EIOPA's response on the ORSA consultation - get on with it!

In a week so full of heavy reading (EIOPA's response to the Reporting Package consultation and the FSA's second tome on creating their SOLPRU handbook), I was hoping to get to something a bit lighter towards the end of the week (heard great things about 50 Shades of Grey on the grapevine...).

Then appears EIOPA's response to the ORSA consultation paper feedback, which is affixed to the document in a whopping 200 page annex. While I have blogged on the consultation paper itself back in November, the real meat and spuds of the response is condensed into the front 15 pages, from which I would flag the (non-exhaustive) following lobbyists points, along with EIOPA's responses;

• Lobbyists were still asking for more prescription/examples in areas of the guidelines, regardless of this being Level 3
• Specific concerns around the "deviation from risk profile" guideline, which may force insurers to adopt internal models
• Continued concerns around proportionality and materiality definitions
• Still seeking "ORSA Report" examples
• Concerns around projecting overall solvency needs over the planning period, so looking for simplifications in that area
• Range of concerns around Group ORSAs (diversification, Colleges of Supervisors, Third Countries, ORSA scope)

EIOPA's highlights in response are;

• Re: proportionality and materiality - stop whining and get on with it (p8)!
• Re: "Record of the ORSA" - a specific document containing all records of ORSA-related activity is NOT required, where existing documentation/records contribute to the assessment as they stand (in such cases "a reference to the relevant data is sufficient") (p9)
• To supplement this, they note "A record of an individual ORSA will in most cases contain more information than is contained either in the internal ORSA Report or the ORSA Supervisory Report" (p10)
• No specific approach for captives (so another 'get on with it'!) (p10)
• All risks are expected to be quantified, regardless of the difficulty (p10)
• Lobbying on forward looking perspective has clearly paid off, as the requirement to quantify overall solvency needs for each year of the projection period has been dropped (p10)
• Onus on companies to justify conclusions around the severity of deviations of risk profile (which may lead a Standard Formula firm to start modelling) - a result of sorts for the industry I guess (p11)
• Confirms that ORSA and SCR calculations cannot be completely divorced, but would allow an ORSA to be performed using an older SCR calculation, providing the risk profile hasn't materially changed in the interim

No reason to think they would radically divert from their proposal (indeed, they didn't on the reporting package as well, so at least the industry is getting the certainty it craves, if not the actual legislation!)

Ernst and Young on Solvency II Pillar 3 - a likely story (sadly)

Time for a walk (actually more of a sthaager for a Manxman!) into the less familiar territory of Pillar 3, or "the output" as some traditionalists may label it.

E&Y dropped a Pillar 3 preparations survey out to a relatively small (53 respondents) but nicely spread (8 countries, and roughly split into Life/Non-Life/Composite) sample, and as one might expect, preparations were found to be slightly underdone by the majority.

They note that even for companies who have completed their gaps analysis between BAU and Solvency II demands, there remains some meaty outstanding issues such as reporting granularity; capturing synergies for other requirements (namely ORSA); policy drafting and implementation around data governance, and process redesign. Appreciating that some of these matters are still up for debate, some aspects of this gap list should be closed by now, and I suspect that the regulators will not look favourably at firms who continue to nudge this topic into the 2013 space.

Other aspects which jumped out include;

• Only a third of respondents have completed a gap analysis of QRTs against capabilities
• Less than a fifth have mocked up an SFCR/RSR, despite the prescriptive nature of Level 2 on the reports
• Interestingly, two-thirds have designated their finance functions as primarily responsible for Solvency II reporting - some have parked it with Risk which, while appreciating a three lines of defence model is not compulsory, seems very wrong regardless of the function's skillset.
• Three quarters expect to achieve reporting compliance only after "significant" or "fundamental" changes to their existing processes
• Some firms were identified as planning to speed up their existing processes to meet the proposed reporting deadlines under Solvency II, which seems an excellent idea

Pillar 3 is likely to be an even more bountiful smorgasbord after EIOPA released their feedback statement on their consultations around the Solvency II reporting package today. I suspect I don't have the ambition to swallow the 88 pages today (or perhaps any other day!), but Will Coatesworth neatly tweeted the big message earlier which the industry tried to avoid, which is that quarterly balance sheets look like they are here to stay as part of the reporting package.

Good news for regulators, consumers, and anyone who is punting round Pillar 3 software solutions I guess!

ORSA guidance from Accenture - good, bad and ugly?

