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).

Deloitte and economist intelligence unit - where are insurers heading on Solvency II

Always nice to see a benchmarking piece at a time when the legislative process has conceded that Eurocracy has led us to Solvency one and a half and we are no nearer to hearing whether the trialogue discussions are going to keep the new timetable on track.

This one comes from our old friends the EIU, with Deloitte riding shotgun. 60 firms, mostly UK domiciled and a good mix of Life/Non-Life, polled in what is a follow-up to last year's survey from the same authors. Already covered as highlights in a few articles (here for example), but I found the following salient:

• Change in emphasis from restructuring and introducing new risk mitigation techniques to repricing and/or redesigning new products.
• 20% of respondents noting they will need to "significantly change investment strategy" - perhaps as a result of the firming up of lobbying positions on the sticking points of Omnibus II?
• ORSA a key area of focus for the majority of respondents over the next 6 months - strange in light of model applicants use test obligations that it is only an area of focus now. Fascinatingly, data quality was only 4th on the priority list, with model embedding/use and risk appetite naturally high up the list.
• Even-ish split between those who are confident of timely implementation of the Directive by the industry and those who are concerned
• Majority have seen their project costs hiked due to the delay to 2014 - not especially new news, though the scale of increase seems relatively modest, with only 5% saying they have ponied up more than 10% over budget
• Only 45% worried about dual running ICA and SCR next year, weighted much more heavily towards the larger companies.
• Big changes in the profile of firms modelling habits year-on-year, the movements strangely towards more complexity (standard formula to partial internal model, or partial to full). A likely link to the earlier stats on radical changes in investment strategy and repricing becoming higher priority? Regardless, it's more work for our pals in Canary Wharf!
• A quarter of eligible respondents are in the FSA landing windows of 2013 (lucky devils!), with a suprisingly large number pencilled in for this year. Bearing in mind the scathing summary of IMAP materials issued to date by Julian Adams last week, should we expect these candidates to one-by-one ask for more time (and potentially get chucked out, as previously indicated?) Seemingly not too many respondents interested in the suggestion that there will be sugnificant tangile business benefits off the back of their Solvency II Programmes.

UK-centric as a piece of research for sure, but certainly some ideas to be gleaned by EU internal model candidates off the back of it, as well as some comfort for anyone lagging on ORSA.

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...

Barnett Waddingham Solvency II Survey - IMAP, ORSA and Pillar 3 progress

Bit late blogging on this (released last week), but Barnett Waddingham's short but perfectly formed survey on a sample of 38 insurers' progress on Solvence II programmes is worth a read (link to the PDF is at the bottom of the landing page). Not clear whether all respondents are IMAP candidates, but it appears to be a given.

It is a pretty diverse sample, weighted more towards small/medium life companies, but the results seem to be as the FSA suggests is par for the course right now, namely that Validation work is way behind where it ought to be (almost half of respondents are behind schedule on validation or indeed haven't started!). This despite the fact that three quarters of respondents flag validation as one of the most challenging aspects of IMAP, which one would hope would ensure it is given sufficient resource and management time. Only 7% are using external resource to validate for IMAP, which is surprising bearing in mind the size of the companies polled.

In addition, documentation is also flagged by a majority of respondents as a challenging IMAP issue, which surprises me to some extent, as the FSA have been particularly critical of this aspect.

Despite these issues, three quarters are confident/very confident that their applications will be approved - I'm guessing this may have lowered after the robust speech delivered by Julian Adams a couple of weeks back!

On the ORSA front, there was a bit of a mixed bag with regards to respondents opinion of the suitability of EIOPA's level 3 guidance (I personally thought it was pretty good, but not everyone agrees, particularly around documentation and group elements). With regards to where respondents were up to with the mechanics of the ORSA Process, every element appears to be underdone at this point, most worryingly around elements requiring model interaction such as S&ST, risk profile assessment and deviations between SF SCR and assumptions underlying the organisation's risk profile. As this would only be supporting evidence for model applications, you can perhaps cut a little slack here, but this is a big ticket item for Use Test, and to have so much work in progress at this stage does not lend itself to demonstrating embedded use!

