Society of Actuaries in Ireland - response on Market Consistent ESGs discussion paper

In the interests of being prepared to scrutinise internal models to the letter of the existing text, I have spent more examining the hot topics on Pillar 1, and the SOA have provided an excellent response paper to the Central Bank of Ireland's ongoing discussion on market consistent black boxes.

I have tried to pick out the key themes in the absence of having detailed knowledge!

• Difficulty is calibrating market-consistent ESGs where deep and liquid markets don't exist
• Risk margin consideration appears and reappears throughout - the SOA advocate clarity and methodology disclosure wherever a risk margin is allowed for (which in my head would be an area the risk function could then scrutinise when validating the Internal Model)
• Process of converging insurance pricing with market-based pricing will involve considerable expert judgement (problematic for pure Risk functions to validate I suspect).
• Easier to use the ESG for interpolation as opposed to extrapolation - organisations need to be able to "show its work" when extrapolating beyond the region of the data (another good area for would-be validators to focus on)
• Also need to be careful when accounting for margins (implicit, explicit, illiquidity premia) that they are also appropriately extrapolated.

I suspect I will be referring back to this as the Level 2s and 3s make there way into their final form, as I found it a reasonably accessible pointer for potential Internal Model weaknesses (and I make no apologies for misinterpretations as a non-mathematician!).

Insurance SIFIs - Metric ideas from the AAA

Spotted this, and it looked intriguing - American Academy of Actuaries proposing metrics "regarding size, interconnectedness and risk assumption" to assess whether insurance companies are systematically important - the AIG angle still seems to be driving this desire (resisted by almost every insurance lobbying group) to include a couple of insurance giants in the SIFI pot. I haven't looked for the paper itself, so google away if you are hot on this topic!

The second notable point here was that a "voting insurance expert" has beeen elected to the Financial Stability Oversight Council - not sure if that increases or lessens the likelihood of some insurers being captured as SIFIs.

Accenture Global Risk Management Study 2011 - talking points

A rather lavish piece of research from Accenture on developments in using risk as a source of competitive advantage was pushed out yesterday - All industry version here, with Insurance-specific report here.

Solvency II doesn't really feature in the global study (which covered just under 400 risk execs), but some aggregate trends are worth noting (observations against their 2009 survey);

• Increased likelihood of execuitve-level oversight of the risk function
• Increased concern about coverage of the spectrum of risk (types and severity coverage)
• Almost half of respondents had "reducing costs" as one of their main challenges in next 2 years
• Vast majority have either a CRO or an executive with Risk responsibility
• Majority of medium term spend seems to be focused towards data and technological improvements
• 40% have responded that regulatory risk will be "significantly increasing" in next 2 years
• Integration of risk measure capture and use across busienss areas particularly poor (most categories of risk were under 50% rated as "highly integrated across business units".
• Some lareg gaps between the importance of the risk function's objectives against their achievement (worryingly large on the matter of ensuring sustainability of future profitability)

For Insurance-specific, I noted the following (around 50-odd companies by my count);

• 80% of respondentshave ERM program in place or in planning
• Top risk executive reports to CEO in almost 90% of respondents (a truly horrifying statistic, and the highest of all industries) 
• 81% of Life company respondents felt regulatory pressure is creating an increasing gap to achieving compliance
• 54% have a CRO who owns responsibility for Risk in their organisations (surely a massive no-no under Solvency II)
• Integration of Finance and Risk and improving reporting capabilities on risk-adjusted performance management are the highest Life company priorities for improving capabilities.
• To achieve "Risk Mastery", a rather anodyne list of enhancements are depicted - invest in analytic tools, integrate risk and finance, improve approaches to fraud and financial crime and leverage compliance initiatives (such as Solvency II I guess, though I wouldn't call it a compliance initiative!)

They create a sub-category of "Risk Masters", whose risk management capabilities are assumed to be superior to the crowd - these are the component parts of "risk mastery";

1. Creation of shareholder value from Risk Management
2. Risk Management involved in key decision making process
3. Improved sophiostication of measurement, monitoring and analysis
4. Going beyond a compliance mindset
5. Integration of risk management capabilities across business units and structures
6. Establishment of a "c-suite" role for Risk
7. Infusion of "|risk awareness" across the organisational culture
8. Investment in continuous improvement

Risk masters (around 40 of the respondents qualified) either have or are in the process of establishing ERM programs, and tend to use their Risk function outputs to achieve quantifiable business objectives considerably more than the pack. They also had significantly higher scores for having "highly integrated" risk measure capture and usage across business units (including using these measures in their decision making process), and the majority participate in most areas of the strategic decision making process.

Interestingly, almost 90% of Risk Masters said that they are active in influencing risk regulation in their relevant industry - Solvency II anyone?

