Irish QIS5 results - par for the course?

Our good friends at the Central Bank did a lot more than scaring the bejeezus out of the senior bondholders of the remaining banks (although as an ardent follower of the 'number 1', I will resist any jokes about severe haircuts) - they also released the Irish-specific QIS5 results.

On the face of it it seemed par for the course compared to the EU-wide exercise - however, they actually fared better on participation (80% ish against 70%). That's where the good news ends, as there were more non-SCR compliant (20% against 15%) and the same for non-MCR compliant (both 5%).

I noted the following on the way through as items of particular interest;

• Life companies in general saw surplus capital rise, but overall coverage fall (life co participation was 87% in isolation). This is because generally Own Funds rise, but so does required capital (the denominator), and the dynamic in that change determines the extent of benefit/downside.
• Over 30% of life cos were over 4x covered! 17% are in the zone of "tight or under" SCR
• Reinsurers and capitives still getting the thin end of the wedge
• Complaints about complexity in the counterparty default and non-life cat modules, non-life underwriting risk calibrations, as well as the risk margin element of the technical provisions calculation
• Contract boundary and negative technical provisions feature extensively throughout, and I will look specifically at this (again, to be an actuary!).
•  A straw poll on data reliability was taken, and the areas of least comfort were in the calcs for Risk Margin, USPs and non-life underwriting risk
• In the preparedness stakes, 35% of respondents had a problem with SCR calc data, and another 35% with the SCR methodology
• Technical provisions were down in general (prudent assumptions, discounting for non-life business and negative provisions mooted as reasons, with Risk Margin somewhat offsetting).
• Contract boundaries determined at zero for unit linked contracts (causing SP and RP inconsistency)
• "Overwhelming" view that QIS5 definition was out of line with IFRS, uneconomic, unrealistic and not reflective of the risk profile of the contract [very strong words, which sounds like the SAI gave it some thought!]
• Illiquidity premium approved of in theory, but poorly executed in QIS5
• Most companies used one of the simplifications for the Risk Margin, as the "sums were too hard" (paraphrasing slightly!)
• Expected Profits in Future Premiums causing big changes to Own Funds

The rest of the doc is heavily internal model influenced, and while I like the look of it from a scenario challenge perspective, I'll save it for another day.

Lots to catch up - starting with the Dutch...

Prohibitively expensive wifi issues aside, I have plenty to catch up on from last week. A best practice ORSA construction guide, issued by the VvV in the Netherlands, made interesting reading (in particular the translation into English, which read like the script for the Austin Power's Goldmember movie in parts).

Sadly cannot find the link to the guide, but I have summarised it on an as-read basis below - bearing in mind AEGON is part of this body, it carries appropriate weight on an EU-wide basis;

VvV ORSA Approach

• Essential ORSA elements
• 3 lines of defense, 
• Tone-at-the-top, 
• Risk appetite framework, 
• Risk identification and business scenarios analysis, 
• Risk & capital profile

• They will split it into static (RSR-type content) and dynamic (FCR and ERM-type content)

• Will need to consider all risks “that may lead to a material reduction in...own funds or the protection offered to policyholders”, and stress testing should be used in considering all risks

• Ticklist for content;

·         Description of risk areas

·         Description of ORSA process

·         Description of responsibilities

·         Overview of strategy, identified risk and scenarios

·         Stress test results

·         Financial condition and overall solvency needs

·         Strategy for raising funds (if required)

·         Independent assessment result and description

·         Content and frequency of management reporting

• Some confusion on the governance aspect (perhaps in translation), but they advocate a management report to be pre-approved at Risk Committee level, then Ex Com level, and finally with Audit Committee.

• Lot of focus on “Embedding ORSA” – input for decision making, not reporting output [I suspect the ICA and FCR already do this for UK firms, less so the KRI monitoring at the ops level.

• Bit crazy on Risk Profile definition, which I would call inherent/residual risk rating (i.e a component of the formula for calculating a risk profile) – no aggregates of data to be used as divisors, as per IFRSA's approach for risk based monitoring in Ireland.

