FSA and cost of Solvency II in the UK - two tunnels or half a tunnel?

Andrew Bailey, incoming head of the PRA in the UK, was widely quoted yesterday as saying that the spiralling costs of Solvency II could ultimately cost "twice as much" as London's new £15bn choo-choo tunnel Crossrail. This was at a parliamentary select committee, which for non-UK readers is where second tier politicians jump on the latest bandwagons, so that fact that Solvency II is getting some air-time is telling in itself.

Not entirely certain what expenses are included in this £30bn mega-bill, but the number is surely as inconceivable as a 2014 start date unless we add FSA costs, industry costs and slap on some arbitrary figure for "additional capital the industry will probably need to hold" - which is of course what was contained in the Cost Benefit Analysis commissioned by the FSA published back in 2011. With much of that based on QIS5 standard formula results (but at least in the same ball park as £30bn), I guess we can swallow £30bn, albeit with a pint, rather than a pinch, of salt.

"But wait a second" keen readers of the FT cry, "this time last month a prominent CEO said the cost was supposed to be HALF that of Crossrail,". Has someone in the fact sheet-preparing department at the Wharf got their wires more crossed that a breakdancing electrician, and sold their boss a dud here? Has one of the journos at the Telegraph or FT misquoted someone? Either way, there's probably a salient lesson in there somewhere around looking before you leap, it just remains to be seen who's left with the proverbial, errr, mucky shoes.

Incidentally, the full text from a separate questionnaire which the UK Parliament's Treasury Select Committee asked Mr Bailey to respond to is available here - this is separate to the interrogation transcript where the "twice as much" quote was obtained from, but contains some insight into where prudential regulation is going as of next month when the PRA take the reigns, including some good news on the regulatory levy front;

"For the next year, we intend to levy just £0.1mn [for Solvency II]. The difference [from last year's £15m] reflects cut backs that we have applied to Solvency 2 preparation costs. Although it is hard to be sure of the final cost of Solvency 2 preparations given the uncertainty on timing and substance, I expect the overall cost to be considerably lower than previously estimated. This will be a saving for insurers."


However, when one reads that, in his own words, the new head of Prudential regulation in the UK is "...by comparison new to insurance, but [he takes] it very seriously", you truly hope if the £30bn faux pas is attributable to him, that it can be put right - with all the Solvency II scaremongering and doom-mongering, we could probably use a little realism-mongering...

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Omnibus II - back to October 2013

Following on from the barely noticeable number of previous posts on Omnibus II Plenary vote delays (here, here, here, here, here and here), we can now stick lucky number 7 in the pot, after the procedure file was updated today to show a postponement to October 2013 - whilst the delay was inevitable after EIOPA made it clear that the Long Term Guarantees Assessment report would only reach the co-legislators by July, the actual date helps with short-term planning for all stakeholders concerned.

I guess the big questions that emerge from a delay to October are:

• Whether it is enough time, factoring in the summer holidays, to consume the LTG report, acknowledge its outcomes regardless of which territory benefits most from the conclusions, and vote positively
• Whether it is actually too much time to pull apart the report's outcomes, and between the trilogue parties, industry lobbyists and any national political pressures than can be marshalled in the interim, October just becomes the next promises graveyard.
• The increasing proximity of this date to the campaigning for the 2014 EU parliamentary elections, which must surely impact on how the voting will go if the LTG report gives a duff outcome to those countries still writing swathes of guaranteed business
• The entry into the mix of Karel van Hulle's replacement (haven't seen a name yet)

Not certain if 2016 is exactly riding on Omnibus II approval by October, but one feels it would certainly help restore some credibility.

EIOPA, Parliament, IRSG and LTGs - momentum sustained?

I guess I should start with a Blein Vie Noa to one and all - after a relaxing few weeks in France I am now back on the beautiful Isle of Man sizing up opportunities for 2013 and beyond.

I didn't expect I would be missing much over the festive period and, other than the FSA sacking-off their proposed January IMAP industry briefing in favour of a (yet to be delivered) letter, things did go quiet. Freshfields kindly filled some airtime by pulling together another of their "where are we now" summaries that remain excellent (and free) materials that I would recommend punting on to your non-executive directors.