Not entirely convinced by the most challenging aspect of ORSA being the daily monitoring of SCR - this is not a requirement by my reading, but even if it is (and accounting for all the proxies and assumptions that one would have to carry on the liability side of the balance sheet in particular), it shouldn't be a problem for model users unless you don't have someone to push the button.

On the Pillar 3 front, nothing especially new - difficulty in populating various aspects of the required templates/submissions are being experienced, most notably the 30% stating that they still have problems with quarterly balance sheet reporting, and an almost 50-50 split of respondents feeling they do not have the required data available to satisfy the requirements.

Worth a benchmark against your own progress at the very least, particularly if you are one of the little guys still hanging on in IMAP.
 

EIOPA on external models as part of IMAP

Nice of EIOPA to wait for a UK bank holiday to publish their news on External Models and Data and how one should anticipate vigour from their friendly local regulator around obtaining details on their integration into internal model applications.

Post-lobbying, EIOPA have come out fighting on a couple of corners in the context of External Models and Data:

• That by not supplying the "specific information or documentation required" by your regulator, EIOPA expect applications to be rejected
• Compliance with "all the requirements for internal model approval...including those related to tests and standards and model changes" - second bit is my emphasis, as I suspect some companies may have tried to scope their model change policies with a caveat for external model changes (which certainly makes life easier).
• "Proper adaptation" of external models and data to both the risk profile and an undertaking's specificities to demonstrate requirement compliance - sounds likely to entail high quality documentation and/or evidence retention.
• That vendors and applicants should/should have dealt with the details around provision of data to supervisors in their contractual arrangements - too late to revisit this with existing relationships without ultimately introducing non-contracted expenses to at least one party?
• That external data providers (whether they be asset, liability or ESG-type input/tool providers) cannot play the secrecy card when it comes to providing applicants with whatever is required to approve the application, as it is covered in both Solvency I and Solvency II! 

Clarity appreciated, but feels instinctively like some strained customer/provider relationships will emerge once the FSA come knocking!

Late Post Script - Hyperlink was wrong yesterday, apologies

KPMG - Solvency II paper, "Beyond compliance towards optimisation"

Another titbit from the Big 4, this time covering the benefits that are available off the back off the legislative delays, specifically around optimising the Finance and Risk functions. If you are one of the Tier 1 companies, this comes across as a bit of a "Where's Wally" paper (or 'Waldo' for my American pals!), as it borrows of their extensive 'experience' on site with clients over the last few years. Despite that extensive experience, this is pretty light at a fistful of pages.

I would struggle to distinguish between 'capital minimisation' and 'capital optimisation', which they start off with, but they go on to describe a world of risk and finance "centres of excellence, which utilise the good work currently being done on the data warehousing front by Data teams to populate the various regulatory reporting requirements as well as management information needs, and that all sounds plausible.

The Risk section is naturally a little flannel-y, but suggests the best functions will be able to predict cash flows better, ultimately improving risk, capital and business planning and as a by-product, RAROC comprehension and enhancement.

Not a lot else, but some ideas around communicating future value of today's expenditure at the very least.

Society of Actuaries in Ireland Newsletter, April 2012 - ERM and ORSA features

Always a riveting read, the SAI pushed out their latest newsletter, which generally provides enough consumable detail on actuarial concept to help relative novices like me!

Get stuck in to the sections on contract boundaries, and the reason for professional vs EIOPA divergence on p4, some ERM activity over the last couple of months on p9 (and slides from those both here for ERM and here for ORSA). Some brief analysis of the older presentation from Towers Watson on ORSA is also summarised.