• Risk Profile component ticklist is however a little clearer;

• Description that helps entries stand up in isolation
• What could cause it to crystallise, and consequence
• Impact and Likelihood, on inherent and residual basis
• Control detail
• Management choice of the 4 T’s (Tolerate, Treat, Transfer or Terminate)

•  Detail quantitative data collection required (as if Actuarial are not already doing this!) as asset book profile, yield curves etc, but then also expect to see Risk Profile factored ub.

• They nicely detail how the Base Case (which is deterministic, or best estimate) should  translate into scenario analysis (stochastic) and stress tests (in extremis scenarios) - great for the non-actuaries!

• Specify that a written policy should be developed for scenario analysis including
•  Who determines them, and what constitutes one?
•  What triggers a scenario construction? (external events, NPD etc)
•  Who administers/validates
•  What is done with recommendations for management on capital requirements

• Specify that guidance should be developed in house for stress testing including;
•  Governance, challenge and regular review
•  Should only support, not direct, business decisions – limitations to be documented
•  Sensitivity analysis of single risk drivers
•   Reverse stress testing

• FCR generally covers their requirements on Capital Management, though they expect strategic planning to start with a capital adequacy check for last period

• Advocates a Risk Response and a Capital Response (Tolerate risk, but prepare to deploy more capital). I love this idea, and will examine the practicalities in near future, in particular if one wanted to tolerate a risk without deloying capital.

• Not convinced by their plan to separate ORSA into tw parts, Static and Dynamic. Static ORSA is no more than an organisation description and mapping of ERM Framework., while Dynamic ORSA (10 pages to answer the following);

• How well does RM Framework function
• What are key risks at any point in time
• What is overall risk profile
• What is overall capital profile
• (Is this the QAR!)

• ORSA triggers for full or partial reruns are requested (they suggest things such as; acquisition, divestiture, market drops, regulation changes [oh sweet irony!], solvency environment shifts etc). 
• For a partial ORSA trigger, a KRI breach could be a real life example, or for a full ORSA, a stress test breach. From that exercise, the most significant KRIs realistically would qualify as full ORSA triggers as well.

All in all, the thinking seems rather confused, as this cannot be kept simple as they suggest with they level and type of content they recommend as good practice, and splitting it into "dynamic" and "static" seems a touch desparate – this just will not be a simple document.

Level 3s

Bit slow on the blog front at the moment, as I work through the Level 3s and construct a worthwhile opinion – slightly hampered by my new surroundings as well (Wifi doesn’t grow on trees sadly!). Updates to resume shortly in due course, but at the moment it’s all about the ORSA...

Osborne and ABI make friends

ABI seem to be loving the Chancellor's work today on reducing UK tax on foreign derived profits. I suspect the Avivas and Prus of the world have a decent shot at thickening the bottom line and reducing capital requirements if they can get the branch structures right (though it was Aviva's share price that got the kicker at the end of the day).

On the Risk side, nice research released today by the Economist Intelligence Unit on emerging risk perceptions for 2011. Number of positive messages (from an albeit small respondent sample), but still woolly on the Solvency II-relevant pieces like risk appetite and scenario planning. I had read a profile about the top risk guy at Lego before, and he is cited in here as an early adopter of scenario analysis at board level, so may look him up again.

Regulator and ratings agencies updates

Interesting that AM Best and Fitch have come out neutral after QIS5, with Fitch actively sponsoring restructuring in order to free-up capital with their public comments.

The FSA ponied up with their business plan for 2011-12. Preparation for a life less significant with the dual change of EIOPA being able to create BTS from 2013-ish as well as the coalitions plans for disbanding it. Strangely, not a lot about Sol II in the plan, which in this particular year seems odd, though they note that the increase in staff numbers has been done. They go for Special Project Fees of £34.3m for 2011/12 to be recovered from the industry.