In the same week as the FSA told the industry to "go fish" for additional guidance around ORSA, the guys at Accenture have pushed out a bite-sized piece on extracting added value (i.e. above and beyond "compliance") from one's ORSA processes.

There are clearly a number of consultancies who fancy themselves in this space (click the ORSA link in the tag cloud at the bottom of this webpage for my review history of them), so having cast an eye over it, I noted the following;

• Leads with the rather hackneyed soundbite around ORSA helping insurers "extract additional value" from what is ostensibly a compliance investment
• Note that "...many companies have just begun to implement their ORSA projects, or are still considering how to do so" - if that's the case, it is good for my business, but it sounds like a lazy justification for publishing this pamphlet (how can anyone only be as far as "considering" in mid 2012?)
• Recommend that operational specifications should derive from the C-suite - easier said than done, but I totally agree if one wants to extract value from the ORSA process rather than tick the box.
• Suggest that ORSA "...may become a source of competitive advantage" - clearly the assessment does not do this, rather the consideration of it by the AMSB and the application of management actions off the back of it.

They then go on to split the doc into sections as below;

Compliance requirements

• Neat enough as a beginner's guide to ORSA compliance 101, though they introduce a rather naughty term in "ORSA Capital" as the amount over and above SCR - the concept of ORSA is difficult enough to transpose into BAU for smaller organisations who perhaps haven't had to consider economic capital measures before, so this term is one I would consign to the "nice try" bin.
• Some nice schematics in the section as well around the process side of ORSA.

Creating an operating model

• Suggest that preliminary input should be obtained from the C-suite to create one's target operating model. As above, I agree with their participation in the design phase, but with BAU pressures around ICA/FCR etc, it should be weighted much more towards approval of recommended models, rather than dialogue, as there simply isn't enough time when dual running.
• Recommend designing the process with people already familiar with existing performance management framework, which is good advice.
• Also allude to the significant crossover synergies between Pillar 3 requirements (as documented in the draft implementing measures) and ORSA as it stands.

Develop risk-adjusted performance management

• Relatively bland section which won't tell you anything new on the topic if you are building/refining an ORSA process off the back of a reasonable ERM Framework

Make the most of these releases - you can be sure that your friendly national regulator will be!

PS - In case you viewed this on Friday looking rather bare, I was supposed to save it as a draft, and accidentally published it!

FSA on Technical Provisions - "The question bank" part 1

The FSA have already publicly stated (about halfway down) that internal model applications will not get a final decision before applicants have the tyres kicked on their Technical Provision calculations, though like one of a hundred Solvency II-related Damoclesean swords, the precise nature of that kicking was beautifully unclear.

Happily, they have released a technical provisions question bank which, while not necessarily departing much from the line of questioning that an EV auditor might take, at least brings some clarity to the level of granularity required to commence this work (appreciating that Julian Adams also stressed in that speech that he wants to review based on the YE 2012 balance sheet).

As you will see, it is GI-related only at this point, with a Life version to follow next week. Neatly, they are already aligned to the L1 and L2 text, which should make any compliance checking aspects of the work more robust for firms.

Luckily I am too handsome to be an TP Actuary (?), but at first glance, the lines of questioning are extremely flabby to say the least (lots of "How do you do x", and references to "materiality", "proportionality" and "significance"), all of which point towards a rather subjective and painful administrative exercise for the first line to go on top of a similar "tell us what you think" exercise when populating the internal model application template.

Is it feasible to expect the regulator to consume this level of subjectivity around how one arrives at their technical provisions when, in their own words (p10), "proportionality" means focusing IMAP activity around the 300-or-so regulatory requirements (of which the TP-related L1 articles do not feature)? Not convinced that this method of condensing data is a bad idea as such, more that I'm not certain what the guys at the Wharf can do with it!

Interestingly, they note that they are "aligning" their TP review work with Lloyds of London - not sure entirely what this means, but would guess it means the syndicates are guinea pigging on behalf of the rest of the applicants, which probably suits the industry just fine!

FSA - Solvency II speeches this week from the great (and greater!)

A couple of topical speeches delivered this week by Canary Wharf's finest, both of which are relevant to the Solvency II world.

First, a speech at the 2012 Risk and Investment conference run through The Actuarial Profession and featuring some multidisciplinary heavy hitters from TV and print as well as some C-suite presence from the UK's largest multinationals. The FSA's Kathryn Morgan delivered a speech which covered Pillar 2 and 3 trends in particular, which is covered in this subscription only article at Risk.net. For those who don't have the budget for that, a pruned down version of that content is available here.

