More from EIOPA and PRA on internal models - anything you can do...

Certainly looks like there is a bit more mileage in this back-and-forth around internal models and the assessing of their appropriateness. As I posted recently, the UK's PRA have come out fighting on the subject of 'Early Warning Indicators' (EWIs) to highlight where a company's internal model, for fair reasons or foul, may be measuring the Solvency Capital Requirement in a way which does not meet the required calibration standard of the 1-year VaR at 99.5th percentile.

Early Warnings - time well spent?

EIOPA, through the words of their Chairman, have already made a pitch for assessing internal models on behalf of our overworked national supervisors, at least at some point in the medium-term future. It would now appear they have also piggy-backed the PRA's work around developing and monitoring EWIs as well!

That article is on Risk.net, so for non-subscribers, EIOPAs work is specifically looking at (in the author's words, not EIOPA's) "...threats to a firms solvency that are not picked up by the company's internal model". These will include qualitative and quantitative measures, and are due to be discussed (by their internal models committee) in the Autumn -  you know, that relatively quiet point in the Solvency II implementation calendar...

The EWI article was published at the same time as an interview with Sr. Bernadino and Insurance Risk magazine was released, where the tone of the interview is particularly aggressive around EIOPA's inability to compel national supervisors to "comply" with their recently-issued preparatory guidance. Whilst it is hard not to admire his optimism ("we are moving closer to the date of implementation"), he is quite fixated with "some countries" who, without EIOPA's guiding hand, he feels would end up divergent from the rest of the market.

I certainly am not familiar enough with continental Europe's positions as it stands, but it certainly reads like a not-too-subtle finger point at Royaume-Uni at the very least. He also goes on to mention that, while 'full Board support' was received at EIOPA to issue the preparatory guidance, not all participants were 'completely happy'. One would certainly feel aggrieved at the smaller end of insurance supervisors to comply-or-explain on preparations for a new regime which doesn't have a kick-off date, while still having to administrate the existing one!

An interesting side-issue around potential discord amongst the states is this recent request (which I have procured through the magic of Google!) from most of the Member States for a second "quick-fix" Directive, based on the fact that some of the implementation countdown dates that feature in the first one are next month (good spot Gideon)! According to the letter, the Commission already appear to have singularly ruled out the need for another quick-fix,

Four countries didn't make it onto the list of senders (Ireland, Netherlands, Malta and Lithuania) - not concerned, or not consulted?

Also worth highlighting the recent spectacularly ill-timed London press strafing of the internal modelling world - an strange development, particularly at the same time that the UK Independence Party has been lifting up its dress for London's financial sector to have a gander underneath. With some of the UK's bigger beasts such as L&G and Pru already openly hostile to Solvency II (and Resolution being an early faller in the IMAP stakes), is there potential for the rinsed-out UK insurance sector to throw its weight behind a political force such as UKIP, who would happily make an EU Directive bonfire, using Solvency II for kindling?

EIOPA and PRA - model appropriateness, expanding remits and early warnings

Another short flurry of activity recently on the Solvency II front ahead of the day (well, 'month') of reckoning for the Long Term Guarantees assessment. The industry media is certainly very chipper around the prospects of a deal being done off the back of the LTGA (here and here), highlighting that some German products may be the beneficiaries of this new found camaraderie (here).

German products - carved out from 

LTG requirements?

EIOPA themselves have been vocal on power extension this week, with Sr Bernadino making a few waves in his submission to a public hearing on Financial Supervision in the EU. Apart from his Partridge-esque diatribe about 'evolution, not revolution', he also highlighted what he considers enhancements to the existing supervisory structure in the EU, namely:

1. Strengthening EIOPA's operational independence - effectively through a change in its funding arrangements, going as far a potentially levying the industry direct, and also by having more money in any case (referred to cheekily as 'budgetary flexibility'!).
2. Reinforcing its existing 'independent challenge' role - by securing access to national supervisors' QRT data and allowing EIOPA to conduct EU-wide investigations of conduct-related issues (effectively an FCA for Europe!)
3. Enhancing both its mandate and powers - perhaps most controversially, fishing for centralised oversight of internal models, as well as powers to ban or restrict activities in member states.

One might say to EIOPA 'don't walk before you can toddle', but I guess if we are serious about operating a single market, the UK's consumers shouldn't need to rely on generally being in the vanguard on these matters (both producing nefarious financial products, then banning them and recouping the profits for compensation!)

Back to the UK's national regulator, the PRA dropped a few pearls of administrative agony for the insurance industry this week, with a couple of 'dear CEO' letters which were part-briefing and part-data request, ultimately driven by the UK's aggressive take on assessing internal model adequacy (i.e the same activity which EIOPA wishes to expropriate from national hands!). 

The purpose of the letters is nicely summarised by Chris Finney here, so I only need to highlight a couple of elements for my own interest;

Solvency II update letter

• "Unlikely to be any certainty" on timetable before autumn
• "Just under half" of IMAP candidates have applied to participate in ICAS+
• They are hoping to share learnings from ICAS+, "particularly developments used by firms in their modelling techniques" - danger here of the early birds determining what's hot and what's not in the world of assumptions/calibration/expert judgement/documentation for those not participating in ICAS+?
• Highlight pension risk as one area where the standard formula is potentially not suitable
• Next industry briefing forecast for late November (post-Omnibus II ratification?) - that's what I call 'scaling back' on costs!