Luckily the noisemakers got back in the game as soon as school restarted, focused largely on the content of EIOPA's Insurance and Reinsurance Stakeholder Group's minutes. This meeting was held in October, so in terms of new news, it is right up there with "Earth is not flat". That said, we don't all have access to the inside track before publication of such materials, so it was interesting to pick through the doc for steers. I noted the following;

• Continuing problems with terms of reference for the LTG assessment (indeed the LTG sub-group note on p7 that there isn't even a EU-consistent definition for LTG!) - still looking like it will impact on the designated Plenary session for Omnibus II due to a combination of last minute delivery of the technical specifications to the industry itself as well as the output report to the Parliament, who themselves were reported today as being less than impressed with the final TORs. The potential number of scenarios in the assessment also clearly remains a sore point.
• Acknowledgement that "Autumn 2013" is now "best case scenario" for Omnibus II adoption, though, according to van Hulle at the last EIOPC meeting, the Commission and Parliament remain almost diametrically opposed on what should materialise at Level 1 and Level 2 (full minutes from EIOPC here)
• Confirms the ex-ante approach is favoured by Parliament and Commission (significance covered by Gideon here), and that Parliament have no wish to commit to an implementation timescale.
• The Council members are being "heavily lobbied", fostering implementation uncertainty.
• Attending stakeholders supported a definitive 2016 date.
• The IRSG's Governance sub-group flag up consistency issues around Fit and Proper regs as well as the "AMSB" term that I'm sure we have all had practical issues with over the last 2 years!
• Proportionality remains a "main concern" for mutuals, as well as smaller insurers - despite having a designated sub-group, any substantive guidance on applying the proportionality principle looks a distant prospect at best.
• Astonishingly, minutes from May 2012 could not be approved due to EIOPA's "workload" - small instance of an institutional tardiness problem?

Whether or not the industry is losing it's appetite for the Solvency II banquet, when you check out EIOPA's workplans for the next couple of years, at least one body will be filling its face!

Another interesting piece came out in the last week, when InsuranceERM pushed out the findings of a Solvency II roundtable (no sub required), bringing in a few UK-based CROs and the like, ostensibly to chew over the loss of momentum in the project. A few noteworthy bits jumped out;

• Solvency II balance sheet appears to be off the agenda for ICA+, for both regulator and industry
• Perception that, with the transition of regulatory "ownership" to the Bank of England, there is a decreased likelihood that the industry will be able to use Solvency II as a capital release mechanism
• A suggestion that the FSA was more minded towards EIOPA's opinions than the industry's during IMAP 1.0, something which has seemingly reversed with the advent of ICA+

One certainly hopes that the UK industry and regulator can make a decent fist of this indeterminate transition period without having to break the bank...

Omnibus II - back to June 2013

Inevitably, the spectre of reality has successfully haunted the facade of optimism until it requires a change of underwear - the Omnibus II Plenary has been shifted out to June 2013 over the weekend. After last year's rather ambivalent stretching of the scheduled Plenary date once the summer holidays/change of presidency approached, this looks like it possibly has more legs next year (why talk Omnibus II when the weather is so nice!)

This certainly gives the beleaguered industry a bit of breathing space to perform whatever data collection is required during the LTG impact study/QIS6 at the same time as standard financial year-end pressures start to pile up for the largest lobbyists - strangely still haven't seen anything definitive on EIOPA's mandate for the study yet, the scope of which appears to have been harder to pin down that one would expect (the FSA's Insurance Standing Group indicating one source of discontent from their September minutes

The coincidence of this being announced at the same time as news of Mr Van Hulle's impending retirement broke is a funny old one, but as Peter Skinner's decision not to run for re-election is also referenced in that article, maybe this changing of these battle-fatigued protagonists over the next 12-18 months may encourage all sides to stop tip-toeing through the tulips.

PS Early retirement? Anyone would think they're trying to get their annuities bought prior to go-live before Solvency II wipes 20% off!

