA should cover and how it should be administered and documented (this post has a decent sweep at capturing most of them), so opinion on this matter is something we are not short on.

For me the headline points are:

• ORSAs (well, 'overall solvency needs assessments', but let's be serious!) expected from 2014
• Internal Models should be used by anyone in pre-application
• Likely that most standard formula firms will have to qualitatively assess deviations between SF and their own Risk Profile at this time
• Expectation of an internal ORSA report and a ORSA supervisory report
• Records of the assessment expected to be documented and kept which must be "appropriate" - no prescription of what that means
• ORSAs to be performed at least annually

The following points are either new, or worthy of reiteration for anyone whose preparations on this front are less than certain - for ease of reference I have used 'ORSA' where EIOPA use 'forward looking assessment of risk', and as with the other preparatory guidance papers I have looked at, I will assume there will be blanket application as written, with no dissent from industry or NCAs:

Guideline 3

• Overall Solvency Needs assessments will be expected from 2014 (i.e compliance with Article 45.1)
• Minimum of 80% of the market must also assess whether they would comply with the Articles 45 (b) and (c) from 2014 - regardless of any Pillar 1 uncertainty.
• Internal Models expected to be used in ORSAs if a company is in model approval pre-application
• IF the standard formula is 'provided' by 2014, expectation that SF firms will assess deviation between the SF assumptions and their own Risk Profile - this excludes anyone outside of the magic 80% catchment figure mentioned above.

Guideline 6 - Documentation generated by ORSAs must include:

• An ORSA Policy
• An ORSA Record
• An Internal ORSA Report
• AN ORSA Supervisory Report

Guideline 7 - The ORSA Policy must include

• Description of component ORSA processes and procedures
• Consideration of the linkages between Risk Profile, Risk Tolerances and Overall Solvency Needs (OSN)

As well as information on

• frequency on stress tests, scenario analyses and reverse stress tests; 
• data quality standards; and 
• the frequency of the assessment, justified in relation to Risk Profile, volatility of OSN relative to capital position, timing (from calendar perspective I guess) and circumstances for ad-hoc assessments

Guideline 8 - ORSA Record

• Firms expected to "appropriately evidence" the assessment - no prescription as to what that means (logs, working papers, meeting minutes, e-mails)

Guideline 9 - Internal ORSA Report

• AMSB must communicate results to "all relevant staff" post-approval, which includes the ORSA results and conclusions

Guideline 10 - ORSA Supervisory Report

• 2 weeks after concluding ORSA, ORSA supervisory report must be submitted, which must include;
• Quantitative and qualitative results, and conclusions drawn
• Methods and main assumptions
• Comparison between Own Funds, SCR and OSN

Guideline 11

• Must quantitatively estimate the impact of different valuation bases (if used) when assessing OSN

Guideline 12

• OSN must be quantified, supplemented by a qualitative description of all material risks
• Expectation that these items are all stress/scenario tested

Guideline 17 - ORSA output to be used at least for;

• Capital Management
• Business Planning
• Product Development

Guideline 18

• ORSA to be performed at least annually

* So let's end with something fundamental, EIOPA - it is NOT useful to replace 'ORSA', as an acronym or indeed in full, with the expression "Forward-looking assessment of risk (based on ORSA principles)" 5 years down the road - I'm sure there is a rationale, just as sure as I am not going to like it (even the GCAE agree with me, going with 'ORSA-like')!

Deloitte and Forbes - the new world of Risk Management

This Deloitte/Forbes paper is sub-titled "Aftershock", which makes anyone of my age immediately recoil at the though of the world's most repulsive bar shooter - it is in fact a pretty decent stab at running on from the kinds of financial services-specific research which came off the back of the 2006-2008 mega-turbulence (these were mostly titled "We've broken the World, what are we going to do" :-( )

At 192 respondents it is a decent sample size, though is US-centric and non-Finance organisations, so not a great all-rounder for you global readers. However, the central message that risk management programmes and frameworks remain in a state of flux (hence the aftershock motif) is a worrying one when one examines the stats behind it:

• 91% are reorganising and reprioritising approach to risk management in next 3 years, citing continued market volatility.
• Only 37% had plans to provide additional training in that respect
• Centralisation cited as more efficent way of bubbling risks to the top - interested to know if that is everyone's experience?
• Around 50% retain primary responsibility for the "risk management approach" with CEO or CFO, with the CRO in third at 20% - should we be expecting that percentage to be moving up or down at this juncture (in particular, does a CRO need a seat at the top table to be responsible for ERM approach?).
• Example cited of ERM being managed in the corporate strategy department, which I thought was an interesting development.
• Biggest challenges included; 26% stating that incentives are not rewarding 'risk based decisions'; 22% struggling with the misalignment of the business operating model and the ERM model, and 23% suffering a lack of information to make risk based decisions. These three (there are of course more in the list!) struck me as common issues when preparing for Solvency II, so handy stats in that respect.
• Staggeringly, Social Media is equal fourth on the list of "most important risk sources over the next 5 years" - equal with Financial Risk! Not to underplay the emergence of social media and its multiplier effect on reputational risk, but seriously?
• Most "risk types" are monitored either periodically or continuously, though strategic and reputational risks seem to be most likely to be measured on an ad-hoc basis (something which you ORSA consultants out there will sympathise with!)
   

I say "worrying" at the top here from a professional perspective - is it reasonable after events as seismic as those experienced in the last 5 years for the risk profession to still be sliding in a mass of new parts into the ERM machine, as opposed to tinkering under the bonnet?

Bearing in mind this doesn't include the financial services industry, maybe the timelag is rational, as the other industries have had plenty of time to learn what not to do!

ORSA guidance from Accenture - good, bad and ugly?

In the same week as the FSA told the industry to "go fish" for additional guidance around ORSA, the guys at Accenture have pushed out a bite-sized piece on extracting added value (i.e. above and beyond "compliance") from one's ORSA processes.

There are clearly a number of consultancies who fancy themselves in this space (click the ORSA link in the tag cloud at the bottom of this webpage for my review history of them), so having cast an eye over it, I noted the following;

• Leads with the rather hackneyed soundbite around ORSA helping insurers "extract additional value" from what is ostensibly a compliance investment
• Note that "...many companies have just begun to implement their ORSA projects, or are still considering how to do so" - if that's the case, it is good for my business, but it sounds like a lazy justification for publishing this pamphlet (how can anyone only be as far as "considering" in mid 2012?)
• Recommend that operational specifications should derive from the C-suite - easier said than done, but I totally agree if one wants to extract value from the ORSA process rather than tick the box.
• Suggest that ORSA "...may become a source of competitive advantage" - clearly the assessment does not do this, rather the consideration of it by the AMSB and the application of management actions off the back of it.

They then go on to split the doc into sections as below;

Compliance requirements

• Neat enough as a beginner's guide to ORSA compliance 101, though they introduce a rather naughty term in "ORSA Capital" as the amount over and above SCR - the concept of ORSA is difficult enough to transpose into BAU for smaller organisations who perhaps haven't had to consider economic capital measures before, so this term is one I would consign to the "nice try" bin.
• Some nice schematics in the section as well around the process side of ORSA.

Creating an operating model

• Suggest that preliminary input should be obtained from the C-suite to create one's target operating model. As above, I agree with their participation in the design phase, but with BAU pressures around ICA/FCR etc, it should be weighted much more towards approval of recommended models, rather than dialogue, as there simply isn't enough time when dual running.
• Recommend designing the process with people already familiar with existing performance management framework, which is good advice.
• Also allude to the significant crossover synergies between Pillar 3 requirements (as documented in the draft implementing measures) and ORSA as it stands.

Develop risk-adjusted performance management

• Relatively bland section which won't tell you anything new on the topic if you are building/refining an ORSA process off the back of a reasonable ERM Framework

Make the most of these releases - you can be sure that your friendly national regulator will be!

PS - In case you viewed this on Friday looking rather bare, I was supposed to save it as a draft, and accidentally published it!

Axa results and economic capital measures - indication of things to come?

So results season kicked off today with Axa putting the basic full year out (got to love European efficiency on these matters!). This was followed by the EEV Report and Analyst Presentation.

Of particular interest is of course the Solvency I vs Economic Capital measures which most insurers are now kind enough to table up, and the figures were pretty stark. On the Solvency I measure they were a touch up year-on-year, while their Economic Capital measure was massively down (numbers on first page, rationale on third).

Detail on their Economic Capital (and indeed their entire Capital Management Strategy) was fired out in 2010 as part of an investor day. They appear to be using the 1-in-200 stress as their EC measure, which would suggest that (model approval notwithstanding) they have received a 'beasting' on their SCR coverage over 2011.

