Standard and Poors on European ERM - momentum lost after Solvency II delays?

S&P released these pearls of wisdom regarding ERM within European insurers, specifically whether the additional breathing space offered to Solvency II may put the brakes on developments.

There's certainly no sitting on the fence with them - they start with the following as a statement of fact;

...the delayed start date of Solvency II has prompted some insurers in the region to reduce their efforts in developing ERM

Unsupported, but probably fair! They are also overwhelmingly positive on Solvency II on the whole, for example;

Solvency II remains a major driver of ERM improvements in Europe

the Directive has firmed up insurers' approaches to risk appetite, risk governance, and risk reporting

The introduction of the Own Risk and Solvency Assessment (ORSA) process...has helped to embed risk appetite in insurers' operations

Solvency II has brought risk management to the fore in insurers' strategic planning 

Easy to take any of those comments to task in the UK and Ireland, where national corporate governance code revisions, listing requirements, IAIS considerations and developments in both the actuarial and  nascent Risk professions are all taken very seriously by the respective industries, all the while cognisant of the shadow cast by Solvency II. In addition, the disciplines espoused by S&P's ERM assessments are practiced to a decent extent in existing ICA/FCR processes/reports, regardless of how 'ORSA-fied' they have become over the last couple of years.

This potential slight to the Western world is remedied on p7 however, where the research acknowledges that Western Europe effectively leads the way on ERM, and in the appendix (p8-12) where the league tables sit Germany and the UK firmly at the top of the ratings class.

They ultimately get to the real crux of their fears with this;

We would view negatively any evidence of a reduced role for economic capital in insurers' capital management arising from the delay

They are also gunning for insurers who continue to sell uneconomical products in the face of sustained low interest rates (p4), and validation standards in internal modelling (p5).

One would hope that, certainly in the UK with ICA, ICA+, and a supervisor who is continuing to staff pre-application for internal models adequately, that momentum around using economic capital in decision making will not be lost during 2014, particularly now that the PRA have as good as said that they accept EIOPA's preparatory guidance.

So give this a read if you want to know where your firm lies in the S&P ERM rating table, and if their opinion matters to your bottom line, be sure to quote this material when your Programme sponsors try to take the pace of 2014 Solvency II activity!

 

 

The PRA Consultation on EIOPA's Preparatory Guidance - priorities for 2014 and 2015

After 10 years, it's finally getting interesting - the PRA today have dropped out a consultation paper on applying EIOPA's preparatory guidelines to PRA-authorised firms (CP 9/13). You can get at the EIOPA materials through this post for convenience.

The content will, subject to any intense lobbying by industry, be adopted as a supervisory statement (section 233) to cover the 2014 and 2015 calendar years, with the expectation remaining that 2016 is our "go-live" date. It covers the following aspects of the preparatory phase;

• The PRA's expectations of firms as they prepare for Solvency II;
• The PRA's approach to implementing the guidelines; and
• The PRA's interpretation of aspects of the guidelines.

They are at pains to highlight that these are "preparatory" guidelines, and provide the traditional spiel on "nature, scale and complexity", so incremental progress is to be expected during the period in question. What that means in practice is perhaps another thing - can you show measurable 'incremental progress' for materials which are only on an annual review cycle, for example? - but that aside, it's worth picking the bones out for your respective programmes, and perhaps most importantly, getting your feedback in by November 15th if you don't like it!

Perhaps the most noteworthy aspect of this CP is that in no way is it suggestive of the PRA rejecting any of EIOPA's guidance (remember, they have until the end of November to voice any protest). That of course makes preparatory work much easier to plan for, as the UK will seemingly be doing it all!

My thoughts on the specifics were as follows;

System of Governance (SOG)

• Emphasise that the SFCR requirements around SOG are also catered for in EIOPA's work (3.7), so a smart move would be to factor that into your drafting plans during 2014
• General governance requirements "largely consistent with SYSC", though individuals holding key functions might expect a personal visit in the next two years (3.10)
• Similar position for Risk Management Systems (3.12), stressing the commonality of requirements with existing PRA obligations, but stressing in particular that firms should be "...including suitable mechanisms and methodology for connecting to their ORSAs and for carrying out regular stress and scenario tests" during the preparatory phase.
• That Prudent Person Principle is not a new concept to the PRA, but firms would be expected to review investment strategies in line with PPP over the next couple of years. A concession is seemingly made regarding the provision and review of third-party data by investment functions for smaller firms. 
• On the (new) requirement for a Capital Management Policy/Medium Term Capital Plan (3.16), they are not moving, despite the howls of protestation - "The PRA regards the development and implementation of such policies and plans as an integral part of sound risk and capital management for all firms, especially as their management and Boards assess the implications of the forthcoming Solvency II own funds and capital requirements"
• On internal controls, they appear to be fishing for firms to analyse whether their existing framework is Solvency-II ready, and then piggy-back of that self-assessment (3.17)
• Same for Internal Audit function readiness! (3.18)
• Actuarial function get a more bespoke treatment (3.19), with all firms asked to "carefully consider" the functional structure to avoid conflicts of interest. They also reserve the right to "...review firms’ analysis of the areas required for improvement, and understand the actions the firm is taking to resolve these".
• Outsourcing similarly gets additional treatment by the PRA (3.22), who are "particularly interested" in changes made specifically with Solvency II readiness in mind

Useful quotes

...the PRA articulates its expectations of firms in the preparatory period, including that firms should read, assess and implement the substantive provisions of the guidelines in order to achieve the intended outcomes (2.5)

The guidelines and this statement are designed to work towards a consistent and convergent approach in preparations for Solvency II and not its early implementation (2.6)

 The PRA expects firms, when asked, to be able to explain what governance changes they need to make to satisfy the guidelines, how they plan to make those changes, what progress there has been to date and any particular difficulties they face (3.4)

The PRA expects firms to be able to document their overall approach to outsourcing, including contingency plans in the event of a service provider failure, to ensure that the efficiency of the service remains unimpaired and uninterrupted. (3.22)

During the preparatory period, the work of the actuarial function will now focus on co-ordinating the calculation of technical provisions, providing an opinion on the underwriting policy and reinsurance arrangements and contributing to the development and performance of the internal model in the pre-application stage where relevant (3.19)

During the preparatory period, the PRA encourages firms to consider how to manage the transition to the new regime and to assess the impact on existing asset portfolios of Solvency II requirements. This need not necessarily mean that changes have to be made to firms’ investment strategies or portfolios but firms are encouraged to work on an incremental basis towards demonstrating that they meet the requirements of the PPP (3.14)

During the preparatory period firms should review their existing policy for assessing fitness and propriety and whether it needs updating in advance of Solvency II (3.11)