EIOPA Conference in Frankfurt - "The authenticity of hopelessness"

"What do we want?" - "SOLVENCY II"
"When do we want it?" - "WHENEVER!"

...or so goes the leitmotif of today's EIOPA conference in Frankfurt, attended by the great and good from EIOPA, the Commission and various regulatory/lobbying bodies - ably tweeted by DIMA and Mr Varnell.

Sr. Bernadino's early morning speech covers the IORP issue as well as pure Solvency II, and tells us;

• Politicial institutions should commit to Solvency II
• All need to agree on "sound and prudent regime" for valuing long-term guarantees - EIOPA hoping to receive a clear mandate "as soon as possible", which is not promising for outcome delivery to a March 2013 plenary session!
• Regardless of how long we stretch out to for full go-live ("not earlier than 2016" is his indication in the speech, rather than a fait accompli), EIOPA will look to co-ordinate early implementation of Pillar 2 and Pillar 3 elements based on their existing powers. Not certain if that means "existing" anticipates including or excluding the Omnibus II changes though.

Interestingly, on the same day our pals at Bloomberg produced this tidy summary of piecemeal introduction of elements of Pillars 2 and 3 which touches on some of the elements from my blog post the other week - particularly like Oliver Bate's "Balkanisation" comment!

Since Bernadino's speech the tweetosphere has been full of comment from the Montalvos/Van Hulles/Creedons etc around the practicalities of Pillar 1 parallel running, leading or following IAIS developments in insurance regulation, and ORSA - get stuck in on the #EIOPA2012 hashtag!

Institute of Risk Management on Risk Culture - ABCs, Double S's and mercenaries

So I figured it might be worth seeing how the other half were living by reading something that didn't start with "Solvency II" and end with "indefinite delay"!

The IRM are endeavouring to produce white papers on some of the less tangible elements of a risk practitioner's day job, which one would hope contribute to more consistency in practitioner approaches and ultimately more credence in the concept of risk professionalism (indeed, their work around defending pure risk professionalism as a career, as opposed to loading risk functions with cross-over actuaries, was very much required in early 2011).

Having scrutinised their work on Risk Appetite in 2011 (lined up against some of the competing influencing bodies here), I figured it was only fair to take a punt at their new release on Risk Culture. It's fair to say that for politicians, regulators and fingers-caught-in-the-till employees, 'culture' or 'risk culture' appears to be a handy soundbite when explaining why they didn't fulfil their obligations to their stakeholders. The IRM are joined by Protiviti in producing this guidance, Protiviti themselves having delivered a survey based on UK insurers on this very topic in the summer, which was not shy about highlighting how little some organisations think of their Risk functions.

I've always felt that the 'culture' comfort blanket was one weasel word too many i.e. "there was a culture of greed" = "they were greedy ********", or "there was a culture of fear" = "scared of the gaffer", so I approached this doc with a pretty open mind, but tempered with a Manxman's natural scepticism. I found the following (sequentially);

What does a good risk culture look like?

• Appears to have used examples of what a "bad" risk culture has recently led to, then flipped that on its head! Would have thought a clean slate approach is better for white papers, rather than reacting to zeitgeist incidents
• Fair list of 10 criteria for anyone in the risk culture assessment space, though will always be a nightmare to codify/quantify.
• The appearance of the dreaded "tone from the top" suggestion, which makes an appearance in the FRC's (p4), the FSA's and EIOPA's world (p10) - bearing in mind that the "top" is normally the problem when it comes to organisational catastrophe (Lehman, Northern Rock) as opposed to fat tail op risk loss events UBS/Credit Agricole/JP Morgan), I would be more inclined to call it "tone at the top".

What does risk culture mean?

• I like the IRM's take on culture being "the repeated behaviour" of a group - very convincing definition in comparison to say the FSA in SYSC (p12), though the rest of the ABC approach is a tad woolly.
• "Virtuous" versus "vicious" cycle sits nicely alongside this image of repetition, but nothing as such around how best to break a vicious one, either as a NED or a Head of Risk - perhaps that has been saved for the more extensive and expensive practitioner's guide!

Why is risk culture important?