I blogged in August last year about an FT article which opined on how companies may approach economic capital targets under Solvency II (125-150% of SCR in UK, and perhaps 170% in mainland Europe was their conclusion, for what its worth). While that would have put Generali fractionally out at the time, most of the other big boys were comfortably covered using that yardstick...until now!

The rationale for the drop presented goes to adverse experience on interest rates and spreads "net of changes to the liquidity premium". A smarter man that me will probably be able to read between the lines on that one to find where they are exposed in a way that leads to such a swing in EC, but if one of the major lobbyists is experiencing this volatility, what chance the rest of us?

NB - Generali punted this round today in order to contextualise the recent downgrading activity of insurers by the ratings agencies - surprising to see a company lump all of their competitors onto a press release from their own offices, but I guess there is safety in numbers! Few comments on Solvency on it, but mostly seems to be about negative outlooks on Eurozone default possibilities, new business and economic conditions etc

Active Risk - 'What makes a great Risk Manager' results...

I participated in a survey a little while back about "what makes a great risk manager" which involved looking at personality traits, and the guys at Active Risk posted the results today.

While I was hoping the results would look like my CV (!), there were some interesting findings from the 200-ish sample;

•  Categorises risk managers into Traditionalists (from the 'department who likes to say no'!), Drivers (who are pragmatic and impatient) and Evangelists (who have the CRO style, without necessarily the substance. The split of respondents was 60/10/30 respectively. The obvious thought for me was that this was the perfect ratio of the three skillsets to arrive at a quality Chief Risk Officer, and the conclusions touch on this throughout.
• Suggests traditionalists may be holding their companies back due to presentational shortcomings (probably fair), while Drivers should understand their impatience can come over as aggression and Evangelists should wind back on what I like to call 'risk rabbit' (where throwing terminology left and right leaves the consumer disinterested or confused.

Should certainly be of interest to my friends at Clarity Resourcing, as these kinds of considerations cross over most industries when fishing for risk talent - I hasten to add that I can't immediately recall what I was classed as!

Late post-script - found my personalised report, and I was down as a "reactive extrovert" - I'll settle for that!

Chief Risk Officer activity

LV+ got in on the CRO staffing activity in advance of Solvency II this week, pitching a finance-oriented executive into the role, with a remit of embedding an ERM Framework and managing Solvency II. In line with previous posts, I'm not sure who to score this one to (probably not the Risk team), but important to note the reporting line still going into the CEO.

On topic, but bank rather than insurer as the example, the Reputability Blog picked up on a slightly different organisational problem that I suspect will become more prevalent over the next couple of years - namely that with the maturity of the CRO role comes an ambition to be more than the CEO's "angel on the shoulder".

Larger financial services organisations may find their CROs develop something of a wanderlust if they don't expect a reasonable shot at the top job will be forthcoming (indeed an earlier blog post highlighted that a company Stateside is using the role as CEO training). I would have thought this is even more of a strategic issue for insurers, where existing CRO/de-facto CROs will be critical to Solvency II delivery plans, and will of course have extensive knowledge of their respective institutions' economic and regulatory capital weaknesses after 2+ years of project graft!

Solvency II and asset allocation - mixed messages

There seems to have been a suite of materials on Solvency II and predicted asset allocation impacts recently, from the great and good (Gideon on the Solvency II Wire has kept on top of these, and I took a look at the Oliver Wyman/IIF document last week - much of the materials pointed towards a drive towards short term EU government debt (capital-free, and no duration penalties) ahead of where an insurer may traditionally have invested for policyholder benefit, corporate (and specifically bank) debt.

There were some left-of-centre views that I spotted, one from a representative of Markit opining that, in the current climate, government debt was now being viewed as riskier than Western European corporate debt. Another covered the potential for Insurance Linked Securities demand to increase under Solvency II, thus necessitating more issuance to be EU-based (as opposed to traditional homes Bermuda or Cayman). The third came from Union Banque Privee, with research cited in the FT that, with appropriate asset selection (cheeky derivatives used as examples), asset arbitrage will allow insurers to obtain exposure and performance without necessarily holding onerous amounts of capital as prescribed under Solvency II.

The first then indicates that the weightings may need a genuine re-examination with the Eurozone debt issues as the backdrop, while the other two suggest there are investment options to counter the new requirements. Is the IIF research therefore much ado about nothing, or perhaps is the mighty banking lobby having one last "flex of the guns" before its emasculation over the next few years?

ERM benchmarking - Accenture - "High-performance insurer of the future"

A decent effort from the guys at Accenture on identifying and explaining the kinds of strategies which in their mind will separate the insurance men from the boys in future.