Ostensibly, the following points were made;

• Don't expect any more FSA guidance on conducting an ORSA - fair point at this juncture, if you don't know your onions by now, there's probably no hope for you!
• Approaching implementation consecutively in 3 pillars is a "worry" - I suspect that worry, misplaced or not, is applicable to most undertakings at this juncture
• "Risk management is the best mitigant of risk, not capital" - I would argue an effective Risk function rather than risk management per se is the best mitigant, but it is slightly more ethereal than a big bundle of cash!
• Perception that "...Risk and Capital are not talking to each other" - true out of necessity at this juncture perhaps (BAU for the balance sheet guys, model applicants or not, and the administrative burden of refreshing documentation suites has impeded comms for some time I would argue, but this will improve in the very near future).
• Number of references to Boards, centred around NEDs participating fully in decisions rather than counting the hours till their taxi arrives, as well as not relying on SMEs to make decisions for them (i.e. Actuarially-minded board members are not left to perform all balance sheet related challenge on their own!)
• With regards to the empire built on sand which is the legislative timeline, reiterates that while some key balance sheet-related issues are yet to flesh out, "...their is a lot of certainty in Pillar 2" - something I have banged on about since the draft Level 2 implementing measures were leaked in November.

While that speech has good insights for you Pillar 2 folk out there, a lecture from Julian Adams on "the impact of changing regulation on the insurance industry" is equally fascinating, if perhaps treading over some Solvency II ground already covered over the last couple of weeks - as a History graduate, I always like a cheeky overview, and the lecture covers legislative developments back to Victorian times.

That aside, a few Solvency II-relevant snippets were also included (or reiterated from prior speeches) such as;

• A definition of what "risk sensitive" regulation actually means (insurers' solvency positions matching their idiosyncratic risk profiles) - something as succinct as that is actually extremely useful for board training purposes at the very least, and I am glad he has communicated it in this manner.
• Also defines "proportionate" from the FSA's perspective on internal model approval - namely, if it is in the Directive or the Implementing measures, it is not negotiable.
• Notes that Solvency II is "influencing" the global regulatory framework - I would argue that strong-arming (in the case of first/second wave countries) and bickering (in the case of the States) is far from influencing, though with the IAIS Comframe draft now open for review, we may see something more resembling dialogue from our pals in Brussels
• Rather worrying comment that, in the context of reporting financial positions, that Solvency II reporting sits in the succession path of EEV and MCEV as "...if perhaps not the final, then the latest step" towards a more transparent and market consistent reporting regime. Anyone for SFCR 2.0?
• A rather ominous note that the standard formula calculation "...would certainly have a distorting effect when considering, say, the London Market subscription business or with-profits businesses" - I hope all you tiny mutuals have got your IMs, PIMs or USPs ready, as it sounds like the FSA may already think SF is not suitable for you!
• Acknowledges that Solvency II is about "maximum harmonisation", and therefore EIOPA will call more of the shots in future (just as soon as Omnibus II gets through...)
• Highlights that the academic modelling around (a lack of) correlation drove many of the banks models' into stupidity in 2006-2008 - an area I would expect fervent challenge around from both the regulator and indeed internal governance structures (and one which Matthew Elderfield at the Central Bank of Ireland has already picked up on as a main area of focus)

Useful stuff from both sources, so keep it up Wharfers!

PS I suspect I won't be posting tomorrow, so I will wish you shoh slaynt and a happy Tynwald Day one day early!

Solvency II - 7 year transitional periods, white noise and Omnibus II on the move

A particularly weird week for Solvency II, with more aimless racket than a drunken tennis player, yet only a slither of substance to it.

Ignoring if I may the robust line being taken by the UK Pensions Minister about occupational pension schemes falling under Solvency II and the Daily Mail's scare piece on annuities becoming potentially more expensive, the big story has of course been Burkhard Balz's alternative for life insurers (presumably on the trialogue table for longer than the last couple of days, but leaked this week to FT Deutschland for the scoop) to transition in the more onerous capital aspects of Solvency II over as many as 7 years.

Bearing in mind the rather blase attitude at the time towards extending the Omnibus II plenary vote to September ('all they are doing over the summer is technical drafting' was the party line), to have something so significant being kicked around the table at this late stage is a truly grim prospect, particularly if it is loaded with national, rather than pan-european considerations.

Of course, conjecture around knock on effects on the legislative timetable is only as good as its source - hence I have linked through to the Omnibus II procedure file, which has been updated to reflect a late October plenary vote (when it was previously Sept 2012, July 2012, April 2012, Jan 2012 and Dec 2011!).