FLAOR/ORSA

• PRA only planning to review assessments "...on a proportionate basis" during preparatory phase - they elaborate further by stating "Due to the high number of ORSAs which will be submitted, the PRA expects that it may have to stagger its review of these during the preparatory period in a way that is risk based and proportionate". Does that mean "Top Ten & Lloyds & IMAP" get the works, with everyone else getting a lite-touch?
• Expectation that improvements are identifiable between the 2014 and 2015 FLAORs - the PRA will contact firms individually if they are within the threshold limits which enact guidelines 14-16.
• On ORSA documentation, "...firms should recognise the need for effective documentation and record keeping", for both Policy and Report (4.7)
• Note that the Board's involvement in ORSA is "...far more extensive than setting risk appetites and tolerances", and leave an open threat to go through Board packs/agendas to ensure this is the case (4.8)
• Smaller firms get permission to use their internal ORSA Report as the ORSA Supervisory Report, provided it has enough detail. Larger/riskier firms may conversely be asked to supplement whatever they submit. (4.10)
• PRA actually considering issuing a "summary sheet" to firms in order to help gather information consistently (4.11). Here comes the ORSA Template!
• Expectation that 2014 projection work is done on existing basis, and 2015 (ideally) on Solvency II basis (4.15)

Useful quotes

The preparatory period is a time of development for firms in designing, compiling and trialling these assessments (4.3)

To help capture [ORSA] data and information in a consistent way from firms and facilitate review the PRA is considering whether it may be beneficial to provide a summary sheet to firms (4.11)

The PRA does not intend to prescribe when firms should submit their ORSA...Firms should inform the PRA when their ORSA will be submitted well in advance of the submission date (4.19)

The PRA expects the Board to play an active part at various stages, providing initial steering on how the ORSA should be designed and documented, challenging on risk identification and mitigation along the way and culminating in the Board approving and communicating the finished product. (4.8)

The PRA expects all firms to develop a qualitative process to develop an ORSA which can be documented and reviewed by the PRA in line with its overall proportionate approach.(4.6)

Submission of Information

• Confirms that XBRL is required prior to 2016 as submission format for QRTs (5.7)
• Suggest that policies and procedures around reporting in firms may need "potentially significant revision" in light of Solvency II. (5.15)
• Rather obscurely, they write, "The PRA does not expect that preparatory reporting will be subject to a requirement for external audit but it may draw upon audited inputs" - as I recall the participation of external auditors in QRT-type reporting has been a massive bone of contention in Brussels (indicated within these IRSG comments from last year, but I'm sure there's a more recent story), but potentially not a welcome development.

Internal Model Pre-Application

• They isolate the Model Change policy as an example of something which should already be tested for its appropriateness (6.5)
• Still expect firms to come forward and brief them on "significant" changes during pre-application.
• Surprisingly, very little else,

Useful quotes

...it is important that where models are sufficiently stable, firms are beginning to demonstrate their use and continue to refine their models with the benefits of experience (6.5)

I may fire some feedback in, but ultimately I suspect this lady is not for changing...

Governance Matters correspondence with the European Commission - Klaus but no cigar?

I mentioned that back in June that, as part of the EU-wide informal Solvency II shutdown, that I had fired off a couple of notes to various EU bodies to see whether or not a second "Quick Fix Directive" would be needed, or if the Commission were going to start proceedings against anyone who hadn't transposed Solvency II into national law (given that, after the 30th June, this was, on paper at least, a possibility).

We of course have had all of the information required on the matter since last week, and can now safely plan programme activity for 2014 and 2015, knowing that any forks in the road come Feb-March time may add another year to kick-off, but won't substantially change what supervisory authorities will expect from the industry.

That said, I was surprised and delighted to receive a reply from Dr. Wiedner on the matter today (below), albeit with an "after the Lord Mayor's Show" feel about it! In it he acknowledges that the threat of proceedings is indeed a viable one, but one which of course wouldn't be pursued in light of Quick Fix 2 (we'll work on the premise that it will sail through co-decision!).

 

So if you want your bureaucratic doors opened gently and without haste, you know where to come!

Workplace stress, and the need for inverted commas

A quick one on the news today that Hector Sants, ex-Chief Executive of the PRA, has been signed off with exhaustion and stress 8 months after taking on the role of Chief Compliance Officer at Barclays Bank.

There is no question that the role he has taken on is a beast - along with the conventional mis-selling/malpractice stories unwinding in UK banks (PPI, Personal loans, Interest Rate Swaps, LIBOR), they are also getting the third degree over their curious ability to have avoided a bail-out back in 2007/08, when all around them failed. As far as control functions go, it is as big a job as UKplc has to offer.

The top boy over at Lloyds had experienced something similar last year (emerging as insomnia in his case), and has thankfully got his mojo back, having recognised that one can't do everything when you're driving a bus of that size. Some of the media still fancied a nibble at this, from Peston's glib headline, a full piece following the announcement on "failing the stress test", though neither plumbing the red-top depths of capitalising the word "stress" as if the very concept bent the laws of credulity.

Perhaps the unsavoury element tonight is that this kind of reporting still seems kosher (for example, some outlets seem to need to use quotation marks around "exhaustion and stress", while others don't). I have no experience with stress in the workplace, and don't propose to start campaigning on the matter - when a man is ill though, it's pretty poor form to bleat about journalist-inspired "controversy" around his pay package or knighthood. Get well soon yessir...

  

PRA and Early Warning Indicators - Knowing me, knowing EWI...

Couple of interesting bits have popped up in the last week on the PRA's Early Warning Indicator (EWI) initiative, which I had touched on earlier in the year. At that time it was a little hard to establish the lie of the land, other than the PRA approach to preventing potential 'gaming' of internal model capital requirements was markedly different to that of their European NCA counterparts, and that EIOPA fancied their chances of doing the job on the NCA's collective behalf.

Julian Adams gave a speech at the Insurance Institute of London last week where he commenced with a rather familiar lament about how, at the outset of the FSA/BoE splice, "...we knew that there was some concern in the insurance industry that the Bank didn’t understand insurance". After collecting the award for 'understatement of the year', he then waxed lyrical about the five lessons learned by the BoE from the financial crisis, and how these are being applied currently to insurance supervision in the UK;

1. "...the need for a prudential supervisor to focus on the risks that might materialise for firms in the future"
2. "...not enough to focus on static point-in-time assessments of firms’ solvency positions"
3. "...for some issues it is not enough to just look at the risks within individual firms and address them at an individual firm level. Instead, we need to supplement this analysis with work across the system as a whole"
4. "...the need for clarity about the objectives of prudential regulation"
5. "...the need to have multiple reference points when assessing firms’ capital positions. Simple crude measures are not sufficient in themselves, but neither are complex models"

The last one is of course our context setter for comments later in the speech justifying the EWI approach, which for me reads as a laundry list of why existing model validation activity, assumption setting processes and expert judgements must be considered ineffective by default, rather than after PRA review.

One brush - two industries?

Most significantly from a strategic perspective is the confirmation that the PRA "...wouldn’t expect firms who fall beneath [the EWI limits] to release capital until we, and they, have reviewed the appropriateness of the modelled calibration".

Alongside this speech, Chris Finney has published a scathing article on the PRA's approach to EWIs, focusing on its legality at both national and EU level, its unwillingness to consult on the matter, and ultimately how the PRA's experiences with banks a few years back (well. the FSA/BoE, but let's not split hairs) have seemingly allowed the insurance industry to be smeared with the same tarry brush.