They have researched 70 companies (mix of single line, multi line and multinational companies) and come out with;

• A suite of KRIs to measure and benchmark corporate performance
• 5 Key attributes of "high performance" insurers; Customer-centric distribution, responsiveness to market, operational excellence, pursuit of cost reduction and focus on risk management
• 5 forces for change in the industry; growth shift to emerging markets, increases in technological development, escalation of risk and regulation, changes in consumer behaviour and changes in the competitive ladscape
• 6 distinct business models that should flourish

Very useful for benchmarking, KRI and ORSA purposes, particularly if you are working for a "multi" - the future growth aspects are likely to be hitting a strategic plan near you in the next couple of years...

FTSE Insurers - last interim result (I think!) and Solvency II progress

Resolution/Friends Life, the darlings of the disclosure world, released their half year results today (there is a location check on the way through on this URL, but don't be put off, it's a Guernsey thing!). This of course compliments the other FTSE Insurers' releases which I have blogged on previously.

As ever, Resolution are very forthright on most aspects of their raison d'etre, including Solvency II preparations - they note the following;

• "The implementation of the EU Solvency II Directive continues to be a key focus of attention for the Group...Friends Life group is closely involved with the industry in lobbying on key areas where uncertainty remains"
• £24 million of cost booked in respect of Solvency II and finance system developments, complimented by "overall [Solvency II] implementation programme is on track against its plans and budget" 
• "the Group believes that [Solvency II] will have a favourable capital impact on the Friends Life group relative to current Pillar 1 solvency requirements"
• "Disappointingly, there is a lack of clarity on the final position with respect to Solvency II, and the implementation date looks likely to be delayed" - no commitment on date, unlike some of the others
• “participated in the EIOPA stress test exercise” and are “closely engaged in the development of the tax proposals including any changes arising as a result of Solvency II”.
• "The Group has been accepted into the FSA’s pre-application process"
• "Providers, in anticipation of the higher capital requirements under Solvency II, have been adjusting their pricing which is leading to increasing margins." reinforced later specifically on annuities
• Solvency II considerations down as a "key driver" in the context of the cash generation result - presumably in the context of how much they can pay away and how much must be retained, though I could be wrong
• German product range directly affected by "the impact of Solvency II [which] is expected to limit market participants' ability to provide traditional with-profits product offerings."

The comment that "The Group assesses strategic developments and opportunities on a Solvency II basis" was perhaps the most fascinating part - how you do this without clarity on the suite of transitional measures, Omnibus II elements etc is beyond me.

As a post script, Phoenix also posted interims, albeit a little later than the others - again, a lot of disclosure on Solvency II, quotes as below;

The Group remains actively engaged in supporting the development of Solvency II through industry consultation and participation in FSA and ABI industry forums. 

Both the European Council and the European Parliament have proposals to amend the timescales for the implementation of Solvency II and there appears to be growing political momentum towards delaying full implementation until 1 January 2014. At the present time however, there is no certainty that this will happen and the Group continues to plan for implementation on 1 January 2013.

The Group remains on track to deliver an approved partial Group internal model and has been accepted into the FSA internal model pre-application process following the submission of the pre-application process qualifying criteria template in 2010. In respect of the resources the FSA will devote to the pre-application process it has stated that it will concentrate on a small population of firms representing a significant market share and which it regards as having the highest potential impact on its objectives. The Group is included in this category and remains in continuous and constructive dialogue with the FSA.

The Group's actuarial IT systems transformation project will deliver a single actuarial modelling platform across the business, transforming modelling capability and efficiency and underpinning development of the Solvency II internal model and Own Risk and Solvency Assessment.

"We continue to target full Solvency II readiness by the end of 2012.Our Internal Model Self Assessment Template has been approved by the FSA and we are on track to meet the Internal Model Application Process date of 1 April 2012."

On 23 March 2011, HMRC issued a technical note on 'Solvency II and the Taxation of Insurance Companies' outlining changes to the taxation of UK insurance companies with effect from 2013. The Group has been actively involved in consulting with HMRC and HM Treasury on the detail of the new rules, with the aim of ensuring that the Group's policyholders and shareholders are as far as possible not adversely affected by the changes.

The consultation process is still on-going in relation to certain aspects of the new rules, and as a consequence of this and the complexity of the proposed changes it has not been possible to estimate their potential future impact on the deferred tax balances shown in these interim financial statements. Draft legislation is expected in the second half of the year and its estimated impact on the deferred tax balances will be considered and disclosed in the year end financial statements.