Geneva Association 7th Chief Risk Officer Assembly - Axa and the ORSA

Sadly my schedule doesn't allow me trot down to Switzerland any more than the next man, but the Geneva Association have just published some materials from their CRO Forum from back in November - one in particular that caught the eye was from Axa's Mr Menioux on the ORSA.

While the first section is fixated with the reporting side of ORSA as opposed to the creation of the continuous processes which ultimately crystallise in a report (sadly par for course I would say), the second section goes on to cover Axa's ORSA schedule from now until 2013.

As the French only have around 3 models to approve (c'est une blague, 4, peut-etre?) it is less of a surprise that they are waiting until their year-end 2013 ORSA Report has been approved before submitting their model application, but it is interesting that the FSA with their 70+ applicants stated that they would not be looking for ORSA reporting in IMAP specifically!

They also mix model validation and ORSA together at the back to state that they are bringing in PwC and Mazars to assist with independent validation, as well as using internal audit. They finally tell us the structure and length of their ORSA Report (shooting for around 50 pages at Group level, with localised ORSAs as well.

Good intelligence for anyone knee-deep in this particular Pillar 2 game...

Economist Intelligence Unit and Blackrock - Asset Allocation trends and Solvency II

Another nice freebie for the benchmarkers out there (you do need to sign up with minimal data changing hands) from the EIU and their sponsors Blackrock, predominantly around asset allocation trends in light of Solvency II.

I haven't exactly gorged on this due to a swollen in-tray, but the population size is pretty decent at over 200 (other stats in the back on size, country etc), and some of the trends are worth considering in the context of one's own balance sheet, particularly;

• Almost all respondents have at least made plans for allocation post-Solvency II, but are waiting until closer to implementation to exercise those plans
• Concerns around "look-through" data requirements on certain investment types (FOHFs etc) and potential impact on asset selection
• Concerns around most areas of data in terms of Pillar 3 preparedness (quality, timeliness, completeness)
• Anticipating aggressive pricing around guarantees, driving consumers into unit linked offerings
• Very interesting granularity around respondents by country on their bond strategies
• Strong support for expectation of downward pressure on equity prices due to lower demand post-Solvency II
• Bit behind the times on the suggestion to review "risk free" assets, which was announced in Omnibus II revisions at ECON, but we'll let them get away with that!

Sign up and dig in, very handy indeed.

PwC paper - Solvency II Pillar II "operational issues of risk management"

Following on from KMPG's efforts, the PwC crew have released their own aide-memoire for Pillar II specialists, which at the very least should be handy for CRO/Head of Risk etc amongst us for board training/briefing ideas as we approach the home straight.

At 60 pages, it's not exactly a comic, and while a great deal of the introductory material is 'Pillar 2 101', it does contain material (either text or schematics) which should be of immediate use, so I would recommend checking out;

• First line of defence and reasons for risk ownership (p26)
• Definitions of Risk Appetite/Risk Tolerance/Risk Profile/Risk Limits/Risk Budget (p35) - I haven't cross referenced these against IRM definitions for example, but may be worth doing for consistency. An accompanying schematic is on p36.
• Internal Model Scope (p40) and Validation (p48) should be extremely topical after Mr Adams's speech on Thursday.
• Communications and training plan ideas (p53-54)
• ORSA schematic, and some talk around process industrialisation (p56)

Perhaps the main weakness in the text is that there are no references to the Commission's draft Level 2 text, which is now clearly a document in a lot of people's hands (not least the FSA, who have made it clear that this plus the Directive text is what IMAP is based on). I also wasn't mad keen on the reference to P&L attribution being "the real risk profile" (p48) - there is already enough flab around this term without additional mis-steers.

All in all, well worth dissecting, even if like a Roast Pigeon, you end up throwing away more than you consume!

PS - Far be it from me to suggest a document from one of the Big 4 has a whiff of Google Translate about it, but this was authored almost entirely by PwC France it would appear, perhaps explaining the odd COSO-ERM reference on p17, the rather oblique title, and of course, the whopping 60 pages...