Early Warning Indicators letter - remember here that the PRA's plans are potentially at odds with EIOPA's, to the extent that the PRA are already braced for some kind of legal challenge

• EWI's aim to test calibrations of internal models as well as "monitor any downward drift in capital" - presumably just quantity for the latter?
• Ratios being monitored are of pre-corridor MCRs (as illustrated in firm's LTGA submissions earlier this year) against current Individual Capital Guidance - once we go live, this is likely to be replaced by modelled SCR
• Special treatment for With-profits business to account for the fineries of that sector (cost of guarantees, level of free assets and the proportion of non-profits written in the book)
• Ratios are deliberately set so that 10% of affected firms will fall below
• Information required to conduct this work is covered by the data collection exercise below

Data collection exercise letter

• Fishing for data from all internal model applicants using YE2012 balance sheets (unless you can excuse using earlier data) which covers standard formula SCR, Internal Model SCR and ICAS by end of July.
• Also asking Life firms for key percentiles from distributions for 'risk variables' - one assumes this means each one of the risk drivers in one's SCR calculation.
• Conducting what seems to be peer review work around credit stresses and stochastic simulation files (for anyone using them).

With EIOPA and the PRA both seemingly interested in being top dog in the world of assessing model appropriateness, it looks like we might need a walk-off...

Judging model appropriateness - EIOPA or PRA?

Risk Appetite white paper from Oliver Wyman - hold the onions...

A white paper on Risk Appetite from Oliver Wyman caught my eye recently whilst fishing for supporting materials for my own take on the matter. I have covered on this blog a range of opinion

Risk Appetite - need to 'ketchup' with
latest benchmarks?

pieces on Risk Appetite from the professional institutes to the consultancies to the regulators perspectives, and so far they never seem to be on the same page at the same time.

From the Solvency II perspective, we know that (as it stands) Risk Appetite only exists in written word in Level 3 System of Governance and ORSA guidance, namely;

• That the AMSB is "ultimately responsible" for setting it (Sys Gov G15)
• That EIOPA did not wish to distinguish between "risk appetite" and "risk tolerance", rather let national regulators and the industry scrap out any divergence in term usage themselves (Sys Gov p30-38!)
• On that basis, "Risk Appetite" doesn't even feature in the L3 ORSA Guidance, though "risk tolerance limits" do (ORSA G7 and G11), perhaps indicating what terminology EIOPA prefer.

From the national regulatory perspective, the PRA have ingrained its importance as the "foundation of [an insurer's] risk management framework" in its new approach paper (section 110), whilst the Central Bank of Ireland have not only built Risk Appetite into the supervisory structure, but even had time remonstrate with the industry for its lack of progress around Risk Appetite statements!

The ratings agencies expectations on Risk Appetite also come into play, with S&P expecting its "clear communication" and "linking to risk limits" as part of its ERM assessment programme (p5, and more extensively, p9). They do however have the courage to define their terms with respect to appetite, tolerance and preference in the appendix. 

Appreciating therefore the Oliver Wyman paper is catering outside of the financial services sector, it still contains a host of rather inane platitudes such as;

Risk Appetite Framework

"...bringing discipline to major strategy decisions" - as opposed to the Chief Exec and Chair? 

"...essential for firms considering an ambitious growth strategy" - as opposed to all firms?

"...developing a robust risk appetite framework does not take an inordinate amount of time and effort" - might want to tell that to the rest of the invoice-generating consultancy world!

Risk Appetite Statement

"...more than just a set of benchmarks" - at what point has a RAS ever been that?

"...setting the 'tone at the top' about the relationship between risk and return" - "tone" as opposed to "rules"? 

It also contains a number of apocryphal tales and irritants, such as

• Senior management "often" fail to take risk appetite into account - probably true even in the financial services world pre-2007 (indeed it was a major feature of the Lehman's autopsy!), but one would think less so now.
• "Few" companies able to unlock benefits of a risk appetite framework - that feels a bit light, though I don't doubt some firms may struggle depending on their corporate structure and industry.
• Frequently interchanging between "Framework" and "Statement" throughout, in the same way as many ORSA-related materials do so for "Process" and "Report".

It ultimately recommends that a Risk Appetite Framework should contain the following characteristics;

1. Qualitative and Quantitative Risk Appetite Statement
2. Ensure the statement content is "useful" for all internal stakeholders (Board, Senior Management, Financial analysis teams and business unit leaders"
3. Connect the statement to the planning, review and decision making processes and forums

There are also a number of positive elements within the document, which I would certainly advocate, such as;

• Size Limit - they recommend no more than 4 pages for a Risk Appetite Statement, and one could probably get away with less
• Concepts of Ability (what one can technically afford) and Willingness (to tolerate uncertainty)...
• ...applied as appropriate to a set of qualitative and quantitative themes which are pretty much ready off the shelf (p3)
• Ensuring the metrics used for monitoring are company-specific - very easy to replicate what one has seen in previous firms, but these will inevitably not make the cut in decision making processes, thus defeating the point.

I'll be doing more on this topic in the near future, but for now this material may at least be of use to you for benchmarking purposes.

Lloyds of London on Validation - testing and reporting enhancement ideas

Lloyds of London delivered a presentation around model validation last week to its 80-odd syndicates which anyone in the world of IMAP would benefit from picking through the bones of, bearing in mind the rather unique position of the Lloyds application (i.e. in the door of the PRA, and seemingly well received!).

They had noted in that presentation linked to above that they had found some weaknesses in 5 areas in particular, so this presentation is a deep-dive examining the strengths and weaknesses of validation - one may expect the other 4 'weak' areas flagged may receive similar treatment in coming weeks.

While their 2013 programme aims only to close the gap between full compliance with Solvency II tests and standards and today's position, it's worth flagging some fundamentals;

• Only half of syndicates felt to meet tests and standards in full - a third are 'pending' positive assessment, the rest have not passed.
• 'Fails' seem to be centred around following up on test failures and documenting findings in the summary report, rather than anything broader.

Around the production of Validation Reports, they noted negative findings around;

• Uncertainty about how to progress when something 'unacceptable' is found during validation testing
• Content of validation reports being statistic-heavy (i.e. indigestible to any non-quants who need to make decisions off the back of the findings)
• A lack of sophistication in the testing of material risks in some instances.

The last one is particularly interesting, as the central team at Lloyds has devised a schematic (slide 11) to show the kind of testing they expect to see on the more material risks (RST, P&L attribution) versus less material (going as far as qualitative tests).