FSA plans for conduct of business under the FCA

Speeches today from Hector Sants and Margeret Cole on the future of regulation for the 24,000+ small financial services firms who will not fall under the auspices of the Prudential Regulatory Authority.

Both provide quality insight as to how the risk/reward argument is playing out at the FSA as they prepare for the 2013 split - particularly liked the parallel of cost of extra regulatory visits against the cost of product failures such as Keydata.

Groupe Consultatif - Actuarial Function research (Solvency II slant)

I really liked this doc, released last week by Groupe Consultatif Actuariel Europeen (GCAE), which ostensibly is used to confirm that there is sufficient actuarial resource in the union to address the future requirements under Article 48 of Solvency II. Covers 20 countries and 18,000+ actuaries - of particular note;

• Most work on setting, validating and certifying technical provisions (all sub categories were 80-90+%)
  
• 46% of Life actuaries have a role in risk management
• 48% of Life actuaries have a role in Internal Modelling
• 54% of Life actuaries are involved in Internal Model validation (high, bearing in mind this at least nominally moves to Risk under Solvency II)  
• 8 countries will only have qualified actuaries running the function (Life only) - 12 will be run by "mostly qualified actuaries"
• The Groupe "will ensure that education is enhanced to capture the changed environment, especially in relation to risk management"
• Highlight "concerns that the use of actuaries may be diminished in some way by the apparent change in role from the current position".

I struggled to work out the missing parts. From what I could see;

• Only 20 actuarial associations covered by the research, against 27 EU members - the following countries are not covered; Bulgaria, Cyprus, Latvia, Malta, Romania, Slovakia, Slovenia. Would love to know if that is because they don't have associations worth talking about, or the function itself it not afforded the same gravitas as in other jurisdictions
• Two countries have no qualification requirements!

Fitch on Solvency II - Asset Allocation

Fitch pushed out a paper on Solvency II's implications for Asset Allocation - well worth a read if you are a Pillar II & III dweller like I am (registration required, but free), as it simplifies a lot of the key areas that will drive strategic decision making outside of one's qualitative comfort zone, and will certainly help on the ORSA/Model validation front.

Solvency II and IMD - Parallels

Post magazine editor's comment on Solvency II deadline shenanighans highlighted an intriguing parallel with IMD, saw the UK industry in the vanguard, and the rest of the union complying at their own pace, if indeed at all.

I can certainly vouch for the tardy and decrepit attitudes towards IMD's pan-European application first hand, so let's hope this isn't too accurate a prediction!

Sr. Montalvo - "No delay to Solvency II" - sure about that?

Forgot to post this yesterday - outstanding quote from the EIOPA chief executive at the ABI's conference on the same day that the Council text was published!

ABI supports FSA Solvency II stance - 2013 regardless

Peter Vipond (Association of British Insurers head) is quoted in InsuranceERM today as supporting the FSA's "2013 regardless" stance for Solvency II implementation.

The logic is cold but impressive, as not only is the ICA process already onerous enough to dismiss any kind of parallel run, but the Internal Model application process has been structured to deliver concrete decisions on admissability by Jan 2013.

Certainly don't fancy the FSA's chances of getting a 2013 Solvency II "parallel run" levy out of the ABI based on this statement!

PS Shouldn't have access problems, the InsuranceERM guys made this one free!

Vince Cable speech at the ABI Conference

Always noce to get a steer from Government on future policy in the governance world (bearing in mind that, even with a coalition, it will get enforced quicker than Solvency II!).

Dr Cable in his speech to the ABI today seems to be fishing hard at the "voluntary" targets for improving gender diversity on boards (I believe if enough FTSE companies haven't declared by September we are probably looking at quotas). Executive pay and short-termism also feature high on the Business Secretary's agenda.

ABI Conference - Single European Regulator?

EIOPA's Chief Exec kindly planted the seed of the single EU regulator at the ABI today - bearing in mind how the EU functions are struggling with consensus for Omnibus II right now, this is one matter best pushed to the back of the cabinet!

International Insurance Society Annual Seminar 2011 - insights from Toronto

Having had a hard look around for material from this weeks IIS seminar (plenty of big hitters present), I have come up empty handed on accompanying speeches/presentations.

This article does let slip a few pieces, which were worth logging;

• Head of Canadian regulator urging insurers to move risk management efforts to the forefront by enhancing the CRO role and engaging properly in stress testing - talking my language there!
• She also added that a global capital standard would benefit the industry, and while Solvency II is an improvement, it is probably insufficient.
• Research from Robert Klein presented suggested that the US should go in for a more modern regulatory regime (citing "antiquated" US capital standards). This runs contrary to the views of the NAIC head who spoke in Bermuda only last week. Would love to see Prof. Klein's research, but couldn't find it today.