PPS - Wife is French, so allowed the odd cheap gag around bureaucracy!

KPMG Paper - Solvency II still fit for purpose?

A handy survey from one of the Big 4 on some of the biggest challenges remaining on Solvency II. Small sample (20 people), and is GI-flavoured, but that doesn't make the experiences any less relevant to you 'Lifers' out there. The following was noteworthy;

• A good half of respondents expect their capital models to be a key driver in their business planning process post- Solvency II, with the remainder using it as a "reasonable consideration" - this contrasts with a quarter who use them to a negligible degree if at all pre-Solvency II.
• Suggestion that, with Solvency II accounting being viewed as a "regulatory exercise" for non-lifers, there is plenty of transitional work to do in order to align the GAAP/IFRS view with the Solvency II accounting view
• Concerns around reporting lines for different strands of actuarial activity (pricing, reserving and capital) potentially going into one executive, with those assessing risk versus those taking it being the primary issue.
• Suggestion that the increased requirements around actuarial staffing may drive some work offshore in order to reduce the costs
• Concerns around calculation of Risk Margin, specifically around what the Finance function will demand versus what the Actuarial function can provide.
• Comment that, as the internal model is expected to change as a business's risk profile changes, that current best practice ensures this is done at least annually, though monitoring of new business (therefore plan against portfolio) agaist forecast is done more frequently - no lead on size of divergence that might drive a model change however, which was one of Mr Adam's bugbears from the speech last week.
  
• The provision of Actuarial opinions regarding the adequacy of reinsurance and underwriting arrangements appears to have split the respondents, with a decent number taking a wait-and-see approach - KMPG are similarly guarded when providing their own view, highlighting concerns with the impact of opinions on decision making and how they are worded.
• Further areas of collaboration between Risk, Actuarial and Finance functions are expected around Capital Management, Performance Management and ORSA, with devolution of previously shared responsibilities made to first line functions, and the second line becoming a multi-skilled "centre of excellence" - nice schematic to go with this on page 18.

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!

Economist Intelligence Unit - new Solvency II research on Insurers and Society

Our pals at the EIU (kindly sponsored by BNY Mellon) have published this new research on how 'regulation'  affects the insurance industry's ability to fulfil its role in society (no prizes for guessing which 'regulation' in particular this focuses on!).

It has a more cross-professional angle than other EIU releases (here, here and here for example), which is a by-product of BNY Mellon's sponsorship, looking more at changes in capital allocation and derisking which are likely to be by-products of Solvency II implementation.

Sample size is pretty good at 254 respondents, all EU based, mostly Financial (72%) or Risk (24%) professionals, and nicely spread across the continent. They split the results into Insurers, Other Financial Institutions and Non-Financials, which is handy to see where divergences in the comprehension of Solvency II's impact are. I noted the following on the way through;

Solvency II Directive and impact on capital

• Only 16% disagree that Solvency II "goes too far" in ensuring capital adequacy
• Life Sector respondents more equivocal on whether "most" insurers already have sufficient capital
• Great table on p14 for Solvency II asset popularity (or not!) by asset class, supplemented by an insurers-only version on p 15

Policyholders and products

• 73% feel that policyholders are going to bear the costs (over 80% when just insurers are considered) - I think I have flagged this previously!
• Half think that the (inevitable?) shift to providing more unit-linked business will have a negative affect on pensions and savings
• 67% of responsdents have life insurance down as a product which will be "most negatively affected" by Solvency II
• Less than a quarter disagreed that With-Profits products would be valued in the current market, but have been driven out by accounting rules and capital charges
• Over half feel that the "squeezed middle" of smaller insurers and mutuals will consolidate to achieve scale, or indeed outsource (though not clear on whether this means administrative functions to reduce overheads, or something else).