With the PRA seemingly using their "lessons learned" rationale alongside the equally informal "interest" of the IAIS and EIOPA in non-modelled capital backstops, is that really enough to fend off (current) UK statute and (pending) EU law if the industry fights back?

Solvency II, 2016 and "Quick Fix 2" - Let the music play...

So despite my best baiting at the start of the summer, it has taken until this week for the big news regarding Solvency II to emerge, namely that, via Quick Fix 2, a layer of formality is likely to be given to the year 2016 as the "go-live" date by the European Commission, provided this draft Directive gets safe passage. Apparently, assurances were given by the co-legislators (p3) that this should be enough time to get it done.

Let's have a look at what exactly has been pushed out, and by whom;

Commission - statement from Michel Barnier
- "The Commission [on 2nd Oct] at my request put forward a draft Directive postponing the application date of the Solvency II Directive to 1 January 2016"
- Current trilogues are "progressing well" and an agreement between the co-legislators is "within reach", which seems to tally with Gideon's report from last week - the Council's "state of play" meeting is still scheduled for 15th October, which being prior to that last trilogue meeting, may help all parties.
- Mr Barnier "...has always wanted rapid application of Solvency II", in case anyone thought otherwise.
- EIOPA's LTGA report is an "excellent" one, in case anyone thought otherwise.
- Postponement done "...only after obtaining assurance from the Council and the Parliament that they would not further change this new application date of Solvency II"

Consultancies
- Apparently KPMG reckon that the industry is breathing "...a sigh of relief", while PwC reckon the date set is indicative that Omnibus II will be settled "...ahead of the Parliamentary elections in 2014". Deloitte's finest highlights that the extended transposition period (effectively doubled) will aid NCAs in giving permission to arbitrary things such as day-one model applications, USPs etc.

Lobbyists
- Insurance Europe don't like it! Still seen by them as an "ambitious timetable", which will lead to a "...significant increase in costs for the industry", which makes one think that the "sigh of relief" heard by KPMG was their own relief at securing two more years of advisory cash...

How much scope is there for something to go wrong now, given the benevolence/pragmatism of the Commission in granting this two year kick-on? Chris Finney covers that off here, most pointedly with the fact that a number of the co-legislator top-dogs giving their "assurances" may have gone to pastures new well before 2016.

PS Programme Managers and CFOs - Try not to laugh or cry at point 4 on the draft Directive document - "The proposal has no implication for the EU Budget".

Reporting/Submission of information to NCAs - EIOPA's FINAL preparatory guidance for national supervisors

And last, but not least, EIOPA have produced their final preparatory guidance to NCAs regarding the submission of information by firms to their supervisors, covering both quantitative reporting templates (QRTs) and narrative reporting. The consultation paper (summarised here by the PRA) caused quite a stir due to the volume of requirements during what is purported to be the 'preparatory phase', and even EIOPA's own Insuarnce and Reinsurance Stakeholders Group (IRSG) put the boot in on a number of elements.

It was of course natural that a combination of parallel running, legacy system horror-shows and potential ambivalence from third party information vendors was going to make this consultation the most controversial, but that said, the outcome appears to be pretty fair insofar as concessions have been made by EIOPA while still keeping the pressure on over-reluctant firms to construct the required processes in a timely manner.

One attempt at quarterly reporting is therefore retained (set for Q3 2015) as well as one run at completing annual templates, based on YE 2014.

The preamble borrows from the other preparatory guidance documents without anything new, so ignoring that, the following items jumped out at me thematically;

Concessions
3.54 Despite the gibberish in paragraph a), this effectively allows for some simplification in the quarterly reporting during the preparatory phase
3.55 Captives are excused for the quarterly run in Q3 2015

Parallel run costs/strains
3.58 As with other papers, EIOPA don't care!

Template changes
3.62 A change log covering amendments between the original template release and those now available has been included to help firms level any work already done in this space. A surprisingly large number of changes made, magnifying the difficulties faced by firms, NCAs and ultimately EIOPA.

Legal entities which are below the threshold
3.72 If a legal entity is below the reporting threshold in isolation, but forms part of a group which is above it, the LE will still have work to do

Annual reporting
3.76 An extra two weeks added to the submission deadline (now 22 weeks for solos, 28 for groups)

Quarterly reporting
3.81 As above, the requirement to report on Q4 2015 has been removed, a practical attempt to manage the myriad other reports expected from firms in early 2016.

XBRL
3.83 Up to each NCA as to whether they demand firms use XBRL in submissions - I think some of the supervisors may already favour it or have indirect experience of handling it (UK, Ireland, France)
3.84 EIOPA will provide a tool to aid firms in doing this, should they want/need to

Internal Model applicants obliged to complete Standard Formula templates
3.94 Confirms that IM applicants will need to complete both, though their SF template work will be governed by the pre-application for internal model guidance (due to the different timescales applicable to that work)

Narrative reporting
3.102 Not negotiable - get it done!

Balance Sheet
3.106 Statutory accounts figures must be included

Assets
3.111 Unit-linked assets will not be exempted - also a clumsy reference to "contagious risk", one of many which betray mother-tongue related drafting problems

Particularly telling is that while the IRSG were obliged on some of their issues, they were not able to drive home all of their agenda - they had asked for and additional 4 weeks for completion of all templates for example.

Unquestionably a great deal of work to do for both firms and NCAs on this matter, and with existing reporting teams no doubt working to tight schedules, the sooner 2014 programmes factor in this disruption the better.

Pre-application for Internal Models - EIOPA's FINAL preparatory guidance for national supervisors

So the March consultation document for internal model pre-application brought a few eye-openers for those countries partaking in a less onerous application process than that favoured by the UK, with the detail in it suggesting that the UK very much had the whip hand in its drafting.

On the basis that there were still areas which even the most hardened IMAP-veteran may have winced at, it was interesting to see if anything got dropped in the lobbying stampede. On that basis, the final guidance for internal model pre-application covers the following in the preamble;

• 3.10 - That it is not in the NCAs gift to conduct pre-application preparation along the lines of provisional approval or to provide "roadmaps" to compliance (which may explain the PRA's caginess with the industry). It is purely about a firm's preparedness and suitability to submit an application
• 3.33 - On request, EIOPA have introduced a compulsion for NCAs to provide "regular feedback" to firms
• 3.35 - Confirms that not all model changes need to be reported to NCAs during pre-application, just those considered "relevant" by firms themselves

It is fair to say that the lobbying in this space has been noticeably more successful than for ORSA or System of Governance, no doubt due to the smaller sub-set of affected stakeholders having a more concentrated relevance. That said, there were still a number of rebuffs from EIOPA, particularly where the lobbying looked more like whinging about paperwork volumes! Highlights below;

Model Change Policy

3.38 - No danger of EIOPA supporting the recommendation to "fast track" model change approvals if a "major change" is required at short notice. They instead recommend "proactivity" with NCAs. Not sure what this does for the world of opportunistic acquisitions though

3.40 - Fudged the question as to whether parameter changes are considered "major", offering an answer of 'it depends' which, for me at least, leans more towards 'yes they are'.