• Don't agree that risk culture affects the capability to take strategic decisions, rather it enhances or impairs the quality of those decisions. Immediately makes me think of ORSA, and how "playing" at it or "doing" it doesn't prevent strategic decisions from being made.
• Also don't agree that "at worst" an inappropriate risk culture could lead to "serious reputational and financial damage" - I'm sure stockholders at Bear Stearns may say it can be a bit graver than that!
• Nice emphasis on how risk culture can both stifle necessary risk-seeking behaviour at one extreme (smartly citing Eastman Kodak as a "too slow" corporate failure), as well as the more obvious "prison rules" which emerge from uncontrolled risk taking.

What can the board do?

• Should they really ask themselves "what is the current risk culture"? If so, is that at a chinwag-type round table, or via some kind of evaluation survey issued by Risk function? Instinctively sounds like the kind of thing that would be squeezed into a Q1/Q3 board meeting at the point of a gun, which is as cynical as it is sad!

Understanding risk culture in an organisation

• The meatier (i.e. costs money!) practitioner guide apparently contains some diagnostic tools to effectively indicate and track culture within an organisation. The flash we are given here reminds me of the psychometric testing for "what makes a great Risk Manager" that I looked at last year, but feels ultimately very high-end.
• The "Double S" model is an intriguing addition to the mix, specifically the comment that low scores on either rating "create a barrier to the effective management of risk". Would love to see more of the research cited, as I've found that the odd mercenary firm can work wonders...

Changing a risk culture

• Can a risk culture effectively be changed top-down without a change in personnel? Can't imagine an existing CEO being prepared to antagonise his board/exec team by declaring them culturally bankrupt unless he had carte blanche to do so, which is normally the case with regime change. I'm more inclined to think a decent CEO, partnered with Risk, could do it by stealth, rather than with a pricey change management programme which would inevitably rock a few boats.
• "Risk culture is not a precise science" - does that make it an art?

10 questions a Board should ask itself

• I would probably make it 11 questions, and frame the first one "Do we genuinely care about how culture impacts on our decision making, or only insofar as laws and regulations insist upon it?". If a Risk practitioner gets the answer to that directly from the Board/Exec, the other questions can be catered for with proportional vigour.

Thought provoking in the right ways, I guess it does what a good white-paper should - thanks to all concerned at the Institute.

Solvency II implementation delay - round up

"No news is good news" so goes the old motto, but in the case of this blog, "no news is new news"! After last week's sneaky peek at the options presented during trialogue discussions, the inevitable change of  EU Parliamentary Procedure file for Omnibus II was duly applied, and will now be discussed at the Plenary on March 28-31^st 2013 (honest).

That wouldn't have ruled out either of the options on the table of the Trialogue parties at the moment, but they might struggle to squeeze in an impact study on LTGs and publish the findings between now and March, particularly after it was made publicly clear by one regulator that EIOPA were not going to start that work as scheduled. The EIOPA lads did push out the tech specs for balance sheet valuation today though, which should at least get the frog out of the box.

 

It would have been a push to complete the study and leave enough digestion-time by March-end even without a late kick-off, so our friend Sr Bernadino has happily corroborated the "Big 4" speculators and faceless "sources" promoting 2016 as the new "go-live" date by giving his own counsel to the Wall Street Journal (cited in this non-paywall article). His preference for 2015 is qualified with the probability that 2016 will prevail.

 

While thumbing my nose at the Reuters article above, it does make the link between postponement and the Commission's desire to immediately spur longer-term investment in a stagnating, rioting, semi-employed Eurozone (which is much easier without Solvency II's heavy embrace, particularly the calibration of capital requirements for long duration debt instruments which the document referenced in this post covers all too well).

 

However, for DG Faull to effectively command a recalibration of that element now the going is a bit better makes you wonder how many more cherries we are going to pick - un deux trois, nous irons aux bois...

Omnibus II and the inevitable delay - why it's not so clear cut

Fantastic work over on the Solvency II Wire from Gideon on the meat and potatoes inside the eternally-baking Omnibus II pie, illustrating why the trialogue parties haven't just rolled over and declared 2015 as the new 2014.