It is also worth highlighting for any benchmarkers out there that Lloyds appear to advocate around 5 pages of Validation Report per risk factor, leaving their overall expectation of reports to be 30-40 pages, with 5-10 pages of appendices (p16). Bearing in mind these reports will I suspect be some of the first to go through the PRA's hands, the frame of reference may help encourage you to bulk up or slim down your own versions!

A large amount of this presentation (from p19 onwards) is devoted to fairly granular examples of how a validation test may be 'failed', and what action would be performed in order to gain a 'pass', so for those in the test design/conduct game, you may find something to support your approaches in that detail, regardless of the risks shown in the example (premium and reserve).

Solvency II "Where are we now" - summaries from Milliman and PwC

Some useful "where are we now" materials have emerged over the last couple of weeks which you may find helpful, if only to validate your own interpretations of the current state of play:

PwC Ireland preparing for solvency II

Predominantly covers summaries of EIOPA's preparatory guidance, with some nice touches around;

• Differences between Irish Corporate Governance code and L3 system of governance demands (p15)
• Insisting that "an automated solution is required" for the reporting to NCAs, no doubt in the hope of drumming up some work out of such projects now that Pillar 2 work is largely done (p27)
• Comprehensive Use Test schematic (p39)
• General problems encountered meeting data requirements (p47)

In addition, PwC appear to be facilitating the set-up of a CRO Network over in Ireland, which will allow "all the different professional skills that feed into risk management" a place to swap Solvency II risk function-related war stories. First meeting at the end of the summer, can't wait to hear the outcomes.

Milliman - Solvency II Where are we now?

This very detailed slide package was released last week, and like the item above, covers all of the timeline-related activity around EIOPAs L3 work. It goes into updating readers on the latest position on;

• Economic Balance Sheet - noting similarities and differences in IFRS Phase II/Solvency II approaches to valuation, and a large amount of detail around technical provisions
• Data Management - retreads some of the FSA's findings from last year
• SCR - Covers latest standard formula position, as well as partial internal models and generic IMAP issues (again, retreading FSA letter content from last year). Particularly nice IM schematic on slide 21
• System of Governance - Basics on general requirements, function requirements and risk categories (which they have as 'risk management areas'). ORSA piece is fairly generic, but the schematic on Risk Appetite Frameworks (p35) is quite handy.
• Supervisory review - covers circumstances around capital add-ons and how they see the PRA identifying and assessing such instances.
• Supervisory disclosure - SFCR, RSR and QRT content and timetables for submission. Particularly useful to have this summarised, bearing in mind EIOPA's expectations for the interim period are for a subset of the full QRT suite previously published
• Insurance Groups and Equivalence are also covered at the end

Plenty of substance between the two (around 100 slides), so if you have an hour to kill, sers toi tout seul!

NAIC's ORSA Manual for US Insurers - a helping hand?

"Tired and Emotional" - European
Insurance industry in 2013 

After the self-inflicted Solvency II transformational pressures of 2011 and 2012 resulted in more wobbly legs than a teenage disco at midnight, the relative calm of 2013 (to date) will have come as a blessed relief for European regulators and industry alike. Not so over in the States though, as they crack on with their take on the Own Risk and Solvency Assessment, releasing their industry guidance manual a few weeks back, in preparation for a proper crack at implementation in 2015, the driver of course being IAIS ICP obeisance rather than Solvency II equivalence.

They have kindly summarised the changes made since their 2011 version of the same manual on p9, which focus on accounting basis, scope (for groups) and ensuring certain year-on-year changes are appropriately flagged. 

Generic ORSA content - what
regulators "really really want"?

Unlike in the UK where there has been a marked reluctance to offer anything in the way of meaningful assistance to smaller insurers, such as a report template or checklist of suitable content/processes, the NAIC, just like the Spice Girls before them, are happy to "tell ya what I want", regardless of the potential for genericism.

That said, a recent Towers Watson survey suggested that there is still plenty of work to be done and staff to be hired in order to get with their ORSA programme.

The NAIC clarify that the US ORSAs are expected to be conducted no less than annually, with insurers documenting the process and results. After that, a high level "ORSA Summary Report" is to be submitted to the lead/state regulator once a year, which "should contain";

1. Description of the Risk Management Framework
2. Assessment of Risk Exposure (we would read as "risk profile" from what I can see)
3. Assessment of Risk Capital and prospective solvency

The Manual states that "[it] is intended to provide guidance for completing each section of the ORSA Summary Report", which should therefore make the job a doodle!

Some interesting bits jump out, not necessarily in contrast to reported/observable differences from the EU approach, more the fact that they are specified in the manual rather than taken as given;

GENERAL

• Chief Risk Officer/executive head of ERM Framework must sign the ORSA Summary Report
• Timing of supervisory reporting may move to match up to strategic planning cycle of an insurer
• Internal documentation expectations seemingly not as exhaustive as EU "repeatable by independent knowledgeable third party", simply to allow a more in-depth look at a given are at supervisor's request

DESCRIPTION OF RISK MANAGEMENT FRAMEWORK

• Specifies in principle what an "effective ERM Framework" comprises of (p18) - includes our old friends 'risk appetite', 'risk tolerance' and 'risk limits' in this, though they are isolated and defined in a passable manner on p25!
• Asks for various descriptive texts around processes
• Specifies that weaknesses/omissions found in the report here may change the supervisor's approach to the insurer!

ASSESSMENT OF RISK EXPOSURE

• Quantitative and/or qualitative assessments of risk exposure, in normal and stressed environments, for each "material" risk. Noticeably don't list Strategic/Frictional risks in the examples of "material" risk, though do mention Reputational risk as one for which "quantitative methods may not be well established"
• "Simple stress tests or more complex stochastic analyses" may be used in assessing the stressed environment
• Potential for supervisory intervention in the levels of stress assessed (in deterministic scenarios) or  even parameters in the ESG (for firms with stochastic capability)
• On risk correlation, "History may provide some empirical evidence of relationships, but the future is not always best estimated by historical data" - not sure where that leaves everyone!