On the other side of the pond, the Central Bank of Ireland have come out aggressively on the subject of poorly performing directors in the nationalised banks, reinforcing that the governance aspects of Sol II are very much in the here and now for UK and Irish corporates, regardless of the transitional periods mooted in Omnibus II.

QIS5 - latest comment, and a reversal of fortunes

So the major consultants are now chipping in with their QIS5 reviews (see here, here and here), with some ambivalent ratings reviews thrown in by the agencies. No one saying anything new while simultaneously keeping the Pillar 2 preparation holes 'on the down low'.

Interestingly, while the implicit internal model advocacy was dealt this week, Generali ponied up today with a reduction in their Solvency II coverage from 187% to 160% over the year (p3 ref) . Driver was apparently spreads on Italian debt (which also drove their margin down at group level). Whilst their governance is notoriously patchy, their dislosure on strategy and capital allocation is phenomenal (this from their investor day in November [p5] is spectacular for Pillar 2 purposes). The reversal in fortune for Sol II coverage should not go unnoticed though.

I'll keep the eye on Pillar 1, but shift my focus towards the pre-consultation papers on the system of governance, terra firma for this consultant!

QIS5 is in - some alarms, no surprises...

So EIOPA have finally coughed with QIS5, and to help myself as a non-actuary, I tweeted the component parts most interesting to me as a Pillar 2 man. Whilst I am not at all surprised to see respondents commenting that their ORSA and system of governance preparation is lacking, to see that around 5% do not currently meet the MCR is pretty sobering.

Perhaps what is of most concern , at a time where the UK and Irish regulators cannot get heads in the door quick enough, is that the headline is that Internal Models will probably bring your capital requirements down (or at least hold them steady). With even some industry sympathy for the FSA at conducting model assessments, one has to wonder how to reconcile the desire of the industry to receive the economic benefits with the practicality of handling the volumes - partial approvals by mid-2012 anyone?

Bringing this back to my discipline, the same problem has to be in the wings for ORSA assessment - unlimited word count, and explain each and every divergence. The difficulty for both parties of course is that there is not likely to be anything like an ORSA template, so to be both concise and complete will be quite a task.

Quick note on the blog

Just to let any early visitors know that this blog is in its infancy, and will rapidly populate over the next few weeks with materials which should help out anyone looking at Solvency II Pillar 2 preparation, or has a professional interest in Enterprise-wide Risk Management. I will either blog or tweet on releases in the meantime, in particular on the ORSA pre-consultation and QIS5 news.

More QIS5 previews

Nice of EIOPA to put the word out direct...via Reuters et al! Couldn't get it from EIOPA's site, for reasons unknown, but looks like no surprises have emerged, and the mooted recalibration for Property-Casualty and Cat Risk will still need to go ahead.

Just wondering with my macro-environmental hat on whether the natural disasters which have unfolded recently in Australasia and, only today, in Japan, make much of a dent in the lobbyists' hands when recalibration starts.

QIS5 - Plus ca change...

Sounds like the murmurs were on the money - little change in standard model, and a nice summer of recalibration thanks to the cat risk module

And another one...

And the bills continue to roll in - Standard Life pitch up with a £64m bill (comment on p55), though split in an unspecified proportion with their transformation programme, which probably compares well against Aviva's £59m for Sol II exclusive cost (p16 for reference). While I will keep an eye out for further disclosures in general (didn't spot anything in Old Mutual for example, and couple more yet to announce), there is definitely some context to try and coax out of these pretty meaty numbers

Two and a half bills...

Interesting comment from the Pru today in their preliminaries on Solvency II progress, noting;

"We are engaging directly with our peers, politicians and regulators to ensure a fair and reasonable outcome before the regime becomes law."

For the £45m they have booked under 'Solvency II Implementation' in the IFRS result for 2010 (p37), they could have funded the 2010 UK election campaign for all parties and still had change left over to buy a nippy left winger for the company 5-a-side team.

As we have seen recently with the accounting treatment on the Keydata levy (try here, here, or here), when one is required to bust out expenses from the standard format, it is normally to make a point - judging by the quality of their actual results, I hope they feel it is money well spent!