Use Test

3.42 - Confirms that evidencing "use" is not compelling use of model outputs over and above other techniques

Assumptions and Expert Judgement

3.46 - Documentation and validation of assumption setting and expert judgements considered "crucial" in order for undertakings to counter the lack of data and subjectivity in those processes

3.47 - A guideline has also been amended to confirm that the materiality principle applies for this topic

3.48 - Only the most material assumptions will need AMSB sign-off

Methodological Consistency/PDF/Calibration

A number of changes made to clarify guidance in these areas

Profit and Loss Attribution

3.64 - No escaping the requirements to produce P&L attribution granularity at Legal Entity level, as well as by risk driver

Validation

3.68 - EIOPA do not accept that those who build models may also validate them

Documentation

3.70 - That the guidance around the documentation of the internal model should provide "...[protection] from key-person risk", which I have never seen offered as justification from the supervisory end before

Ultimately, there have been no huge concessions from the position in March, which one would think will cause a number of the more liberal EU regulators to give serious consideration to "explaining" rather than "complying" - that said, with this having been written in Union Jack ink, my British cousins should simply get their transition planning updated accordingly.

EIOPA's FINAL preparatory guidance for national supervisors - it's on at last!

Sporting less change than a busker's flatcap, EIOPA have published their final version of the preparatory guidance for the EU's National Competent Authorities (NCAs) to get themselves ready for Solvency II ahead of the anticipated implementation date of 2016. You can catch my post on EIOPA's consultation papers here if you want to dig out their position prior to the consultation, which saw over 4,000 comments offered.

EIOPA - Thanks for the feedback,
here's your change...

Over the last week, while I have been recuperating from yet another rugby injury, there is plenty of chatter recently about the kick-off date, Omnibus II's progression through trilogues (and hopefully parliament before the May 2014 elections), etc elsewhere, so I've just had a run through the final guidance to see what got lobbied out, and whether that is a win for all stakeholders, or just the industry. As the PRA have already made it clear that should the go-live date move, their expectations on supervisory reporting will also move (p3), whether it is 2016, 2017, etc. is kind of a moot point.

The mainstream press has trumpeted the big wins as being in the reporting space which, judging by the IRSG's scathing take on that topic, should be no surprise to anyone. However, it would appear that EIOPA have refused to bend for much else, adopting a relatively sniffy tone in response to stakeholders concerns/complaints.


Below are links to separate blog posts covering the more contentious highlights for each of EIOPA's 4 hot topics, while Mike Claffey and the Milliman crew have quickly summarised the changes here;

System of Governance - Final Guidance (EIOPA Doc)

ORSA/Forward Looking Risk Assessment - Final Guidance (EIOPA Doc)

Reporting/Submission of information to NCAs - Final Guidance (EIOPA Doc)

Pre-application for Internal Models - Final Guidance (EIOPA Doc)

ORSA/Forward Looking Assessment of Risk - EIOPA's FINAL preparatory guidance for national supervisors

EIOPA reuse the preamble from the System of Governance guidance in their ORSA/FLAOR guidance, save for confirming that an assessment of overall solvency needs will be expected in 2014 and 2015 (more on that later). I will use ORSA rather than EIOPA's shiny new acronym for my own convenience throughout this post!

It ultimately reads in parts as a circuitous and convoluted piece due to the way that EIOPA have had to splice the ORSA requirements into three component parts, as per Article 45.1 of the Directive, to accommodate the postponement of some elements until 2015. An horrific example of this is point 3.112, which to paraphrase Chris Morris, reads like the ramblings of a drugged horse.

That said, they have clearly had to contend with a mountain of feedback since the initial consultation paper was released, and have done a better job of explaining why most comments were, in EIOPA's view at least, misguided.

Again from the practitioner's perspective I would highlight in general that;

1. There is almost no discernible movement in EIOPA's position, even after lobbying;
2. That explanations for the inclusion of contentious content are generally forthcoming, though for this subject are more forthright and pragmatic (perhaps naturally due to the lack of L1 and L2 substance);
3. That 2014 ORSA is a genuine piece of work which will require the attention of the most senior staff in insurance firms - it would be a brave company that play-acts at any elements of the documentation, processes and outputs of the assessment.

Supporting arguments for EIOPA's final views are listed below, along with any relevant commentary from my practitioner's angle; 

Clarification re Omnibus II
3.49 - If go-live in 2016 does not happen due to further Omnibus II delays, "...undertakings will still be expected to perform the [overall solvency needs] assessment from 2014 onwards"

Clarification re continuous compliance with SCR and Technical Provisions calculations requirements, and the deviation from SF SCR assumptions assessment
3.50 - Confirm that these elements are postponed until 2015, and that technical specifications will be forthcoming from EIOPA by year-end to aid in the conduct of some of this activity.

Parallel running Sol I/Sol II concerns
3.53 - basically, not EIOPA's problem!

Compulsion for model applicants to also use SF in the assessment
3.54 - clarify that this in NOT about benchmarking models, rather "taking into account contingencies" should a firm's model not get through IMAP. A thoroughly negative and unsympathetic approach from EIOPA on this one I'm afraid

Timing
3.58 - "EIOPA considers it necessary that all undertakings perform the assessment of overall solvency needs at least two times during the preparatory phase, once in 2014 and once in 2015...[and] at any time during 2014"
3.60 - Stress that "...it is for the undertaking to decide on the appropriate reference date for its FLAOR", though couched in an expectation that financial year-end is most likely.

Guideline 5 - Delegation of activity by the AMSB
3.73 - "not acceptable" to delegate full responsibility for ORSA to sub-committees of the AMSB

Guideline 7 - ORSA Policy
3.62 - "...it is necessary to develop a full policy during the preparatory phase"
3.63 - "...[The ORSA Policy] may be part of the policy on Risk Management", though must be clearly identifiable

Guideline 8 - Record of the ORSA
3.64 - Rather bizarrely suggest that the ORSA Record is "...no less, but maybe even more important during preparation that after the start of Solvency II", but either way the message is clear - maintain the records carefully

Guideline 9 - Sharing information internally
3.77 - "It is for the AMSB to decide which parts of the information will be distributed to whom" - clearly some panic amongst respondents that they may have to start telling the 'proles' about their future employemnt prospects!

Guideline 10 - Supervisory Report
3.66 - EIOPA "...does however not expect that the first report will necessarily already be perfect"
3.69 - AMSB sign-off, accepting the results of the ORSA is the trigger for the 2 week window in which to submit the Supervisory Report
3.70 and 3.71 - Some rather confused paragraphs which seem to indicate that, if there is enough resistance to the results internally, that extra time may be afforded to the firm

Guideline 11 - Valuation bases
3.79 - EIOPA scrutiny postponed until 2015, but justifications on bases used expected

Guideline 12 - Overall Solvency Needs assessment
3.83 - EIOPA expect "...it will take several years" before this assessment is good enough, hence they expect the preparatory phase to include practice!

