PRA - Q&A from December's Industry Briefing

Following on from the PRA's Industry Briefing on Solvency II prior to Christmas, they have released a set of Questions and Answers, which appear to have prompted by questions asked on the day as opposed to being more generic. A useful document to push around your programmes in the UK in particular, even if you are not part of ICAS+/IMAP.

I was particularly interested to see if they had rowed back on any topics where they have previously expressed an opinion, as well as any new insights which aren't necessarily made public as a matter of course. The Q&A is broken out into topics, so I have grouped my thoughts accordingly.

Proportionality

• For ICAS+, the PRA are "...focusing in on those areas which move the dial the most", referring specifically to the ICA calculations.
• They will therefore apply "a relatively higher view" in some areas than others (later referred to in terms of their intensity of focus).
• They use their IMAP approach as an example of this, where they have grouped the 300+ requirements into 15 categories.
• My common-sense read of this is, to be proportionate in the above context, the first 7 consecutive categories on the IMAP template would receive less time and attention than the following 8, all of which have the potential to numerically "move the dial".
• They are already looking prospectively at firm's risk profiles during planning sessions, in advance of ORSA, so that they work and plan proportionally, but with the future in mind.
• They suggest that firms provide their own opinions on materiality if they wish for the favourable application of the proportionality principle (though they don't guarantee it!).

Documentation-specific proportionality

• Confirm that "...there is definitely a need for an improvement in the quality of documentation".
• Seem to specifically align the calibration requirements of Solvency II with the need for additional documentation, therefore a good area to be elaborate in your work.
• On expert judgement, they suggest that documenting why a judgement was made, and what were the alternatives will help firms currently falling short.
• "...no aspiration" to revisit documentation review work already conducted and concluded.

PRA's Supervisory Statement

• They confirm that letters confirming whether a firm is covered by the reporting guidelines will be sent this month. They suggest categories 1-3 (p20) will be the bulk of participants
• There are national-specific reporting templates to come, currently under consideration. While they are not certain on submission format for those, they reiterate that xBRL is required for QRT submission.
• QRTs can be submitted incomplete, but they reserve the right to intervene if you take too many liberties!
• Acknowledge that, due to most firms' ORSA Processes operating around year-end balance sheets, that they expect to receive a flood of ORSA Supervisory Reports, and that this will delay feedback (presumably worse in 2015 than this year?).
• A question regarding 'who is the ORSA for' was answered rather dismissively. However, bearing in mind the content of their "good and bad documentation" letter (which constantly refers to "the reader", which for me meant "the PRA"), it felt like a reasonable question. Clearly if the PRA do not like your style, it will add to your review time.
• They seem to indicate that the amount of time one's Board should spend on reviewing/using their ORSA is not subject to any periodic expectations. That means if you are planning for annual intensive interaction, or something more regular and fluid, you should get a fair hearing from the PRA.

Standard Formula

• Without much subtlety, they seem to be encouraging firms to look at the appropriateness of Standard Formula asap, encouraging further by stressing "...that internal models do not need to be overly complex". This feels like early positioning for their planned SF work with the industry, where no doubt they will find a few firms ripe for USPs/PIMs during the next 18 months. 

Early Warning Indicators (EWIs)

• Following on from a post in October, they are evidently still stuggling to calibrate them!
• They confirm that the purpose of automatic capital add-ons (in the event of a future EWI breach) is to freeze the modelled capital figure to prevent distribution

Trilogue

• Question 29 is a good example of the PRA showing where their hands are now tied, and where EIOPA will be the provider of guidance.
• Interesting confirmation that the Commission has apparently asked that as little as possible of the Draft Implementing Measures be changed. Those of us working on non-mathematical areas can perhaps take some comfort from that!

Germany, BaFin and Solvency II - Tchüss wisely...

With the British Lions rugby team having had such a marvellous summer, it's nice to see that the spirit of "getting one's retaliation in first" has been brought back to Europe with them. The Executive Director of insurance at BaFin, the German regulator, came out swinging late last week (while the rest of Europe was lotioning up), and delivered his two'penneth worth on, amongst other matters, the Long Term Guarantees situation currently holding up Omnibus II.

Omnibus II trilogue - work to do

This is the same man who has recently been quoted as saying that delays are not a problem, as "Solvency II was not designed for today". Which is true - strictly speaking, it was designed for about 8 months ago!

The German contingent have been labelled in a number of articles (here, here, here and here) as a major source of legislative delay (presumably ever since they twigged that the proposed design of the extrapolation element was massively unfavourable to their industry), and the lobbying angles pursued here are not really new news, but to emphasise;

• Concerned about the increase in interest rates at Central Bank level - "should be carried out gradually", though rather disingenuously saying that they would have no influence in that - BaFin may not, but Chancellor Merkel and the overflowing pot of export surplus certainly does!
• Solvency II go-live of Jan 2016 "absolutely realistic" provided the trilogues are finished this year - I've noted in earlier posts that the official schedules of the co-legislators are looking shoddy in this respect, so I'm more inclined to side with S&P (and indeed the president of BaFin!)on 2016 being on shakier ground than a Hippo's decking..
• That transitional periods should be determined individually in accordance with a firms existing maturity profile - they want to avoid an insurer "falling over" just to meet the new regulation. Worrying that after 10 years of efforts, Solvency II compliance still carries such a credible threat of business closure! 
• As they have so many insurance contracts (90m cited), they would simply "say goodbye" in a worst-case scenario if they don't get their way on transitional periods.

