Solvency II Delegated Acts available online (kind of...), plus EIOPA's plans for 2014/15

So let's start with something a bit unexpected - DRAFT DELEGATED ACTS! ONLINE!

I'm not sure who the leaky uploader is (appears to be a Spanish consultancy firm), but the document is very much online. Sadly, it is only the January 2014 version, which as you will see in the rest of the post, has just been superseded, but it definitely pairs up with the version currently doing the rounds, I promise!

I have managed to get a sneak preview of the latest version of this document (dated 14th March) which have seemingly managed to burst the banks of the tightly-knit circle of advisors, and are now no doubt winging their way to a Solvency II Programme Director near you! There are "tracked changes" on the March document now circulating, which only appears to cover changes since the emergence of the January document hyperlinked above.

Lord help anyone who wants to trace it back to the more familiar 2011 (unpublished) draft, you might as well draw a load of foxheads on sticks...

Insurance Europe were obviously part of the privileged few for the March revisions, hence they fired out this missive last week regarding all of the Pillar 1 technical areas which they feel (on behalf of the industry) remain deficient. There are no real surprises in their list - it is the same topics which have been on the whinge-list since EIOPA's LTGA last year, and indeed earlier in the case of the Currency Risk approach and Own Funds classification.

Following on from the draft Delegated Acts being made more widely available, there has been a reasonable amount of noise in the paid-for press (here, here and here for subscribers), as well as Insurance Europe's top man having a lobbying call published in the FT (here).

Being more of a Pillar 2 man myself, I thought I would check to see what, if anything, had been tweaked in my areas of interest. The impression given earlier this year was that little had changed outside of the Long-Term Guarantee elements, and that was certainly true if you compared the November 2011 and January 2014 documents.

However, having examined the amendments in the March 2014 version, I have found is that a few areas of governance (both SOG and Internal Model governance) which were previously untouched have actually received a fair bit of treatment, for example;

• Changes to the requirements for internal audit function holders not to cover multiple control functions (this constraint has been removed). This is presumably to pacify the smaller firms across Europe who have a Risk/Compliance/Internal Audit multi-tasker, so textbook "three lines of defence" have taken a bath in the interests of proportionality.
• The devil remains in the detail though, as the amended text allows someone to "carry out" more than the IA function, but seems to stop shy of them "taking responsibility" for other functions. Not sure how that will work in practice.
• Changes in the IM Validation space, in particular the removal of the requirement for a "Validation Policy". Fair to say most firms in IMAP would have produced one of these at least a year ago now (plenty of industry references here, here, here (p8) and here for example!), and while still a document of merit, does a "validation policy" now constitute gold-plating?
• Changes in the required Internal Model Documentation, targeting a much slimmer set of compulsory documents. This includes replacing a number of "policies" with "descriptions of...", which will no doubt be well received by those supervisors with multiple internal models to assess over the next 18 months!
• The tiered timescales for submitting QRTs, SFCRs and RSRs have now moved into the Directive, via Omnibus II text (as opposed to haveing been deleted, which is what it looks like at first glance!)
• A few of the other TSIM articles (Tests and Standards for Internal Model Approval) have been enhanced. "At least quarterly..." assessment of the IMs coverage of material risks is now specified, for example. Quite how the hard-coding of the regularity cramps your actuaries' style is another thing! 

I strongly suggest you all get back to work and check for yourselves!

PRA on "good" and "bad" documentation for IMAP - restart or refresh?

As an welcome aside from the PRA's activity day on the 12th, they also delivered on a promise to provide examples of what constitutes "good" and "bad" documentation in the context of the internal model approval process (IMAP). Bearing in mind it has been quite some time since the PRA publicly pronounced on the matter - indeed, they were called something else the last time they did - the industry welcomed this in like a lottery-winning prodigal son.

Bad documentation
- reform or execute?

There have certainly been enough apocryphal tales spewed out by the industry over the last couple of years to suggest that the production of documentation to support participation in IMAP had transformed from a small cottage industry into something of a palatial Georgian Mansion house with a granny annex.

Whether or not this kind of advice is therefore timely enough to save the Solvency II Programmes of the UK from using documentation in their revitalised IMAP preparations that is neither good for man nor beast is another thing, bearing in mind there is three years worth of accumulated flotsam currently kicking around the servers of UK insurers which, given this message, will need to be revisited as a matter of urgency.

Regardless, as the UK still appear to hold the whip hand in EIOPA's model sub-committee, the PRA's views on model documentation are relevant to readers across the continent, so the document is well worth a read for anyone in pre-application.

I took the following from it;

• They have 3 principles of "good documentation" - accessibility, evidence and quality control
• "It is helpful to have a clear separation of policy, methodology and results"
• The document refers throughout to giving consideration to "the reader". Feels a little disingenuous if they mean "the PRA", and after reading their document a couple of times, I can't imagine who else they have in mind.
• Following on from that point, a reference to a bad example suggests that "...the author is not thinking carefully about the audience" - it is equally fair to suggest that the author may be assuming a level of technical/commercial knowledge at the PRA end which is lacking?
• The PRA are evidently not happy to have to "seek clarification" on matters, which suggests the time allocated to assessments is tightly planned, or indeed the level of technical knowledge held by the assessors is limited.
• Interested to know if these principles hold firm for Standard Formula firms if viewed conversely e.g. does paperwork for the justification to not use an internal model need to be of a similar standard?
• The reiteration that the PRA "...will rely, in large part, on the submitted documents" when assessing the model - just in case your friendly executive committee reckon they can talk their way in!
• A lofty aim to improve "accessibility" of documentation, by having levels covering; executive summaries; model reviewer/validator level info; and model user/operator level technical documentation. The PRA only want the first two levels as a matter of course, which would suggest that procedures and technical documentation should be used as supporting evidence only.
• Tabling up references to the Directive and Implementing Measures within documents is viewed favourably.
• Their "useful rule of thumb" feels instinctively unwieldy - they suggest better documents contain one-third 'what has been done' with the rest covering 'why and how'. That said, expert judgements are clearly not being evidenced anywhere near the level desired.
• A convoluted and potentially frightening reference to "self-validation" testing, which the PRA view favourably, but which seems to point towards a preference to see suites of documentary evidence for each assumption applied in the modelling process. 
• To conclude, readers are redirected to Julian Adams's letters from  mid- 2012 (here and here) - important to note that this guidance remains relevant, regardless of the passing of time.

I suspect that most model applicants will find they have re-work to do off the back of this, both with the pen and with the sickle. Expert judgement and assumptions documentation remain the unquenchable thirst though, so one's best endeavours would be well spent in that field in early 2014.