Guideline 14/15 - Continuous compliance with SCR requirements and Technical Provisions calculation rules
3.85 - Postponed until 2015, and again justify activity prior to Solvency II going live by using a practice makes perfect mantra, noting that attempting to do this will "...intensify the learning experience"! I wonder if anyone ever used that phrase in their budgeting requests...

Guideline 16 - Deviation of one's Risk Profile from SF SCR assumptions 
3.89 - Postponed until 2015, and also note that quantifying one's deviation from the SF assumptions will not be necessary "...if there is no indication that the deviation is significant". I guess modellers will have to wind their necks in around Credit Risk assumptions in particular on this matter, bearing in mind the diversity of methods currently on display.

Ultimately, little opportunity for shortcuts then, but perhaps enough time to review what's already in place before resource planning your 2014 activities.

System of Governance - EIOPA's FINAL preparatory guidance for national supervisors

Based on feedback received since their initial consultation paper was released, EIOPA make the following generic clarifications/statements in the preamble of their guidance doc for System of Governance preparations;

• That proportionality will not be defined or presented as examples in the guideline text (p5-6)
• That NCAs are "expected to...review and evaluate the quality of the information provided to them" - bad news for the PRA, who were clinically uninterested in reviewing Solvency II reporting attempts according to one blogger (p6)
• The emergence of a new ORSA acronym, "FLAOR", which looks more like something an amused teenager would write on Facebook (p6)
• The expectation that 2015 will see submissions of (2014) ORSAs to NCAs (p7)
• While there is no generic take on what enforcement action should take place in this interim period, firms are expected to (a) Discuss any negative findings from their ORSA/Governance systems with their supervisor, and (b) To produce SCRs using information of appropriate quality. Enforcement action in the absence of this WILL NOT consist of capital add-ons, apparently (p7)
• That the submission date calendar for all of the information expected will be reviewed at the end of this year, so that EIOPA can take Omnibus II progress into account (p8)
• That the explanatory text in each set of guidance is NOT part of "Comply or Explain" (p9)
• That the reasons behind a negative "Comply or Explain" decision from any country will be kept secret as standard (p10, and disgraceful, frankly).

They then go on to focus on some of the larger bones of contention within the 52 guidelines provided. The following generic points stand out for me as a practitioner;

1. There is almost no discernible movement in EIOPA's position, even after a volumous lobbying effort;
2. That explanations for the inclusion of contentious content are generally forthcoming, though on a number of occasions, flimsy;
3. That planning for 2014 full-year mothballing of Solvency II programmes is not an option, particularly for ICAS+ candidates - some may get away with a few months of inertia, depending on the quality of their paperwork (strategies, policies, process guides/maps, terms of reference, charters etc).

The following supporting arguments for EIOPA's final view were, in my mind at least, poorly formulated, regardless of whether the end result is still agreeable;

3.48 (Guideline 6)

- Refused to add more definition around what constitutes a "significant decision", which is poor form.

3.58 (All of Chapter III)

- That the expectations of Risk Management in insurers  "...comprise risk management standards which are considered to be matter-of-course and wide spread activities" - extraordinarily loose, considering the lack of a majority-accepted global, or indeed pan-European standard on the subject (IRM/ISO/COSO/FERMA/FSB's efforts notwithstanding)

3.65 (Guideline 19)

- That, while it is "not an easy task", Operational Risks should be quantifiable, and therefore subject to tolerance limits - I don't think it would have hurt to suggest (or even compel the use of) a method if it is that difficult.

3.68 (Guideline 25)

- That firms should maintain Investment Risk-related KRIs outside of what might be provided by normal parties (for example, ratings agencies), which would help "...increase overall risk management" - not entirely convinced that a generic "increase" is any kind of worthy ambition. 

3.74 (Guideline 31)

- That a capital management policy and capital management plan is both necessary (though for not entirely convincing reasons when tying back to the Directive)

3.78 (Chapter VI [Internal Control])

- That there is already plenty of clarification on what the Compliance function is charged with. I would agree in principle, but have heard evidence to the contrary in practice.

3.81 (Chapter VII [Internal Audit])

- That they neither wish to mandate or discourage rotation of Internal Audit staff or whistleblowing direct to NCAs - in which case, why mention it!

3.110
- A bizarre comment in response to a suggestion that a public statement should be released by the AMSB annually regarding the discharge of responsibilities around the system of governance that the Directive "...only deals with internal governance, not corporate governance" - think I know what they are fishing at, but terribly worded.

3.144
- Justify their decision not to define risk appetite and risk tolerance in the context of these guidelines

They have however provided some more defendable clarifications, for example;

3.51 (Guideline 11)

- Clarified that the gold-plated "Fit and Proper" requirements apply to AMSB/Control Function staff only, as well as specify what is expected from Outsourcers.

3.57 (Chapter III [Risk Management])

- That in the context of separating the duties of the Risk and Actuarial functions, the Directive is abundantly clear and that undertakings "...cannot deviate from [the Directive's] distribution of tasks"

3.62 (All "Policy"-related guidelines)

- That efforts should be targeted towards drafting the required documents during the preparatory phase. I would imagine this would be "re-working" in the UK, where such activity is most probably long done.

3.67 (Guideline 19)

- That there is no compulsion for firms to operate an electronic database to store operational risk events

3.85 (Chapter VIII [Actuarial])

- That, regardless of the absence of a valuation framework for TPs, the processes behind their co-ordination and calculation justify early activity, rather than "wait and see" on Pillar 1.

3.124
- Regarding Op Risk, activity will have to include "...identifying all operational risks that have crystallised and their near misses" (my emphasis)

Relatively easy in summary then - if it was a gap/issue in your system of governance in March, it probably still is, so go and fix it!

Financial Reporting Council - documenting 'principal risks' in Strategic Reports

I had recently spotted that the UK's Financial Reporting Council had issued draft guidance on the compilation of the Strategic Report for listed entities. This segment of a company's Annual Report and Accounts (currently called the 'Business Review') has been a rather ubiquitous and clunky affair regardless of industry, delivering little information to prospective and existing shareholders about how the company's risk profile, appetite, preferences etc. are catered for when executing its strategy.

Strategic reporting for UK companies 
- elimination of flannel?

Insurers have been prominent in efforts to improve this, though driven more by the need to pacify the FSA/PRA than by Parliament - see "risk appetite" break out from its box in  Aviva's AR&A between 2007 and 2012 for example - but the fact that a substantial piece of statutory reporting generally in the hands of executive management can potentially stray from the lexicon and structure of their increasingly professionalised Control Functions (and for banks and insurers, potentially their Internal Models), is clearly one that warrants some focus.