ASSESSMENT OF RISK CAPITAL AND PROSPECTIVE SOLVENCY

• Provide a non-exhaustive list of considerations that an insurer/group will need to cover when assessing the adequacy of capital over its business planning period, which touches on many of the areas prominent in the EU's work (time horizon of assessment, valuation basis, definitions of "Solvency")
• Defines that this part of the assessment should identify "...the capital needed within a holding company system to achieve its business objectives"

Is this the type of demi-prescription that the smaller EU insurers are looking for? Is it too much to ask for national regulators (Ireland a notable exception) to take a similar stab at communicating what they want to see?

Internal Model Validation - the "desire for certainty"

Some useful snippets on the links here for anyone in the model validation space, whether if be the practical applications of Monte-Carlo simulation outside of the insurance industry, actuarial perspectives on model risks themselves such as parameter uncertainty and goodness of fit testing where "the problem is more often too many candidate distributions" as opposed to restrictions in choice.

This fantastic blog post from one of Willis's finest is about as blunt a critique of actuarial modelling activity and its potential for subsequent misuse as I have read, and I would strongly recommend it on to non-expert risk practitioners who may one day find themselves in the model validation/use test firing line. A few of the pearls of wisdom offered (focused on reinsurance industry, but relevant to all) include;

• How the human "want to believe" and "desire for certainty" can lead to models making rather than guiding decisions
• Reliance of models on "large numbers of heroic assumptions"
• "Data is always limited and flawed"
• That "models take combinations of assumptions and torture them to come to conclusions"
• The revisiting of assumptions only when the answers don't fit expectations ("euphemistically called 'calibration'", hilarious!)
• That using models for setting regulatory capital, rather than just informing decision making, has led to "extremely onerous" IMAP activity i.e. the limitations noted above are so well established that the regulators cannot ignore them at a granular level.

Then there this piece from Deloitte US on model validation, or more specifically, research into the quality of existing actuarial modelling controls, is an eye-opener for anyone working in the validation space. With RMORSA and associated capital modelling firmly on the agenda Stateside, it is interesting to watch how aggressively they approach validation, bearing in mind this work was commissioned by the Society of Actuaries, whose members may ultimately be charged with applying some of these recommendations!

This research in particular assesses current state versus best practice controls over the assumptions, inputs and outputs of actuarial models, and though the sample of respondents to the survey is relatively small (representing "30 unique companies"), the absence of suitable supporting documentation around model governance so evident in the UK's IMAP process appears to be a depressingly constant theme. This report at least includes recommendations as to how the US actuarial profession may bridge some of the gaps Deloitte identify.

In the NAIC's ORSA Manual, they ask that "ORSA Summary Report should provide a general description of the insurer’s process for model validation, including factors considered and model calibration" (p7), which I guess is what one expects to see in the EU (i.e. validation being a sub-process of the ORSA, which can be summarised in the ORSA reports). That said, the breadth of validation work performed over there will surely be driven by S&P expectations communicated in ERM Level III reviews, rather than profession-sponsored consultancy recommendations!


Finally (and slightly off track), an odd piece from Towers Watson on validating ORSAs, pitched to a room full of Internal Auditors. Would be unfair to say there aren't some salient points throughout, but given that there is "no clear requirement" to validate ORSAs (there was something on the matter in the original CEIOPS ORSA pre-consultation, but it was dropped in the public consultation and the final advice), then you would think it could be covered in less than 30+ slides!

As it happens, the TW slide pack for internal model validation appears to have been raided and had the acronym 'ORSA' jemmied into the text for much of the second half of it.

Munich Re on Strategic Risk - ORSA food for thought

A thought-provoker from Munich Re for anyone in the business of Emerging Risk/'Top Down' risk review activity with this release called "Strategic Risk to Risk Strategy", which leans on the findings of the World Economic Forum's 2012 Risk Report to observe how the risks highlighted may compromise existing insurer strategies, as well as materialise into the thoughts of underwriters once sufficient data exists.

With coverage of "strategic risk" featuring in everyone's ORSA thoughts, as well as obligations around scenario analysis and reverse stress testing, there are some benchmarks in here that are worthy of consideration for practitioners. In particular;

Strategic Risk definition
Risk of making wrong business decisions, implementing decisions poorly, or being unable to adapt to changes in the operating environment


Subcategories of Strategic Risk

• Ineffective M&A
• Incorrect interpretation of external activity in a given market
• Decision making based on poor pricing/profitability assumptions
• Legal misinterpretation

Specific points

• In their opinion an insurer's risk strategy "goes beyond covering the risk capital requirement for a portfolio for the forthcoming financial year on the basis of valid models" to actually questioning and enhancing a company's business. I think most practitioners would agree that any documented risk strategy would look further forward than one-year! 
• That shortcomings around the evaluation of Strategic Risk "...are not so much of a question of the [informational] resources available", which are plentiful, nor are they especially time-pressured.
• They also include a definition of Reverse Stress Testing as scenarios which "endanger a company's business model as a whole" - interesting purely in the absence of an EU-driven definition to-date, as it tallies along with UK equivalent definitions.

An edited list of Strategic Risk scenarios is included (p3) which you may want to line up against your own activity in this field, and follow on by exploring which of these are within and outside of an insurer's sphere of influence. You might also benefit from the diagram on p6 on the main stakeholders in an insurance company which may influence your selection of strategic risk scenarios depending on your structure and business model. 

The aim of Solvency II is...

As Solvency II implementation stubbornly drags its heels like a legislative bull in the Plaza del Toros of European bureaucracy, I noticed a few mutterings about the 'aim', 'purpose' and 'objective' of the Directive and its companion texts as the main protagonists play for time.

Aim of Solvency II - could be better

This is particularly frustrating as a practitioner, where consistency and brevity of message is vital when one generally has limited time with AMSB members (most notably Non-Executives), and therefore may find the messages being offered to the press differ from those previously communicated to clients.