While it would appear that the lobbying arms at Insurance Europe, AMICE, GCAE etc haven't piped up on industry preference yet, it looks like we have two deeply unpleasant alternatives to look forward to; hard launching a year late (i.e Omnibus II would only get signed off after the recently requested LTG consultation but 2015 would be the definitive "go-live"), or soft launching with 2 years parallel running (i.e. Omnibus II can go through before the LTG consult is finished, but with the sword of Damocles hanging over its contibution to the regulations until 2016).

My guess would be that there is little appetite in the firms for parallel running Solvency I/Solvency II to 2016 based on the administrative burdens this would currently place on the UK in particular through the current ICA process. A 'hard' 2015 and some more effective leadership in Brussels would be welcome relief to Solvency II Programmes from a planning perspective, though the knock-on effect on the model approval process and other scheduled supervisory work is yet to be seen.

Oddly, the EIOP-ians of the world pushed out the 2013 Work Programme this week which of course skips over any of the practicalities around such a delay - so having "already achieved a great deal" in Solvency II prep, they will "finalise the [53] standards and guidelines" currently required of them, set up an "internal model support expert unit", and "finalise the preparation of the [supervisory] Colleges" - and all of this while Rome burns!

It is a perverse situation when a subject as politically divisive as capital requirements for long term guarantees across the union is not as complex as trying to get three well-briefed parties around a table to agree on an implementation date. At a time when the Commission wants an inflation-busting funding rise (which Parliament have 'ole'd through) and EIOPA have grown in headcount and cost by 50% y-o-y, the alarming regularity with which national self-interest and horse-trading has derailed a project of such significance makes me long for the jingoistic certainty of the Corn Laws - I'm guessing that's not a good thing...

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...

Omnibus II - Plenary vote delayed by 3 months

The worst kept secret has finally been revealed, namely that the EU Parliament's Plenary session to clear Omnibus II has been postponed by 3 months to July (good spot Gideon) - obviously makes that session more of a coronation if they are going to get it cleared before the summer holidays, so lets hope the guys in ECON get their job done later this month and the 'Trialogers' don't waste too much time between then and July.

EIOPA's Bernadino on a "clear timeline" for Solvency II

Picked up on by a number of outlets (here, here and here), Sr Bernadino had some choice words to exchange with the folks at Goethe University (available here) regarding a desire to avoid further Solvency II timeline slippage, citing his earlier "hurry up" letter to Mr Barnier.

From a forthcoming EIOPA output perspective, the paper on Colleges of Supervisors action plans for 2012 should be an interesting read, however, the indeterminate delay in Parliament clearly leaves them stymied regarding the big public consultations that practitioners are waiting for.

Solvency II - Another year (or two) later?

As flagged by Reuters earlier, the German FT has cited an "industry insider" as having whispered that a move to 2015, or even 2016, is a possibility.

While the general chatter in the FT article covers some supportibng argument on the quant front, the legislative timetable argument is a lot more compelling. Bearing in mind that the ECON vote has moved, but the plenary vote currently remains unchanged, should any delays or differences of opinion hold up Omnibus II clearance above and beyond the summer recess, the knock on effects would perhaps support this (i.e. bifurcation or not, Jan 2014 would not be achievable).

As ever, I guess the parliamentary vote date is the one to look out for!

Late post script - Reuters ponied up with another article today which touches on the story but brings in Peter Skinner's explanation of the delay

Omnibus II delay - ECON moves, Plenary stays still?

No doubt you all enjoyed Gideon's reportage from Friday (leapt upon by the other outlets shortly afterwards) that the sign-off on Omnibus II from the specialist EU parliamentary committee ECON, scheduled for this month before moving on to a full plenary (i.e. all of the EU Parliament) vote in April, had been yet again postponed. For you Brits, the FSA have commented on this development as well.

Easy to speculate on the causes of this (indeed the recent snub by David Cameron on the bail-out front is cited here as perhaps having weakened the UK's lobbying power at a time where they perhaps have the most to lose), but fair to assume it is still on the numbers front as opposed to Pillar II or III.