The Strategic Report will be compulsory content for Annual Reports and Accounts from October (Companies Act 2006 414C). The FRC's (non-mandatory) guidance regarding the incorporation of risk-related material into this section is to address the requirement on p2 that the Strategic Report;

...should include a description of the principal risks and uncertainties facing the company

The FRC's specific definition of Principal Risk is found on p35 of the draft guidance as;

A risk or combination of risks that can seriously affect the performance, future prospects or reputation of the entity. These should include those risks that affect the viability of an entity.

The draft guidance (p23) aims to tack on a few definitional aspects of how "risks and uncertainties" are reported in the context of strategy, most pointedly;

• [The risks] should be limited to those considered by the entity’s management to be the most important to the future development, performance or position of the entity. They will generally be matters that the directors regularly monitor and discuss because of their likelihood, the magnitude of their potential effect on the entity, or a combination of the two
• Principal risks or uncertainties with potential effects of such a magnitude that they may threaten the entity’s viability (ie its solvency and/or liquidity) should be explained fully and given due prominence
• Directors should consider the full range of business risks including commercial, operational and financial risks
• The descriptions...should be 
  sufficiently specific that a shareholder can understand why they are important to the 
  entity. This might include a description of the likelihood of the risk, an indication of when 
  the risk might be most relevant to the entity and its possible effects. Significant changes...

  such as a change in likelihood or possible effect, or the inclusion of new 

  risks, should be highlighted and explained. An explanation of how the principal risks and 
  uncertainties are managed or mitigated should also be included.
• 
  

  Where the risk or uncertainty is more generic, the description should make 

  clear how it might affect the entity specifically.

Prudential provide a good example here (from p72) of how this is currently done by an insurer - the fact that it is buried in 75 pages of 'Business Review' underlines why the streamlining of this work has become of statutory interest!

Interestingly, the FRC note that definition for "principal risks" has been developed/derived from previous FRC work, supplemented by work from the Sharman Inquiry - all of that therefore feels well divorced from anything produced by the IRM/Actuarial Profession/EIOPA around risk categorisation, and leads to the same bridging work I have been involved in previously; namely, reconciling how one manages and monitors risk within the business against what one reports externally. Might we have expected to see some kind of compulsory categorisation of "principal risks" in here that favours the financial services industry who arguably carry the largest set? 

Much of the other compulsory material in the Strategic Report (with exemptions) touches on other topical or sensitive matters such as;

• Inclusion of key performance indicators in the report ("...where possible, they should be accepted and widely used")
• Information on environmental matters, staff and social/community/human rights issues
• Information on gender splits at Board, Senior Management and All-company level

I may throw some feedback in to the FRC on this paper- comments welcome until late November. Externally, the main change for insurers will be trimming down some of the fluff and flannel already produced in the space. Internally, aligning the concept of "principal risks" with existing ERM programme/Internal Model lexicon may be a bigger job for anyone operating on a shoestring.

Towers Watson - 'Risk Appetite revisited' (did we ever leave it?)

I have been doing a little work on Risk Appetite in the background recently, so was intrigued to have a read through this recent release by Towers Watson on the subject, seemingly targeted at North American and UK markets, but relevant to any practitioner in this space. Somehow I wasn't put off by p6 when, in response to the hypothetical question 'What is Risk Appetite', they responded with, "...we do not want to focus too much on the issue..."!

Appetite - second helpings?

I had blogged earlier this year on Risk Appetite, covering the expectations of EIOPA on the matter (which are few), as well as the more pokey/proddy stakeholders like the PRA/Central Bank of Ireland/S&P (which are several!), so the backdrop of risk appetite's practical significance to insurers doesn't need to be repeated here, more how consultants and practitioners are improving their game on the ground. Worth noting here that a few of the other consultancies have proffered their two cents on the matter over the last year or so (here, here, and here).

While interest in 'risk appetite' is currently piqued at governmental level thanks to the forensic examination of the banking industry's failings (multiple references in Parliamentary Commission evidence here and here for example), the driver of activity in the UK and Ireland is predominantly from the regulatory compliance perspective rather than expectations of bespoke, strategy-driving activity. In addition, we now see the emergence of Internal Audit as a party with a vested interest in the matter, which has the potential to draw the subject even more to a tidy, but ultimately superfluous documentation exercise.

With that in mind, Towers note that this paper is focused on "...enhancing risk appetite by improving its articulation, via clearer linkages to mission and strategy", and a rather derisive tone is therefore applied throughout regarding the familiar quantification methods preferred by regulators to monitor likelihood of insolvency in the next 12 months, giving equal billing to non-monetary capital and qualitative measurements. The paper also crosses some familiar ground, such as a lack of consistent terminology, which it tries to address (below).

Oddly, the document does not reference the FSB's thematic review of risk governance earlier this year, which will surely drive efforts in this space in the medium term, if only due to the paucity of certainty on the subject. That the FSB believe that regulators have "more work to do" is striking, and while they also bemoan the lack of common terminology, they don't let that prevent them from offering definitions of their own, as well as listing their "Key features" of a Risk Appetite Framework.

More obvious statements

• "..clearer linkages are needed to mission and strategy for risk appetite to be effective"
• "risk appetites must include boundary constraints"
• "We suggested that greater clarity around the definition of risk is needed..."

Definitions

• Risk - "In this context, risk should be defined in terms of those events and circumstances that may result in an insurer failing to deliver on its mission."
• Risk appetite - "...the manner in which a company expresses an identified set of risk-trading opportunities, and sets boundaries on its risk-trading among those opportunities, aligned with successfully delivering on its mission."
• Risk strategy - "The company’s risk strategy articulates how risk fits with the mission".
• Risk tolerance - "Risk tolerances are a quantitative extension of the risk strategy...risk tolerances must be measurable...[and] place quantitative boundaries on the company’s strategy"
• Risk limits - "Risk limits are more granular tolerance levels expressed for specific risk sources, business units, and/or products that are used to implement the risk tolerances."
• Risk appetite statement - "...risk appetite statements should be taken as the combination of risk strategy tolerances and preferences, bringing together qualitative and quantitative enterprise perspectives on risk as both opportunity and threat."
• Mission - "mission is the insurer’s unique multi-period and multi-stakeholder value creation proposition."

Technical suggestions

• They promote four facets of risk assessment: size, likelihood, impact and significance.
• For those working on statement content, they recommend "...since published mission statements can be fairly terse, the risk appetite may need to look beyond the explicit elements of the mission and consider elements that are implicit." Instinctively that feels unfair, but I guess the world of implicity is one for the second line to inhabit, while the first line concentrate on value-adding.
• Concept of adaptive buffers sits nicely with me - the most visceral ones being economic capital and reinsurance/hedging/liquidity facilities, but TW attempt to expand that over qualitative areas of the risk appetite statement
• Risk preference ranking of 0-4 depicted at the back is a handy schematic

Sore points

• "Some take the view that risk appetite can be expressed as a single metric, or perhaps a small set of metrics, that capture the organisation’s willingness and ability to bear risk." - that 'some' would include the FSB, COSO, the Central Bank of Ireland and the IRM, so I wouldn't be too sniffy at efforts to-date
• "Much of the work to-date on risk appetite statements has been driven by solvency supervision requirements, many statements tend to focus primarily on potential losses of capital"- a natural and by no means unwelcome by-product of having regulators in the box-seat, as opposed to stakeholders combining their efforts to establish compulsory risk appetite statement content?
• "While most insurers have, by now, developed risk appetite policy statements and discussed them with their boards, many have expressed dissatisfaction with the exercise" - that feels a rather loose statement, and if true says more about the personnel charged with performing the work.