In addition, EIOPA's status as "super-regulator" (Omnibus II pending!) now allows for further demarcation of message between those who currently determine the adequacy of senior management/director fitness, propriety and Solvency II knowledge, and those who will be co-ordinating the revised approach from 2014.

Finally from the bottom up, the stealthy creep of Solvency II into the general public/intermediaries worlds surely makes it imperative that the overriding purpose of the Directive (as well as the expense and delays!) can be explained in unequivocal lay terms - though maybe not as haplessly as the PRA's top man the other week when he tried to price Solvency II in terms of unfinished tunnel projects...


Regulators and industry tend to be focusing on policyholder protection when justifying the Solvency II approach to supervision, though in a rather long-winded manner in the CBoI's case!

Regulators

Bernadino to Croatian press, March 2013

Purpose of Solvency II is "...a harmonized prudential framework in the EU"

Bernadino to German press, April 2013

"The purpose [of Solvency II] was to increase policyholder protection and incentivise better risk management"

The Prudential Regulatory Authority

"[Solvency II's] main objective is the adequate protection of policyholders and beneficiaries"

Central Bank of Ireland

"Solvency II is a risk based approach that aims to provide the basis for a more ‘root and branch’ review of the overall financial position of an insurance undertaking. It represents a new system of supervision that assesses the overall financial position of an insurance undertaking or group. The new supervisory system is concerned with, amongst other areas, highlighting the importance of holistic risk management and prudential standards. Solvency II also aims to reduce the possibility of both insurance undertaking failure and, in a wider sense, of disruption to the efficient operation of the insurance market"

Industry

Lloyds (whose CEO has been a touch vocal on the threat of Solvency II early implementation recently) have the objectives bullet-pointed on their site as;

• Improved consumer protection
• Modernised supervision
• Deepened EU market integration
• Increased international competitiveness of EU insurers 

Others tend to get "protection" somewhere in the mix;

"[Solvency II] should bring consistency to the way in which EU insurers manage capital and risk with the aim of enhancing protection for consumers" - Standard Life AR&A 2012 p6

"[Solvency II's] objectives are to establish a solvency system that is better aligned to the true risks of insurers, and aims to enable supervisors to protect policyholder interests as effectively as possible" - Aviva AR&A 2012 p129

"The purpose of Solvency II is to unify a single EU insurance market and to enhance policyholder protection" - IPB 360 AR&A 2012 p69

"The aim of Solvency II is to introduce EU-wide regulations that match capital requirements as closely as possible to the risks incurred." - Munich Re

Expert lobbyists

"The overriding aim of Solvency II is to bring a common, risk-based approach to capital setting, supervision and disclosure to the whole of Europe" - ABI's Tim Breedon, 2010 (original speech text unavailable from ABI site)

"The primary purpose of Solvency II is consumer protection" - FERMA executive board member 

Naturally, the consultant/vested interest world generally prefers to keep it fluffier to justify the invoices (Thomson Reuters a notable exception);

Consultancies

"Solvency II represents an opportunity to not only improve insurers' operations, but also develop significant competitive advantage in a challenging market" - KPMG's Phil Smart

"[Solvency II] is expected to provide a catalyst to transform the way insurance companies run their business" - E&Y

"[The Solvency II] project aims to create a more harmonised, risk-oriented solvency regime resulting in capital requirements that are more reflective of the risks facing insurers" - Towers Watson

Vendors/vested interests

"The aim of Solvency II is to gather all risk together in a holistic way" - FINCAD

 "[Solvency II] will ensure that insurers are protected against financial collapse, which is rife in today's unstable financial environment" - Xactium, clearly not big readers of the SIFI materials currently doing the rounds!

"The primary aim of Solvency II is the creation of an effective single market in insurance services across all 27 countries, creating the conditions for an adequate level of consumer protection." - Thomson Reuters

"[Solvency II's] aim is to ensure the financial soundness of insurance companies to not only protect policyholders’ interest, but also increase competition in the EU insurance market" - SAS 

Saddening really to see how a decade of malaise and false starts can even start to erode the fundamentals...

Elderfield at the European Insurance Forum - one for the road...

So the European Insurance Forum is in full swing over in Dublin, which from what I have seen to date in the tweetosphere (thanks DIMA and Mike!), sounds more like Alan Partridge's sales conference for Ireland plc.

That aside, Matthew Elderfield, the outgoing Head of Financial Regulation at the Central Bank of Ireland, gave a rousing speech touching on risk-based supervision and the 'prospects' for Solvency II. As a member of EIOPA's management board and head of the second largest internal model assessment body in the EU, his words are very much worth heeding.

Given that he has already addressed this forum a couple of years ago on such matters, as well as being relatively outspoken  recently on the quality of components parts of Irish risk management systems, one might expect a few home truths on his way out of the door to an equally precarious task as Head of Compliance at Lloyds Banking Group.

EIF 2013 - More to Ireland 'dan dis'?

The headline acts for me was his revelation that diversification in internal models remains a bugbear, to the extent that he supports the kind of 'floor' arrangement being given airtime at the PRA. Given he had already made his distaste at the extent of the diversification benefits being sought clear in a speech last year, it is not surprise to see it on his agenda, more that it implies that the expert judgements of those involved in the calculation process may be overridden (due to regulatory prudence?), regardless of how well they are documented or supported. 

In addition, his angle on bridging the LTG issue makes interesting reading for anyone who doesn't receive briefings on EIOPA's inner workings.