I'll leave it to the experts to work out whether 2014 is realistic given the trialogue curveballs and the phantom plenary...

FSA Annual Report and Business Plan - Solvency II coverage

Our friends at the Wharf have had a busy week, throwing out a multitude of paperwork with some nuggets of gold deep within - this post covers their annual report and workplan. Pretty light on Solvency II-specific material to be fair

From the FSA 2012/13 business plan, I noted the following;

• Still talking about transposition from 1st Jan 2013 (p13) - typo, or just written before Solvency 1.5?
• From p32 Insurers should expect "detailed reviews" of their risk management arrangements and internal models; with-profits business reviews from a PRA and FCA angle; underwriting and reserving controls at GI firms; and use of "external tools" in challenging senior management (citing their use of section 166 of the FSMA as an example, but not certain what else they are suggesting).
• As well as standard Solvency II work on L2 and L3 etc, they will conclude their consultations on the FSA handbook transition.
• Special levy for Solvency II will be £25.9m for the next year (and they continue to use their £100-£150m parameters for their overall Solvency II spend, which is liberal at the top end given the £110m figure they mentioned in the SOLPRU document).
• Consultation paper around Solvency II expected out at the end of this month (table on p83)

From the annual report and appendices, the following;

• Reiterates the Jan 1st 2013 date for transposition (p39) - again, I though Solvency 1.5 effectively moved that date to July 1st?
• £23m of Solvency II income booked (p137)
• In their Diversity Report, it would appear that their profile is sadly similar to many firms, being top heavy with blokes and bottom heavy with female administrators (p2). Making some headway on the ethnicity mix though (p8), and getting a little older in aggregate (p14), perhaps a by-product of all of the young bucks leaving to work on Solvency II! Also touches on sexual orientation, religion  and disability, so I highly commend this genuine look at diversity, rather than allowing gender to dominate it.

While they still haven't got to grips with the staff turnover issue, the levels of turnover that most Solvency II projects will be experiencing will be no different, so I suspect throwing more money at the issue wouldn't do much good (which the chief exec effectively said at the Treasury Select Committee in November)- the benefit of this frugality is a lower than expected industry levy, so fair play to them on that.

What is perhaps less convincing is the £150m tag to split the regulator into the PRA and the FCA - that's one expensive axe Hector...

StoneRiver Financial Regulatory Survey - ERM and ORSA in the US

An interesting US perspective published today touching on the near term future of ERM and ORSA reporting in the States from the guys at StoneRiver (need to fill out a little form for the download).

They are of course attacking it from a "buy some reporting software" perspective so the questions are a touch loaded, but the findings from the survey (68 in the sample, majority of P&C insurers) are certainly sobering for the NAIC, namely;

• Only a quarter were confident enough to state that they had a formal process for ERM, including reporting
• 44% claim to have "in-house expertise" on ORSA, despite the requirements being in a state of flux (guess I'm not getting a green card anytime soon!)
• Only 40% were confident that their existing software will efficiently handle ORSA reporting requirements

Bearing in mind when I blogged on the draft NAIC ORSA manual in November the regulatory filing aspect was heavily emphasised, the combination of undocumented ERM processes and software fallability may be cooking up an administrative nightmare for the insurance industry over there - welcome to our world!

Lloyds of London on Validation - Workshop Output

For all of you working on one of the FSA's (and indeed I suspect other supervisors') pet peeves, Model Validation, the Lloyds guys published some slides from their recent workshop on the topic.

Anyone not in the IMAP space may still find their presentation of interest, particularly as they have already had to ask for 3 months leeway on their original application "landing window", perhaps hinting at the enormous complexity and expense of producing material to support a successful model application.

They start with a "Top 5" ways to improve existing validation practices, rather worryingly stressing coverage and ranking, which one would think would be par for the course rather than something which required additional emphasis. They go on to hint at, if not confirm;

• That both analysis of test results and subsequent escalation has been found to be lacking during their validation dry run
• That historical syndicate experience is "always necessary" in modelling, even if not sufficient on its won
• An over-reliance on sensitivity testing using pre-defined SCR ranges
• Their recommended materiality hierarchy of validation tests
• Their take on reserving risk (not my forte, but dig in if it's yours)
• Their take on correlations and the diversification matrix (interesting bit on diversification in the tail)
• That their model walkthrough exercises brought up material issues for "most" agents, and that clearly some syndicates have been asked to complete remedial action before the end of this month
• That they are waiting for L3 before reviewing their validation reporting formally.