I'll take a look at the diversity of definition in the risk appetite space across different bodies in a separate post - for now, just enjoy this tidy piece of work for what it is.

Deloitte on 'regulatory uncertainty in Europe' - embedding a new modus operandi (?)

In a wonderful example of predicting the present, Deloitte have released a white paper (sign-up required) giving their take on regulatory uncertainty in the European insurance industry, and how the volume of new regulations (and their inability to land on time) is driving emerging best practices in the consideration of regulatory risk at Board level.

New Modus Operandi - alloy wheels optional?

Of course, it is always best to wait for such matters to emerge before proselytising, and the current cup of omni-postponed over-elaborate regulations is running over (Sol II, IFRS 4 Phase II, FATCA, etc), naturally causing difficulties for all those responsible for preparing for them, as well as the execs who take the topics into the boardroom every quarter, only to say "it's been delayed again, can I have more money"...

From my perspective, it was particularly interesting to see that proactivity is recommended regardless of nature/scale/complexity, bearing in mind the first time I spoke to a Board of Directors at a tiny insurer regarding Solvency II preparations was in 2009 - only consultants could comfortably suggest that an new executive-level role is established, and Board agenda time is regularly set aside, only to explain the latest delays in multi-jurisdictional regulations (I certainly know what my old CEO would have said to that!)

That aside, they suggest that two major problems need to be overcome; that few insurers have a single view of regulatory risk; and that regulatory insight is poorly represented in the strategic workings of insurers, both of which are easy to agree with purely on circumstantial evidence.

Whilst this frequently reads like a paper written to justify bringing consultants in to compensate for failing in risk and compliance professionals' armoury, Deloitte make the following noteworthy assertions/recommendations in it;

Trends

• That most insurers prefer to 'wait and see' rather than be 'first mover' when it comes to regulatory preparations - after the Solvency II experience, does that surprise anyone?
• That "...Deloitte's view is that regulation can be regarded as a 'structural' driver of the insurance industry"
• That "...Deloitte's considers a regulatory dividend can and should be sought", which is not necessarily my experience of consultancies when on site, who (presumably for legal reasons) prefer to promote a gold-plated complaince approach to regulation-driven projects.
• Cost of compliance is now materially diluting return on equity in EU insurers
• That Conduct Risk is likely to become high profile across Europe over a longer period of time than its current flavour of the month feel, thanks to IMD2/PRIPS/MIFID
• National regulators are increasingly impeding on day-to-day running - examples given (all of which have a whiff of IMAP requirements about them), include documentation improvements and influencing risk appetite/capital allocation work.

Costs and volume

• Regulation prep cost the European insurance industry €4.2-€4.7bn in 2012 - they go on to expand that to €8.1-€9.2bn over the last 3 years.
• UK industry will be subject to 29 new pieces of legislation of the next 5 years (surprisingly lower than the French at 35, and the Germans at 32!)
• That the "cost of doing nothing" while waiting for regulatory clarity may be significant - as significant as consultancy spend preparing for something which never arrives perhaps?
• That compliance functions are naturally struggling to cope with the current volume of initiatives

Solvency II-specific

• They extrapolate an estimated €550m cost of Solvency II compliance preparations in 2012 into a €1.5bn-€1.8bn 'top 40 insurers' number, and a €2.4-€2.9bn figure for the whole industry - feels a bit light, bearing in mind 'UK plc' must have done the best part of £1bn on Solvency II alone in 2012.
• They quote one strategy director as saying that "Solvency II is killing European M&A..." - p10

Their recommendations (from p19) are too woolly in aggregate to help a normal practitioner - they are probably targeted more towards programme directors and managers - but the recommendation  to establish a Regulatory Assessment and Response Executive with a suitable remit is a smart idea, even if from a practical perspective this might need to either be balled in with the responsibilities of an existing executive, or only be a mid/senior management role, in smaller companies. 

These recommendations also include the marvellous suggestion to "embed a new modus operandi" - an expression normally reserved for profilers of serial killers, and perhaps the hardest sell since Isle of Man beach holidays.

PS I apparently missed the memo where the oft-ridiculed speech of Donald Rumsfeld used to support war against Iraq became de rigeur in risk management/insurance white papers. If there is one "known known" in this world, it is that I will never use that expression on the job!

Omnibus II Plenary delayed until March 2014 - 2016 out of the question?

Confirmation was provided today, if needed, that the Omnibus II Plenary vote was being pushed back into 2014 - that it needs until March 2014 perhaps underlines the swell of discord at the trilogue table, all of whom have seemingly been digesting EIOPA's long term guarantees report for, well, a long term...

Solvency II Spuds - hoofed

While July and August naturally died a death while the Eurocracy topped up their tans, any thoughts that compromise and camaraderie were on the various parties minds can now be unequivocally hoofed in the spuds, as can any notion of January 2014 being a meaningful date for anyone aside from EIOPA, its national satellites, and the 'soft launch' we have seemingly acquired.

A few of the Big 4's rather underemployed Solvency II experts have commented today on this latest delay and the rammifications, which contrasts against the optimism shown yesterday on Risk.net  by Insurance Europe in particular. I guess what is particularly disappointing is that the ITER listings haven't changed in respect of Omnibus II before and after the summer break (here and here), so why wasn't something said earlier?

I had already blogged on the shifting sands before the summer break, and the stance of BaFin in particular, and it would appear a market analyst sees the German approach (including an uncited reference of a desire for 20 year transitionals) as being a genuine show stopper, rather than a mere irritant.

That may be a touch dramatic, but by shifting the Plenary vote to March, when retiring/deselected MEPs will be on autopilot, and careerists will be electioneering (indeed, Primary activity starts before the end of 2013), is the trilogue's hope that this might squeeze through via fatigue-inspired lack of inquisition? Does the alternative of a fresh crop of politicians picking holes in the work of technical experts from summer 2014 bear thinking about?

Finally, with Sr. Bernadino having already pronounced that 2016 would not be viable without Omnibus II agreement having been reached by the end of this year, can we provisionally move on to 2017 as the new 'go live' date?
 

FTSE and European Insurers - Economic Capital and Solvency II trends - money pit filled?

Interim Results season - without question, the most exciting time of the summer for me (although to qualify that, I do live on the Isle of Man and blog in my spare time). As good an opportunity as any to peer review where the big boys are at in the UK and Europe, both on Solvency II preparations/costs and economic captial positions.

Solvency II project costs - on the wane?