Noteworthy points (my emphasis if emboldened) therefore included;

On Solvency II

• Drawn out process has "naturally resulted in a combination of fatigue and exasperation", with the "...high costs of preparation compounding concerns"
• Regardless, "it is unacceptable that the common regulatory framework for insurance in Europe in the 21st century is not risk-based"
• "Urgently need" the framework to reflect asset risks, riskiness of different lines of business, encourage better governance and risk management, and provide better disclosure.
• "Solvency II does indeed have its imperfections", but "...the benefits of moving ahead with Solvency II outweigh the costs..."
• Notes his "long-standing concern" around over-optimism in the calibration of internal models
• "...complexity has clearly gone too far in some areas - and makes implementation very difficult for smaller companies"

On Omnibus II and EIOPA's LTGA

• Omnibus II delay "...is a course of considerable concern to regulators and industry alike", and the "...entire framework is essentially stuck on one issue" which "...will require a political compromise"
• Personally supports a more generous approach to matched premium adjustments on certain lines of business, provided they are (a) only applied to the back-book, (b) companies provide Pillar 3 disclosures both with and without those adjustments, and (c) supervisors can apply capital charges if they are not happy.
• "With European elections looming next year, it is important that this process concludes in the autumn at the latest"

EIOPA - filling gaps
since 2013

On EIOPA's Interim Guidelines

• As justification for supporting them, "Much of the Solvency II framework is already clear", and emphasises that "we will adopt a proportionate approach"
• EIOPA is "helping 'fill the gap' created by the hiatus in the political negotiation"
• "The EIOPA initiative should be strongly welcomed by regulators and industry alike"
• Hopes the system of governance and ORSA interim guidance provide "manageable and useful transitional steps towards full Solvency II adoption"
• For Pillar 3, expecting "best efforts" especially from High Impact insurers, with the use of statutory powers held in reserve "as a last resort.
• For IMAP, can neither sanction an "early conclusion" nor a "hard stop", so will ultimately elongate the administrative burden, hopefully leaving less to do towards the end.

On Diversification benefits

• "...in common with a number of other [unnamed] supervisors", CBoI is concerned to ensure "prudent recognition of diversification effects"
• "Fundamentally, what is needed is a broad agreement on the outer bounds of acceptable levels of diversification in the model approval process", citing one jurisdiction (UK?) looking at hard SCR floors based on proportion of MCR.
• "...the Central Bank's message to Irish firms is to take a conservative approach to the recognition of diversification..."
• Points to the failure to add formal constraints on diversification benefits in the Directive text
• "Supervisory quants are at risk of being outgunned by industry quants in the minutiae of a correlation debate"
• Also has a stab at "overly generous approval" in other member states in the context of regulatory arbitrage - is it that hard to say "no" just because the home regulator says "yes"?

Of less consequence for those outside of Ireland, he goes on to cover the CBoI's bespoke work around VA-specific risks (in light of prolonged low interest rate environment), the failure of Quinn Insurance, and the bedding in of their PRISM risk-based supervisory framework, the latter eliciting the comment that "we are still some way from fully embedding our new approach".

From this, one might reasonably think that, should Mr Elderfield's successor continue in the same vein, that the correlation matrices of Ireland's 30-something IMAP candidates are likely to get a severe working over in the next couple of years. Let's hope the industry gets their documentation in order!

Lloyds directors briefing and Solvency II update - looking well

With Solvency II news and comment pretty thin on the ground this month as the guys at EIOPA count their LTGA beans, it was nice to see the trailblazers at Lloyds release their director briefing slides from last week, an event one may assume is relatively frosty after the money spent in preparation and the distinctly agitated tone on the matter from their CEO recently!

Bling - things Lloyds could have
bought with £300m

As Lloyds are already well down the road of internal model development (having almost kept to their original IMAP deadline they were able to get materials down to the FSA prior to the implementation deadline shifting), the slides are very revealing as to where the group remain lacking when attempting to meet the Tests and Standards for Internal Model approval (TSIMs). With 84% of the market 'by materiality' meeting the principles of the TSIMs, they are clearly in good nick, although by stressing 'materiality', it implies that a relatively large number of smaller members are perhaps still lagging.

The list of "common issues" found will neither surprise nor delight anyone else in IMAP, given that the same themes have been festering for a good 18 months now, and the legislative paralysis on the continent has clearly done nothing to aid the industry (in particular, the FSA letter from this time last year touches on most of these!). Specifically, they observe problems in the following areas;

• ORSA - looking far enough forward (i.e. past year 1), and using stress and scenario testing effectively
• Validation - evidencing validation work done, and following up on test failures
• Model Change - justifying the thresholds for minor/major changes, and agreeing an approach for aggregating minor changes so that they can be considered as minor/major in aggregate
• Use Test - using the model for something other than spewing out an SCR, and it would appear also that when interviewed, the effectiveness of board training and their understanding of the model is being found wanting
• Documentation - documents are either not checking off against the TSIMs, or the content is contrary to the revised controls and processes which have been developed for Solvency II

As Julian Adams made clear at the turn of the year, full compliance with TSIMs is not part of the ICAS+ agenda down at the PRA, however they will expect firms to be fully aware of where they are currently light, and what they plan to do about it. Certainly looks like the Lloyds application won't struggle in this regard, and I wish them well.

The PRA's take on EIOPA's Interim Guidelines - far from a 'Tragedy'...

The Prudential Regulatory Authority have celebrated their second week in office by hosting a number of industry briefings regarding EIOPA's Solvency II Preparation Guidelines. One Blogger keenly dripped some of the materials discussed out yesterday, but I've had a look through the briefing materials released today on the PRA's site to see if there are any messages worth amplifying.

Steps - appropriate?

From a calendar perspective, the PRA are planning some technical workshops with "industry representatives" in early May, to be followed by an industry briefing later in that month. The output from the workshops appears to be a major influencer on whether the PRA will "comply" with EIOPA's guidance or "explain" why they won't.

With final versions of EIOPA's guidelines expected by September/October 2013, the national regulators have an additional 2 months from publication to formally confirm their "comply or explain" position.