The $10m Chief Risk Officer - every little helps...

Cracking article on the (fiscal) rise to prominence in the USA - before you start pre-ordering Lambhorginis, this covers the headline money for the US "big banks". However the rest of this article is excellent, self-affirming stuff for heads/prospective heads of function, so I recommend a read (and perhaps forward it on to your board colleagues...)

In particular, when analysing the output required to generate that whopping pay packet, the article draws attention to ERM rollout as one of the gentleman's achievements - for $10m, that's got to be one shiny set of powerpoint slides!

In all seriousness, the comment regarding the CRO role being a training ground for future CEOs is a very interesting concept - I would very much like to know which company was implementing it, as certainly for the financial services industry, it is an incredibly sound idea.

The Actuary magazine - QIS5, ERM, Risk Language and Land Grabbing

Busy day today, so apologies if you are not a fan of volume!

I went through a few articles in June edition of The Actuary magazine - as I had blogged earlier, there seems to be a Solvency II land grab exercise anticipated in which the Risk Management profession would lose out to their Actuarial counterparts, so it is good so see where the common ground is.

There are four articles this month which I strongly advise you give a once-over; my take on these was;

Risk Management - Defining Risk Language -  From premise to execution, there is almost nothing I can fault about this article, and I implore you to read it. I hasten to add that I had seen this (or an extract from it) on InsuranceERM, but this is gratis"! My highlights were;

• Ease at which the drill-down from key risks to sub-categories causes confusion in existing categories (project risk held up as a prime example)
• Their tie-in of "risk occurrence" impacting on "economic value", and using that to tie their premise in to impact on Embedded Value or prospective management actions.
• Illustrating the exact damage each of their categories could do to the different elements of the Embedded Value
• Their busting out of Liquidity, Strategy and Frictional risk, and the reasoning for it
• Their explicit inclusion of Diversification and Aggregation risk - I had blogged on how this area may get the 5 star treatment in Ireland, and seemingly, the actuaries behind this paper also acknowledge how the suite of assumptions made in a correlation matrix hold a risk in themselves
• Acknowledgement of the weaknesses in the scope - just for the benefit of actuaries, and only used 4 bodies to show differences in terminology.

A great effort, and worth 10 minutes of anyone's time.

ERM Strategy - Plan of Action - Stake in the ground for how the Actuarial profession can be properly harnessed for ERM, with the following of note;

• Call to arms for actuaries to make a name for themselves in ERM's "exciting and growing area"
• "Analytical skills, judgement and clear communication" attributes of actuaries positively highlighted
• Nice section on modelling Operational risks, including using the Delphi process ("incorporating expert judgement within risk modelling")

You can see why the Risk Profession may be feeling increasingly uncomfortable!


Solvency II QIS 5: The end of the beginning - Direct from the FSA QIS5 lead, he draws attention to a number of aspects which overstate the change in UK plc's capital under Solvency II (£62bn surplus down to £35bn);

• Change is measured against Solvency I, not the ICAS regime
• Surplus is based on Standard Formula, and UK is largest Internal Model market
• QIS5 takes no account of management actions which can easily and fairly be applied
• Transitionals (not that they are guaranteed) could have a massive impact on UK, with the prevalence of annuity providers - A nice example is included

He also notes 600 questions were fielded by the FSA resource - at £15m p.a for the model-specific industry levy, that is a pricey call centre! 

ERM - The Evolution of ERM - Cross references some Towers Watson Global ERM Surveys for 2008 and 2010, and good for general trends and benchmarking on Risk Appetite and ERM satisfaction.

FSA update - Solvency II, Supervision Framework and death of ARROW

The FSA had a busy week, with a major conference in London on the future of the regulator in its new guise as the Prudential Regulatory Authority (PRA) .

Media commenced with an interview in which which Hector Sants discussed the obligations of the regulator to publish findings  such as those from their report into RBS (which has been taken out of the FSA's hands). Speeches given by Hector Sants and Andrew Bailey are available here and here respectively.

It is of course banking focused, but the new risk assessment framework (p9) shows much more agressive intent from the regulator, and it will be interesting to see any transference of experience between Solvency II preparations and changes on the Banking side when the PRA finally comes out to play

As a funny aside, Andrew Bailey confirmed in the speech that the ARROW supervision model was to be scrapped - having seen the number of site visits it generates dwindle as shown in these numbers, I am surprised it has taken so long to confirm it!