AIRMIC Conference 2011 - Presentations now available

Was very kindly directed to these by the AIRMIC guys - two of use in my line of work were the Solvency II specific presentation from some Allianz reps and a good one from Lloyds on emerging risk - the former gives some decent insights as to how a massive organisation has to administrate the Solvency II project, while the latter is a decent benchmarking piece for performing qualitative risk identification, analysis and synthesis.

Solvency II - Official Shift to January 2014

Some guys were pretty quick off the mark in the Tweetosphere - Text out of the Council meetings over the last few days confirms a wish to shift to Jan 1st 2014 - implications will naturally emerge over the next couple of days, but in the meantime, you might want to adjust your calendars by 12 months (unless you are in the UK of course!)

ABI Solvency II Newsletter for June - clear words (and nice pictures!)

The ABI have pushed out their June industry newsletter, and it's a beauty. Highlights;

• Compromise for long-term products appears to be palatable (to the ABI's working group at least). Final proposals in their 'package deal' will be discussed tomorrow at the Commission's Solvency II experts group
• Clear "that some of the Level 3 guidance will not be available, nor imminent by go-live date
• This will require regulators to "cede some autonomy" to the industry over implementation techniques
• Asking for 1 year grace period between presentation of Implementing Technical Standards and actual application (indeed the ABI seems a little anxious on developments in this area)
• Nice piece on justifying their approach on contract boundaries
• Some good schematics on legislative timelines and Implementing Technical Standards due dates

Barnier on video - from CEA June conference

I don't have the luxury to watch it right now, but apparently this video of Michel Barnier at the CEA conference last week (various quotes have made it out since this on the 16th June) may, in combination with the Omnibus II revisions published on June 7th, help identify exactly what was said and by whom to perpetuate the deadline extension rumours.

FSA revised approach as the Prudential Regulatory Authority

The FSA pushed out their revised approach yesterday, which will be fully implemented after they change the sign out front of Canary Wharf next year.

I pretty much glazed over at Hector Sants' speech, which had to fish pretty hard for examples of why Insurance justified more intrusive supervision than banks (Independent Insurance and Equitable both being a decade old). However, the Proactive Intervention Framework (PIF) is no different to Solvency II's intervention process, with a "capital add-on" level, an SCR breach and an MCR breach all dressed up in different clothing. The main document is out of necessity pitted with Solvency II references, and all in all, no new news.

Solvency II - additional FT articles

FT also posted a couple of supplementary articles on Solvency II today. One covers some old ground on calibration lobbying, but notes that the Solvency Experts Group is meeting this week with the Commission (one to look out for). It also reiterates that FT party line of move to 2014 implementation as more of a fait accompli.

The second quotes an ABI and KPMG straw poll that talks of the raft of supervisory changes in the UK (Solvency II and FSA-PRA changeover) is not helping support consumer trust in the industry.

Insurance Day Summit 2011 - Bermuda shorts

Exceptional pun in the headline aside (?), there was a few tasty pieces from the Insurance Day summit in chilly Bermuda at the end of last week. Not sure if these are free or not, but I didn't struggle this morning;

Bermuda Monetary Authority
- their man Jeremy Cox spoke, emphasising how mutually beneficial the Bermuda/EU market is, and why it justifies increased headcount spend to ensure equivalence. He also spoke of their 3 year roadmap to equivalence, as well as 6 areas where they have expanded their output to achieve equivalence.

Mike McGavick speech
- CEO of XL Capital chipped in with a more industrial quality speech, albeit making the salient point that, should Solvency II inadvertently lead to mergers and larger insurers, it would not be a systematically great thing.

He comments (ironically, bearing in mind my last two posts about soft launching) that because the EU like their version of the rulebook, then "everyone else should follow suit".

He followed that with "...why is it that we just have to swallow your [the EU's] proposal" - again, this seems a little misguided, bearing in mind the IAIS have xeroxed most of the Solvency II text and obligations, so this is not far off being international best-in-class, as opposed to being EU-centric.

Certainly didn't stay on the fence, and should be applauded for that at least.

NAIC CEO speech

Pretty blunt speech from the head of the National Association of Insurance Commisioner in the US - that, while she likes soome parts of Solvency II ("ORSA and some of those Pillar II things"), the Pillar I stuff will not wash over there. In particular, quite scathing about regulatory capital being used to incentivise good risk management.

Omnibus II - June version with substantial illiquidity premium transitional changes

A linked story was reported in parallel by Risk magazine (again, subscription only), highlighting that the June version of Omnibus II contained a dramatic shift in the area of illiquidity premium. You will see the section itself near the very back of the June Omnibus II text.

The language used by Risk.net is not helpful (we are after all talking about a transitional measure, yet they and their RBS talking head note it "effectively means the full impact of the directive will not be felt until 2019").

They note more importantly that the revised transitional will allow a lock-in of yields at the 2012 year end which can be used as the basis of the transitional for the 7 year duration (if beneficial I guess).