Reading between the lines this looks (for now at least) as a foregone conclusion however, with this comment from the internal model pre-application slides;

"We expect firms to have regards to the interim guidelines and take appropriate steps to prepare for Solvency II" 

Three slide sets have been released - anything new, or worth reiterating, below;

Internal Model Pre-Application

• Model change - to be monitored throughout pre-application.
• Colleges - Evidently notable divergences in assessment practice across the union which the Guidelines hope to fix, but "no direct implication for firms".
• IMAP - while EIOPA's guidelines "will be considered as part of IMAP reviews", they don't (in the PRA's mind) touch on anything which wasn't already part of existing L1/Draft L2/pre-application L3, so no surprises on that front. They do however highlight the elements on Expert Judgement and Validation as providing more clarity on supervisory expectations.

ORSA and System of Governance (combined)

• No PRA expectation of  a full/'live' ORSA or Solvency II-compliant systems of governance by 2014
• Neither are there any expectations for firms to make changes in investment strategy/capital strategy/outstanding Pillar 1 elements - at least not due to Solvency II in its current form.
• For System of Governance, the PRA's slides highlight areas where EIOPA's guidelines exceed expectations of the PRA Handbook - these include Board MI; revisions to control functions; revisions to Risk Management Policy; Prudent Person Principle; and calculation of TPs.
• For ORSA, the slides clearly indicate that dry runs and ORSA process development should be the immediate focus, and it should serve to reaffirm best practices that already "underpin the ICAS".

Submission of information to supervisors

• Only a subset of the full package recommended by EIOPA in July 2012
• EIOPA want to see at least one round of annual submissions, and two rounds of quarterly submissions before Solvency II goes live, with 2016 seemingly the preferred year.
• On that basis, firms will have 20 weeks (26 weeks for groups) after year-end 2014 to submit annual template obligations.
• They will then have 8 weeks (14 weeks for groups) after quarter end Sept 2015 to submit their quarterly template obligations.
• As per ORSA, firms which are involved with internal model pre-application will need to perform both standard formula and internal model work in this area.
• Also as per ORSA, thresholds for participation based on TPs (Life firms)/Premiums (Non-Life).
• Narrative reporting requirements are "significantly reduced"compared to final requirements - however, there is plenty of crossover between what one might document during ORSA processes and what is expected to appear in RSR/SFCR, so firms shouldn't struggle in this regard.
• The concept of a "Reporting Policy" document (guideline 33 in the consultation) covering who will be responsible for what in the submission of information to supervisors, is referenced in these slides. This hadn't featured on my radar before as 'compulsory', so documenting this early, even just as process steps/maps, seems like a move that the PRA would appreciate.

UK's "new" Prudential Regulatory Authority - Approach to Insurance Supervision

So a magical thing happened over the weekend: a venerable institution disappeared on Friday, only to come back reborn on Monday...

...that's right, the FSA is no more, being replaced by two more focused entities in the Prudential Regulatory Authority (PRA) and Financial Conduct Authority (FSA). This is part of the UK-specific fallout from the financial crisis, where a perceived lack of focus from the former tripartite system which housed the FSA allowed for both systemic risk (Northern Rock, RBS) and conduct risks (PPI, Interest Rate swaps) to emerge largely unchecked.

Rather excitingly, this means a new website with some natty logos from the Bank of England (which

PRA - emperor's new clothes
or Solvency II aperatif?

has rehoused the PRA side of the FSA), as well as a statement on the new supervisory approach that the PRA will be taking.

For anyone in the ERM/Solvency II/Corporate Governance space, this gives us a chance to pick up on the kind of regulatory interrogation one might expect when writing/upgrading system of governance-related materials in preparation for both full Solvency II implementation in 20??, as well as how they are accommodating EIOPA's interim measures from 2014.

Remembering that the PRA's two statutory objectives are to promote safety and soundness of the firms it regulates, as well as specifically providing appropriate protection to insurance policyholders, I thought it wise to make some notes on how they have catered for Solvency II and deference (when due) to EIOPA, as well as the general content around expectations of governance systems. I found the following worthy of note;

Control function-specific

Section 82 - "[PRA] wants to be satisfies in particular that designated risk management and control functions carry real weight within insurers"

Section 117 - Should have separate risk management and individual control functions in place (dependent on nature scale and complexity etc)

Section 118 - the PRA "expects these functions to be independent of an insurer's revenue generating functions"

Section 120 - expectation of an "operationally independent Actuarial function", which the PRA consider to be "integral to the effective implementation of a firm's risk management framework"

Section 182 - "Actuaries can play an important part in supporting prudential supervision"

Section 119 - an effective Risk function on the other hand merely "ensures that material risk issues receive sufficient attention from the insurer's senior management and Board" - just because I'm paranoid, doesn't mean the Risk profession isn't being made something of a gooseberry here, particularly as the FSA/Actuarial profession love-in started some time ago!

On Risk Appetite

Section 110 - a firm's risk appetite "[is] to be integral to its strategy, and the foundation of its risk management framework"

Remuneration

Section 84 - "remuneration and incentive schemes should reward careful and prudent management" - just like Prudential's and Standard Life's did this week!

Section 194 - Hint at potentially restricting pay in firms if intervention is warranted

Stress/Reverse Stress Testing

Section 109 - the AMSB must have "...an explicit understanding of the circumstances in which their firm might fail"

Section 145 - with regards to Reverse Stress Testing, "...management should consider the reliability of the output of the internal model compared with the results of these tests"

Section 106 - "competent, and where appropriate, independent control functions" should oversee risk management and internal control frameworks

Internal Models

Section 116 - On Internal Models, the AMSB should understand;

• extent of reliance on models for managing risk;
• limitations of their structure and complexity;
• Data used;
• key underpinning assumptions

Section 140 - "PRA expects internal models to be appropriately prudent"

Section 144 - firms may not choose the lowest capital requirement to determine whether or not to model internally

Regulatory Capital

Section 135 - for capital adequacy, firms "...should not rely on regulatory minima", and also "...should not rely on aggressive interpretations of actuarial or accounting standards"

Proportionality

Sections 212-215 - touches on treatment of "low impact" firms - is this effectively where aggressive approaches to proportionality interpretation should be expected (combined control functions, limited documentation, passive acceptance of Standard Formula etc)?

p43 - table covering the allocation of supervisory staff - 10 staff to 1 firm for the 25 largest insurers, versus approaching 10 firms to 1 supervisor at the small end.

