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.

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

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

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

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

Sign up and dig in, very handy indeed.

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

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

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

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

Solvency II Directive and impact on capital

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

Policyholders and products

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

Balance Sheet de-risking

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

Capital charges

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

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

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

Economist Intelligence Unit - Getting new perspective on strategic risk

This out last week from the Economist Intelligence Unit, always a great spot for benchmarking, and at a verty opportune time for anyone working on ORSA or enhancing the visibility of strategic risk in general. Sample size is almost 500, around a month old, and all respondents have responsibility for risk management in their respective firms. The research is also supplemented by interviews with a few big cheeses.

Again, it;s a quality publication, so doesn't need much sifting through, but the salient points for me include;

• Lot of agreement that Risk should challenge management's view of the future (two-thirds)
• Almost three-quarters agree that flexibility is more important that ability to plan for the long-term (indeed a third of respondents don't even plan for events a decade or more into the future)
• "By extending their risk models further into the future, companies must be aware that the data being used to populate them are increasingly unreliable" - interesting in the context of ORSA (i.e where does one stop projecting)
• Main barriers to considering longer term risks are executive management's focus on immediate risks (41% of respondents), and the nature of the business making such work redundant (36%)
• Almost 60% have their Risk functions actually participating in the formulation of strategy
• The risk planning horizon doesn't appear to be aligned with the strategic planning horizon (risk planning being much shorter) - obviously changes with ORSA for insurers, but not sure what the resolution is for other organisations.
• 60% have one of the most important objectives of the risk management function being the identification of new and emerging risks - may actually be the cause of some of the mismatch mentioned above. Despite that, only 40% feel they are doing a better than average job of anticipating and measuring such risks
• Main areas for enhancing risk management practices have been to make risk management more forward looking (50%), and allocating more board and senior management time to long-term risk analysis.
• 40% have their CEOs as being responsible for exploring long-term impact of risk on strategy - very high, considering that boards/committees were alternative responses
• 44% think a bigger commitment to ERM will help align risk and business strategy, while 33% thought that the Risk function presenting themselves more as business enablers would do the same thing.
• Only a third of Risk functions report to the board quarterly - seems very low
• 30% have no plans to use horizon scanning - beyond mad!
• Only around half of respondents have or plan to have a CRO