As I had mentioned in an earlier post, the FTSE-listed insurers have gone noticeably quiet on both Solvency II and, in the UK's case, the havoc it was inevitably going to wreak in its 2012 form - while the 2013 silence "speaks volumes" as to the priority of the dossier, it is a smart idea to see what impact the threat of a 2014 start has had to EC positions of major insurers over the last 12 months (i.e. after last year's whingeing, did any of them actually do substantive capital-related activity!)

A few notes for each below;

Aviva

• Solvency II project costs of £44m - well down on £77m in 2012 year-to-June
• "...there is still significant uncertainty over the detailed requirements [of Solvency II]"
• Pro-forma economic capital surplus of 175%, up from 172% in December
• IGD coverage 1.8 times, up from 1.7 times in December

Axa

• Nothing on Solvency II at all or project costs
• Solvency ratio down to 218% (from 233%) since December - interest rated attributed
• Economic solvency ratio (calibrated to 1-in-200 VaR) down to 204% (from 206%) since December - dividend and market risk elements attributed

Allianz

• Nothing on project costs
• Solvency ratio (based on FCD) of 177%, down from 197% this time last year - change in accounting standards attributed
• "...Allianz continues to be exposed to two external forces that adversely affect our risk profile and would not normally be associated with our core operating activities: the European sovereign debt crisis and regulatory developments – especially the European solvency directive, Solvency II"
• No reference to economic capital or modelling

Legal and General

• "Investment projects and expenses" (which covered Solvency II last year) were £20m - £23m in 2012 year-to-June
• "...remains uncertainty both to the implementation timescales of Solvency II and the final calibrations that will be used for long term business"
• IGD surplus unchanged at £4.1bn, coverage ratio down to 226%

Old Mutual

• No mention of Solvency II project costs, same as last year
• EC coverage of "over 160%", calibrated to VaR 99.93%
• FGD surplus of 160%
• Dividend outweighed operational cash flows in the 6 month period, though this was due to the special dividend paid last year after a massive disposal

Resolution

• Solvency II project costs of £10m for the half year - well down on the £48m for 2012 comparable!
• "Proposals for Solvency II continue to be the subject of debate"
• EC Coverage of 192% - (194% in Dec - quantum increased by £200m though)
• IGCA coverage of 221% (222% in Dec) - sold a business unit, which helped cover dividend

Prudential

• £13m Solvency II project costs for the half year - £27m in 2012 year-to-June
• "...deferral until 1 January 2016 or beyond appears likely"
• "...we now know that it will not be implemented before 1 January 2016" - my emphasis
• "[potential for] optimising the Group’s domicile as a possible response to an adverse outcome on Solvency II" remains on the table, a copy/paste threat left in from last year.
• IGD coverage of 230% - quantum lower by over a billion since Dec, due to a change in requirements in their US business

Standard Life

• £36m Solvency II "and other programmes" costs for the half year - £42m in 2012 year-to-June
• Solvency II project "...continues to respond to changes in requirements"
• IGD down £500m since half year after accounting for a special dividend, and surplus generation down year-on-year (attributed to new business strain)
• IGD surplus of 185%, down from over 200% at YE2012, but up 11% from this time last year
• Not a single reference to "economic capital" in the document

Generali

• No mention of Solvency II
• Solvency I coverage at 139% - up from 130% this time last year
• Economic capital coverage of 167% - up from 159% this time last year

RSA

• Solvency II project costs down to £10m (was £16m  in 2012 year-to-June)
• "There remains continued uncertainty as delays in agreeing the rules have caused the planned implementation date of 2014 to be delayed."
• IGD covered 1.7 times - down from 1.9 times since December - dividends again cited in explaining the dip.
• Economic capital (calibrated to 1-in-200 VaR) £1.3bn, up from £1.2bn in December.

So a trend of steady Solvency I ratios, and no sign of any war chests being created by holding excess cash back - quite the opposite in some cases, with dividends (special or otherwise) on the high side. With project costs diminishing and barely a passing comment on the Omnibus II impasse, it looks very much like Solvency II is yesterday's news in the boardrooms of major insurers. 

That said, in just those insurers covered above there has been over £100m confirmed spend in the last 6 months on Solvency II preparations, during which time the implementation date has (informally) moved at least two years, IMAP has been elongated, and the LTGA panacea has turned out to be anything but. That's hardly chickenfeed, and the rest of this year can only get busier for the UK with ICAS+ and EIOPA Interim Guidelines to contend with.

I hope Finance Directors don't get too excited by the dwindling project spend though - we haven't started Pillar 3 yet, apparently!

PwC and CSFI's 2013 Insurance Banana Skins survey - "Conduct Risk" firmly a la mode

Following on from the 2011 version, PwC and the Centre for the Study of Financial Innovation have pumped out another version of their Insurance Banana Skins survey, identifying how well the insurance industry feels it is prepared to handle a list of pre-identified risks. The average response on a scale of 1 to 5 was 2.97, which rather unrevealingly suggests the industry is averagely prepared to manage its collective risk profile.

EU Legislative process - not for vegans

This survey was conducted during March/April 2013, and elicited 662 responses from 54 countries, with two-thirds of respondents coming the insurance industry (the rest consultants/brokers etc). Almost half were European, so no surprises that the risks emerging from the regulatory environment were top of the pops for the second survey in a row. Solvency II gets a particularly flavoursome mention, with reference to its struggles to get through the "Brussels Sausage Machine"...

Bearing in mind the exquisite pressures being applied by the EU machinery to quantify risk, this publication is a welcome return to horizon scanning, qualitative assessment and emerging risk, all of which is handy for the ORSA posse, who according to recent surveys, should be all over this during 2013.

Some very interesting snippets emerge from the report, in particular;

• "Conduct Risk" - if ORSA was the new boy in 2012, then its 2013 counterpart is surely Conduct Risk, which I suspect didn't warrant a category of its own in many risk managers thinking until the return of twin peaks regulation in the UK. Conduct Risk has shot up the charts in its significance for insurers, now sitting 4th (from 18th last year)! Specifically, the suggestion that insurers are now "...looking beyond conduct risk as simply a compliance exercise" makes you wonder what some firms through were acceptable products in the last 10 years!
• "Guaranteed Products" - was not listed last time around, now jumps to number 6
• Actuarial Assumptions (which can easily mask the emergence of a number of the risks listed) unchanged at 12th
• Capital availability down from 2nd last time to 16th this year - interim period been spent squirrelling capital away, or happy that the onerous elements of Solvency II are (thanks to Germany) in the distant future?
• Reputational risk still in mid-table, at 14th

And sectoral/country specific;

• Surprisingly, the Life sector doesn't have actuarial assumptions in its top ten concerns
• Equally surprisingly, the non-life sector doesn't have regulation in its top ten concerns - clearly happy with their proposed Solvency II lot!
• That reputation doesn't feature in reinsurer's top ten - with customers likely to be eager yet more discerning  under Solvency II, one would think this is an area for enhancement in order to stand out from the similarly-rated crowd
• The quality of risk management appears to have spiked as a concern largely due to the emergence of emerging market firms into the space playing catch-up (on paper at least), as well as concerns that some firms are playing at risk management without making necessary adaptations to the prevailing risk culture.