Balance Sheet de-risking

• Hints at knowledge gap between corporates and insurers regarding the impact of insurers being overcapitalised (corporates favouring additional capital being held by insurers for additional security).
• Divergence between non-financial and financial institutions regarding how important rating and tenor of debt issuance will be in future (non-financials seemingly less concerned).
• Similar divergence around whether unrated debt will be forced to pay higher yields to appear more attractive to insurers (p18) - insurers were by some distance less convinced than other financial institutions and non-financials, so clearly a perception issue there.

Capital charges

• Half want the risk-free aspect of Eurozone government debt to be revisited (which Omnibus II has promptly obliged!).
• 41% want all capital charges reconsidered as they stand,  while only 22% would like them maintained as they are (down to a trifling 9% when measuring just insurers). Can this level of displeasure really stand during the trialogues?

Some smart general comment throughout by some "expert" talking heads, which expands on some of the conflicting responses.

Another worthy piece of research from the EIU, and hopefully will be wielded by the trialogue parties accordingly.

Central Bank of Ireland - Solvency Matters newsletter, ORSA and models

The Central Bank of Ireland have released their latest Solvency II briefing letter (thanks to Mike Claffey for tweeting it).

Important to note the following from a UK and Ireland practitioner's perspective, on the premise that the two regulatory bodies in the UK and Ireland are setting the benchmarks in many respects;

• 'No panic' message given regarding the Omnibus II 'delays' - timetable unchanged in this regard
• No references to the Commission's draft Level 2 text as a basis for undertakings to use for internal model application activity (which the FSA went out of their way to advocate at their February IMAP event). Is there a legitimate reason for this, bearing in mind how useful the document is for applicants in ensuring their documentation addresses the final requirements, even if only 'there or there abouts'?
• Model applicants should be "well advanced with the technical aspects of their model build" - this is somewhat to the FSA's take, which was that build should be pretty much complete by now (p10)
• Some nice visceral examples of Use Test evidence requirements from undertakings, particularly around evidencing Board 'understanding' of the model - I would add that these seem onerous for NEDs, but reasonable for executives, so I would be interested to see how this is applied (could you for example see your non-industry, non-executive director justifying diversification benefits to your friendly local regulator? Is that a reasonable use of project resource/Board training time?)
• Board members will be interviewed by the CBoI individually "without the support of their technical experts" - I'll get my coat then...
• On ORSA, they "recognise that individual undertakings would like to get more details on specifics of the ORSA Reporting Process", but want undertakings to focus on the contributing processes themselves - easier said than done, particularly when even EIOPA had to relent from the mantra of 'ORSA is process, not a report' when they got to public consultation stage!

I'm sure that the industry will appreciate some of the clarity in here - they may appreciate the Commission's Level 2 draft a bit more though!

Irish boards - the clean up commences

First sign of the wholesale changes demanded by the Financial Regulator over in Dublin, as Bank of Ireland get cracking with the boardroom changes.

Bearing in mind the size of the talent pool and the restrictions on number of directorships (anecdotally I have heard they have been particularly tardy in turning around NED applications) I suspect there will be a whiff of "new bottles for old beer" about this process, but it is important for the jurisdiction to at least practice the discipline.

More ORSA advice - Towers Watson

Towers Watsons' recent ORSA advice is worth a read for anyone who is well behind on the matter - it essentially says "I've read Level 3 pre-consulation papers". which may save you some time or money in doing it yourself!

I noted the following when going through it;

• Requirements "still developing" - unlikely with this new impasse at parliamentary level, and they are actually perfectly visible between the L3 and the Issues Paper (as there was no L2)
• Approach to ORSA "deliberatley non-prescriptive" - I suspect becasue the regulators couldn't staff a prescriptive review.
• ORSA to exert "increasing influence over key operational activities" - I would substitute 'increasing' for 'almost complete'.
• Dependent on "nature scale and complexity of the risks inherent in the business" - as if clients wouldn't have read this already
• Useful list of ORSA requirements in various guises between EU/US/IAIS/Bermuda as well as early incarnations
• Not keen on the principle of risk culture per se (little too much like nest feathering as a consultant) but the ticklist of positive attributes is admirable on p4
• Don't agree at all that Risk Appetite represents "overall philosophy to risk taking" - I have never considered it to be anything other than granular personally.
• Recommends a "slimline" ORSA to "engage the executive" - certainly in the UK where Boards will be familiar with ICAs, this may be tempting, but seems very presumptuous when there is so much prescriptive material in the L3 and CEIOPS Issues Paper.