Not sure whether this keeps the guys on track for their group application, but certainly not an unhealthy thing to be picking up such flaws at this stage - if it was that easy, everyone would be doing it!

ORSA guidance materials from CRO Forum and Lloyds - any help?

It is always nice to get a bit of friendly steer around ORSA when the powers that be stubbornly refuse to give us boxes to tick!

Released over the last week or so came two such documents, one from Lloyds of London and the other from the CRO Forum.

The Lloyds effort is of course tailored for their syndicates, but the areas they emphasise clearly have merit for any organisation which is embarking on the ORSA adventure, whether sponsored by Solvency II, IAIS ICPs, the NAIC, or indeed any other random acronym! In particular I liked;

• Clearly set out an explanation to cover difference between regulatory and economic capital measures
• That while the ORSA Report would be expected to set out the impact of shocks over the medium term, this does not imply that a multi-year model is required (anyone struggling to keep it stochastic after year 1 would be relieved to hear that!)
• Small set of simple questions which one might like to ask their Board after they review the report in order to establish use
• No specification on size!

The tables which make up the bulk of the document should be a useful reference point for anyone with an inferiority complex, as it highlights gaps which have been identified during their own QA work, as well as suggesting remediation. Appreciating ORSA is only required for IMAP from a use test evidence perspective (which they comment on in the Q&A in the appendix), any chance that these gaps contributed to the delay in their submission?

The CRO Forum paper on the other hand tries to cater for both the poachers and the gamekeepers by summarising observable best practices from regulatory-themed bodies (who I suppose will ultimately determine what's hot and what's not on the matter). From their doc, I noted the following;

• Potential divergence between what lobbyists said about ORSA supervisory report when feeding back on Level 3 (i.e shouldn't differ from that presented to the AMSB, otherwise what would supervisors be considering it against) and the CRO Forum (who expect it to be a "summary of the results of the ORSA assessment") - doesn't feel like semantics the more I read it, so worth highlighting
• Value of the ORSA Report for the AMSB is covered in a few paragraphs, which is always handy for board/senior management briefing
• Strange bit around internal approval of ORSA reports, stating that the AMSB should review but not approve the ORSA Report, and that this is as per Level 3 - worth some attention if you have structured your ORSA governance around Board sign-offs of the associated reporting
• An "illustrative purposes only" ORSA Report structure, which has no more or less merit than any others you may have seen, other than it is less granular than some which have emerged publicly from consultancies etc
• Tips the hat towards leveraging RSR and ORSA administrative efforts in order to reduce duplication.

Whether or not you gain something from reading these materials, it's always nice to know someone is having a go!

Elderfield speech to Insurance Day summit in Bermuda - equivalence, model approval and "hub and spoke"

Very informative speech delivered this week by Mr Elderfield from the Central Bank of Ireland to the Insurance Day summit held in his previous stomping ground of Bermuda (certainly a more welcoming climate that last month's summit in not-so-sunny London!).

He mainly covers equivalence, internal model applications and, as one might expect from the Emerald Isle, the potential for Hub and Spoke operations and the potential capital benefits of this technique (which has a sniff of Group Support about it in all but name). I noted the following;

General

• Suggests Solvency II provides "...an incentive for investment in risk management, including the use of internal models" - I would substitute "incentive" for "compulsion"!
• Singles out "small firms" as those which will "certainly" struggle to assimilate and implement Solvency II in its current guise
• Notes that "...the current target is that member state governments will domestically implement [Solvency II] by 30th June 2013" - I have emphasised the "current target", as the very wording suggests that there is an implication it is not the "final target"!

Model applications

• "...it is important that approval process doesn't get bogged down in detail such as endless documentation reviews" - cue some raised handbags down at Canary Wharf I suspect!
• Highlights expert judgements around correlation and diversification (as he has done this time last year) as being much more significant around challenging the solvency requirements calculated by the models, in particular the "swing" these elements have on the final numbers. On that premise, he puts these "...at the forefront of the regulatory approval process", as well as expecting them to generate the most challenge in the boardroom.
• Elaborates on the extent of Board challenge by commenting that "...boards should be expected to challenge vigorously the amount of diversification benefit being claimed in internal models, even if they don't know the internal plumbing of copulas or correlation matrices". Very telling comment, and clearly one to heed, bearing in mind he is on EIOPA's management board.