Solvency II-specific references

• In the PRA's view "[Solvency II technical detail should] leave scope for supervisors of individual insurers to make informed judgements around risks posed"
• Confirms that elements of the Directive such as Prudent Person Principle, ORSA, Control Function requirements and Pillar 1 are all aligned with the new Threshold Conditions
• Model approval will be dependent on "adequate" risk identification, measurement, management, monitoring and reporting throughout the modelling process
• Will impose capital add-ons when necessary "to ensure insurers meet the required standards"

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')!

EIOPA Preparatory Guidelines - System of Governance

Consultation on System of Governance preparatory guidance (plus explanatory text)

For a topic which has felt like a given for a number of years (certainly in UK and Ireland where we already ask a lot in this area), the System of Governance preparatory guidance is still 40 pages, comprising of 57 guidelines, accompanied by 60 pages of explanatory text.

A couple of things immediately grabbed at me when going through the guidance (again anticipating a conservative approach of the supervisors rolling over and applying all content as is)

• That the Risk Management Policy (regardless of how one structures the component elements) is expected to contain procedure-level information about the management of each major risk category - this sounds hopelessly disproportionate, and almost impossible for supervisors to reasonably get through;
• That it is "expected" that large or complex firms separate their four key control functions, and that others at the small/medium end may ultimately find it easier to do so than consider the range of controls/maintenance of independence required to have combined functions;
• That an expectation that insurers' systems of governance require regular independent review, with the AMSB only retaining the ability to choose the performer;
• That insurers will be expected to formally identify/analyse/report on Operational Risk Events
• That EIOPA bottled out of defining Risk Appetite and Risk Tolerance, leaving national supervisors and insurers to fight it out amongst themselves.

Ultimately, the document reads like a checklist which practitioners or full-timers can run through against the suite of documentation no doubt already in existence which, if based on CEIOPS/EIOPA final advice and/or the Commission's Draft Level 2 measures, won't be miles away as it stands. On that premise, I've only listed elements which jump out for me.

GENERAL GOVERNANCE REQUIREMENTS

Guideline 3

• Evidence should be collected of the AMSB "proactively" seeking information from committees/key functions

Guideline 5

• No more detail than an expectation that the AMSB "appropriately implements" their key functions - in the explanatory text, it goes on to say that larger companies will be "expected" to fully separate Risk/Actuarial/Compliance/IA, with a series of measures expected to preserve functional independence if smaller companies choose to combine some.

Guideline 7

• Expectation that both AMSB decisions, and how information generated from the Risk Management System (RMS) influences them, is "appropriately documented" - compulsion for Board Decision Logs?

Guideline 8

• Regular System of Governance reviews appear to be expected, which are documented and reported back to the AMSB - the AMSB retains the right to choose who performs it 

Guideline 9 - All policies must include:

• Goal of policy
• Tasks to be performed and by whom (person or role, unlike for validation, where person/s was specified)
• Associated processes and reporting procedures
• Obligations of affected operational teams to inform control functions of "relevant facts" at all times

Guideline 10

• Contingency plans are expected for areas which are "especially vulnerable" - this pushes outside of what one would consider a conventional contingency plan for operational emergencies.

FIT AND PROPER

Guideline 11

• Must have a Fit and Proper persons policy
• It must be equally applicable to both hired staff and outsourced functions

RISK MANAGEMENT

Guideline 15 - AMSB is "ultimately responsible" for:

• RMS effectiveness
• Setting Risk Appetite and Risk Tolerance Limits
• Approving Risk Management strategies and policies

Guideline 16 - Risk Management Policy must cover at least

• Risk categories used and measurement methods
• How each category/grouping of risks is managed
• Risk tolerance limits for all categories in line with Risk Appetite
• Linkage of both SCR and ORSA to risk tolerance limits
• Frequency and content of regular stress tests, and circumstances for additional testing

In addition, the associated guidelines touch on the risk categories within one's Risk Management Policy. There is an expectation for pretty much every category that procedure-level information is included in the policy documents themselves, as well as hard limits, which is unlikely to be the case as it stands.

Guideline 18 - Insurance Risk Policy

• Expected to cover types of acceptable insurance risks, how premiums will cover claims/expenses, as well as how product design accounts for investment restrictions and formal risk mitigation techniques

Guideline 19 - Op Risk Policy

• Expectation that Operation Risk Events will be formally identified/analysed/reported in insurers, and that a system for collecting and monitoring them should be in place.
• Operational Risk Scenarios should be developed and used, based on failures of key persons/processes/systems and external events

Guideline 23 - Investment Risk Policy

• Buzzphrase introduced of managing the level of "security, quality, liquidity, profitability and availability" of one's asset portfolio

OWN FUND REQUIREMENTS AND THE SYSTEM OF GOVERNANCE

Guideline 32

• Concept of a "medium term capital management plan" introduced which covers; planned capital issuances, maturities and distribution policies - not sure how that works for mutuals, but I can see what they're fishing for

INTERNAL CONTROLS

Guideline 33

• "All personnel [should be] aware of their role in the Internal Control system
• The Internal Control system should be "commensurate to the risks arising from the activities and processed to be controlled" - this line should hopefully avoid overkill

INTERNAL AUDIT FUNCTION

Guideline 36

• The Internal Audit policy should include the procedure for informing supervisors [of whistleblowing-level wrongdoing I guess]

ACTUARIAL FUNCTION

Guideline 44

• "Material"deviations of Best Estimate Liabilities should be back-tested for by the Actuarial function, reported on, and remedial changes proposed

Guideline 46

• The Actuarial function is expected to "contribute to" specifying the risk coverage in the internal model, as well as the dependency structure - this feels like areas where, even in larger insurers, the function probably already leads, so will they be asked to take a step back?