Worth flagging here that, while the ECON vote has now been changed to end of March on the Europarl website, the full plenary vote is still as it stood previously (mid-April). This could be the reason why most public comment since Gideon broke the story has been reluctant to say that this delay might shift the go-live date.

Good news then I guess...

Additional delay to EU Parliament vote on Omnibus II - change in priorities?

Having blogged late last week on the reasons for the EU Parliament being a notable no-show at the ABI Solvency II conference last week, I was pretty shocked today to see that the delay on voting on Omnibus II (mooted by Sr. Montalvo only last week by the same publication to be a delay until the end of Jan 2012), has now apparently been moved back to April 2012.


This would clearly be a dreadful result for both the industry (on the uncertainty front) and EIOPA (on producing technical standards), and bearing in mind the disdain and petulance currently being displayed by the Parliament and head of the Commission towards the UK, might we expect to see some last minute shenanighans from the Parliament to the detriment of the UK industry regarding, say, transitional measures or the illiquidity premium?


Look forward to hearing what the other institutions themselves have to say about it - delaying the parliamentary vote to January is one thing, April is surely stretching their patience, regardless of the competing priorities at present.

Post script - proof of the pudding is in the eating

ABI Conference today - reason why the EU Parliament stayed away?

Still very early after the ABI conference today (I wasn't there, so relied on some heavy duty tweeting from Elliot Varnell and Insurance ERM).

All the great and good were there (van Hulle, Montalvo, ABI, FSA, and all the CROs in the UK who blagged a day off!), however there was no representation from the EU Parliament which, bearing in mind we are in trialogue season and there is plenty of debate still to be had, is conspicuous to say the least. A Burkhard Balz or a Peter Skinner would surely have been a good attendee to get the right balance.

However, Insurance Times flagged this from Sr. Montalvo at the conference today - looks like the EU Parliament have missed the pre-Christmas window for discussion Omnibus II, and, looking at a late January debate now, have left almost no wriggle room between debate and the Omnibus II vote.

Who this compromises the most out of the troika is unclear (EIOPA I suspect, being the unelected body), but Parliament's absence surely saved the event from a seasonably frosty atmosphere!

ABI Conference this week - who's off the Christmas card list?

I had a look through the ABI agenda for their meeting later this week (sadly won't be going). I may be missing something, but it appears that everyone got an invite except for someone from the EU Parliament.

A deliberate snub, or was rapporteur Balz or one of his lieutenants not available to ensure that at least one representative from each of the trialogue parties was present?

EIOPA 1st Annual Conference - additional media comment

Worth adding this to yesterday's post on speeches etc falling out of the back of EIOPA's conference. Nicely depicts the rather prickly atmosphere which must be hovering over the trialogues between EIOPA, EC and and Parliament, in particular emphasising that rapporteur Balz and the Parliament appear to be the fly in the ointment as far as staying on timetable goes.

PS In case you don't follow my twitter feed, EIOPA released a specialist Solvency II page and their own twitter feed today!

ABI - Solvency II Bulletin for October 2011

The ABI have put their Solvency II Bulletin out today (link is to the pdf version, as there is something weird going on with their HTML version!).

Plenty of goodies in here, in particular;

• Omnibus II update - confirms that the trialogues are in the offing, but also that Parliament will not have its text for bringing to the negotiation table until late November. Any danger this is a bit late, and that February 2012 might be a push for Parliament to sign off on the negotiated text with their plenary vote?
• Also confirms that the 'outsourcing' of drafting Level 2 measures by the Commission to EIOPA via ITS or RTS also needs to be agreed with Parliament (who would of course lose the right to reply on some of the content subsequently produced.
• Decent timeline diagram for anyone who needs one (p3)
• Reporting templates consultation coming in November - also mentions that their will need to be national-specific templates (highlighting importance of with-profits business in the UK, but same for other countries and their favoured savings vessels).
• Confirms that the ORSA consultation is also about to kick off with the Level 3 guidance paper soon to be released (most of the industry has of course seen the early draft of this, so it will be interesting to see what has changed).