As I said, worth having if you are behind the curve, but has no new news if you have seen the L3.

ICAAP vs ORSA - "Common Themes" from first attempts

As an addendum to the last doc, I found this rather cute list of observations from the FSA regarding the first sweep of ICAAP submissions. I like the fact that they exempted larger firms from what it ostensibly a bollocking for making so many omissions and errors, and I suspect something similar will be dished out in 2013 due to the lack of unequivocal ORSA guidance.

Of the 13 points, the errors in calculating Op Risk capital, advice to "keep it short" and the ticking-off for inadequate stress testing to be particulary amusing, but that doesn't detract from its usefulness for anyone with an ORSA to construct, even if it is as a "what not to do" list.

ICAAP vs ORSA - looking at lessons learned from bank regulators

A fascinating document hit my RSS aggregator account the other day from KPMG regarding ICAAP experiences across Europe, split by key countries.


It isn't too much to suggest that these experiences will be mirrored to some extent in the ORSA process (indeed in many countries the supervisory staff examining ORSA submissions will be in the same building!). I noted the following;

• Degree of regulatory influence over management varies widely
• As far as pillar 2 goes, both banks and regulators are in a "state of experiment"
• UK noted as less keen on full economic capital modelling (the opposite would be true for insurance I would hope)
• Regulatory pressure from some countries (Germany and Belgium) much higher than others when it comes to adjusting the ICAAP
• Significant pressure to integrate ICAAP into overall bank management (as per ORSA)
• Pressure on banks to include strategic and reputational risks in pillar 2 (these obviously stand out as non-quantifiable risks for inclusion in the written policies under Solvency II).
• UK and Swiss happy to cover business risk in stressed planning assumptions under ICAAP, where in Belgiun and Germany there is pressure to include it as an ICAAP category in isolation.
• Projections of capital requirements requested over the "medium term horizon", which is 3-5 years ( a useful benchmark)
• Potential to increase capital via company-specific Individual Capital Guidance (ICG) highlighted as a particularly onerous concern in the UK (contrasted with a more lenient France).
• Firms not expected to hold capital against non-quantifiable risk, instead demonstrating that they have factored it into the planning process.

I don't know how much stock I would put in the lessons from the banking industry experience, but bearing in mind the regulator is, at least for now, all in one house, I would factor in lessons learned here with no qualms.

PS This document is also a great advert for regulatory arbitrage!

Internal Models - more "Hassel" than they are worth?

Pardon the dodgy David Hasselhoff pun (product of an idle mind!), but it looks like a storm is brewing with out German pals on the internal modelling front - hot on the heels of Hannover Re's threat to abandon ship via a Societas Europaea passport to an easier ride, Gothaer, a German mutual, has now apparently decided to give up altogether.

Whilst the knowledge that people are giving up part-way through is not new (the UK managed to slim down from 100+ expected to 70-odd pre-applications between 2010-11), I was under the impression that Bafin were not dealing with a huge number to start with (this seems to suggest no more than a dozen), so to see two teetering on the brink is newsworthy I guess. 

It could be that these guys have seen something in the Commission's draft Level 2 that they don't like, or indeed the outcome of the ECON lobbying didn't quite go there way, but anything which leads to insurers not measuring their overall solvency needs using their own experience analysis and calibrations is surely unwelcome.

Some good quotes on just how onerous Bafin may be are included in this article (subscriber only I'm afraid), the most telling perhaps being "So far we see very few small insurers building an internal model [or partial model],". Very few, minus one, it would appear...