Hub and Spoke

• Seeing "considerable interest" in using Ireland for the "hub" of the "hub and spoke" business model - one may have said this was for regulatory arbitrage purposes 5 years ago, but I'm guessing corporation tax, falling wages and underemployment may have kept it in play even after the recent beefing up of the CBoI
• Comments that "...it will be interesting to see whether [the hub and spoke] model will grow as Solvency II gets closer to implementation - implies that not only does he think the existing corporate structures are not settled yet, but that Ireland is actively open for business in this regard.

Equivalence

• Not sure if he was just being polite to his hosts, but he commented "...Bermuda is very well placed for [the equivalence] assessment process" - again worth heeding in the context of his position at EIOPA, as well as Bermuda coming off worst of the 3 countries which have been assessed in wave 1.
• Suggests there should be some sort of early adopter's premium for Bermuda which makes it worth being ahead of those countries who may come in in wave 2 (no mention of one of their competitors Guernsey in this context, who continue to bang the IAIS ICP drum while stating categorically that they will not seek equivalence).

Good intelligence all in all - PS must try and swing an invite to one of these things when they go tropical!

Barnier speech to the Insurance Europe conference

Msr Barnier put a few words out for the great and good the other week at the Insurance Europe conference, which have finally been published for the proletariat on the EUROPA website this week. As well as touching on the conjoined matters of IORP and IMD, he wades into Solvency II in a pretty forthright manner (driven by the increasingly fractious and desparate attempts of the EU to jump-start economic growth, and what the Insurance industry can do to aid this), noting;

• Solvency II should not prevent or discourage investment in certain asset classes per se
• Insurers with long-term guarantees should therefore be rewarded (via a reduced capital burden) for investing in long-term assets, and that Omnibus II should mop up outstanding concerns from individual countries.
• That politically, the EU Parliament has had plenty of time to reflect on Omnibus II, and their tardiness has ultimately led to the need for Solvency 1.5

Interesting to see real world politics and probles interacting with the legislative timetable, and in particular how quick the Commission have been to point the finger at their Parliamentary pals when under duress!

Risk Appetite benchmarking study - Grant Thornton

Very neat release from Grant Thornton this week, trying to capture some of the juicy Risk Appetite space which corporate governance codes and indeed Solvency II is making particularly profitable.

The sample is reported on their website to be 43 CEO/Director-types from the London Market, hence the content isn't quite as picture perfect as a conventional life insurer may want, but the findings are very important for anyone who is in the thick of Risk Appetite Framework construction, refresh or replacement as we speak (which must be the majority of you, surely!).

Both ORSA and a general interest in understanding what one's neighbours were doing in the area of Risk Appetite Frameworks and Statements seems to have been the driver to participate, although strangely the corporate governance angle (whether it be UK code or indeed non-Solvency II EU activity) wasn't mentioned.

Elsewhere of note, I spotted;

• Average 12-18 months to get a Risk Appetite Framework (RAF) signed off - from a standing start, that seems fair, bearing in mind the educational aspect is one which, from my experience, is massively constrained by pre-existing committee agendas which simply cannot (or perhaps will not) yield some additional time for coaching.
• Wonderful split in perceptions between actuarial-led and risk-led RAFs. The actuaries are perceived to lend more weight to insurance and investment risk, use more quant in their synthesis, and as a result deploy the frameworks more effectively. The risk profession came off worse in this head-to-head, with a stringer focus on qualitative elements and operational risk. The actuarial approach was also observed to exert "more discipline, and in general demonstrated greater progress". Never mind, we'll win the war!
• Instances where Risk Appetite Statements have been flexed in order to accomodate business cases which have been successfully presented to the Board. I seem to remember flexed limits (off the back of successful lobbying/inept challenging) causing Lehmans a problem or two a few years back...
• Approaching the setting of limits in the Risk Appetite Statements from bottom up, using business plan content, appears to have been more successful than cascading down. Some debate about whether the tail should wag the dog here is also included.
• Approach to Credit and Operational Risk was observed to be application of fixed limits for losses, as these are seen to be necessary evils in order to be in business.
• Use of previous years results in setting some limits/tolerance levels seems to be common practice - not sure how that tallies with top-down/bottom-up approaches to rolling a framework out, but one might expect to see some element of projections in this activity.
• Sadly, insurers were observed to be afraid to fall behind or indeed trailblaze on the matter due to fears of additional regulatory scrutiny. I truly hope that is a misplaced fear, and not a by-product of the zealousness of the pre-Solvency II regulatory interface.

Thanks GT, looking forward to the next one, but with a wider sample and a few more stats ideally.

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.