So the likelihood of the German industry "taking one for the team" here is pretty small, and with Hrs Balz and Giegold having made it pretty clear that the LTGA result will not elicit a swift conclusion to trilogue negotiations, it looks like there's still plenty of talking to be done...

PRA's take on EIOPA Guidance - no truck with dual reporting?

One of the Barnett Waddingham crew was kind enough to make a few notes about the PRA's current position, presented in an industry briefing back in early June (slides seemingly unavailable). While it didn't touch on pre-application for internal models, it did publicly tease out a few more details on ORSA and System of Governance from those already available, for example;

• The concept of a "Glide Path" towards ultimate Solvency II compliance, which is being agreed between firms and the PRA, to make up for the lack of certainty around both EIOPA's requirements from 2014 and of course the ultimate 'Go Live' date itself - gives both parties plenty of wriggle room in their preparations
• PRA are currently doing an "EIOPA vs PRA" comparison, but are not looking to change the PRA Handbook (which would neccesitate a consultation period, and therefore wouldn't be ready for 2014)
• That the PRA are not especially enamoured with their reporting requirements up to EIOPA!
• That the PRA believe that the trilogue discussions will be concluded before EIOPA's guidelines come into force. That seems less likely with every passing day
• That the PRA do not have the resources to feedback on any of the firms' efforts in the Solvency II reporting space

I guess the slightly odd thing is that the PRA have just announced a radically reduced Special Purpose Fee for Solvency II preparation (only £3.1m for IMAP, and a rebate for non-IMAP due to underspend last year - compare that to previous years!). Could they perhaps have just hung on to a bit more cash to provide a more substantial service in the next 18 months, or have they also given up the ghost on anything of substance happening in the foreseeable future?

EIOPA's Long Term Guarantees assessment - long time coming

So EIOPA have finally released the specifications for the Long Term Guarantees assessment (press release here), the second most eagerly awaited release this year behind Kate and Will's baby. Relatively straightforward timetable of events expected by EIOPA it would appear;

• End of March - completed templates submitted to national regulator
• April and May - national regulator and EIOPA will analyse and synthesise results
• Second half of June - technical results to be provided by EIOPA to the trilogue parties
• Mid-July - report provided by the Commission to the co-legislators

I am stressing the second half due to the current procedure file for the Omnibus II Parliamentary Plenary session pointing at a 10th June date, which is of course too early to consider that report in making a decision on Omnibus II. That leaves one more Plenary window in July before the summer recess, so we can probably bank on a postponement to September at the very least, particularly as the report is bound to contain more contentious bones than a frozen beefburger...

A few things of note in the suite of materials published by EIOPA today, of which the presentation slides are perhaps most useful;

• Objectives of the assessment include "possible competition distortions" and "impact on long-term investment", which have surely topped the list of differences between trilogue parties and indeed individual countries to date.
• Predominantly based on YE 2011 balance sheet, but will test pre and post financial crisis positions as well (2004 and 2009)
• Can optionally use internal models for capital and risk margin calculation, provided the entity is in a national IMAP.
• At least 50% of Life non-linked TPs and 20% of Non-Life TPs in each country must be covered (hence the industry has been quite vocal about doing this at financial year-end!)
• 13 scenarios included in the assessment, of which one does not include any of the proposed measures - not sure if that reduced quantum addresses the concerns of the FSA's Insurance Standing Group back in September, when the number sat at 18.

The main meat in today's releases are of course for the digestion of your friendly local actuaries and accountants - best of luck!

Omnibus II moves again - accelerating the inevitable?

No sooner has the holiday season drawn to a close (and by that I mean everyone else's holiday season, as we don't 'do holidays' at Governance Matters...) than our good friend Omnibus II has jogged down the road another month - the procedure file has just been updated to show it will be hitting the November parliamentary Plenary (by my count, the 5th postponement since 2011).

Not entirely sure of the rather abrupt nature of this movement, bearing in mind the main players are probably still wearing their 'budgie smugglers' in the Med at the moment, but Gideon over on the Wire picked up on an issue which may have led to an early concession that October was simply too early, with an impact assessment on LTGs likely to roll off the back of the next trialogue.

We are also close enough to the finish line (don't laugh) to be getting into the national political cesspits, so a whiff of sabotage and national interest may also be coming to bear. Not only have the UK political opposition decided that Solvency II is controversial enough to start point scoring on, but last month Sharon Bowles (current Chair of ECON) gave an astonishingly frank interview to Risk.net (subscription only I'm afraid) where Das Küchenspüle was thrown at the German contingent. Quotes included;

• "...certain leading German MEPs have publicly said that Solvency II is never going to happen anyway" and
• "...I think there is a subtext here that the Germans - and I think this is well known - are trying to jettison the whole of Solvency II"

Well if Der Wahnsinn really is eine schmale brücke like the song says, its probably best not to cross it!

Omnibus II - Plenary vote delayed by 3 months

The worst kept secret has finally been revealed, namely that the EU Parliament's Plenary session to clear Omnibus II has been postponed by 3 months to July (good spot Gideon) - obviously makes that session more of a coronation if they are going to get it cleared before the summer holidays, so lets hope the guys in ECON get their job done later this month and the 'Trialogers' don't waste too much time between then and July.