Friday, 23 December 2011

All the best from Governance Matters!

Enjoy the festive period all - I'm off for a few days in freezing France, but will be back to the day job next week. As we say on the Isle of Man, Nollick Ghennal as Blein Vie Noa, and I hope to be of some use to you over 2012, which promises to be a busy one!

All the very best,

Wednesday, 14 December 2011

Financial Reporting Council - Developments in corporate governance 2011

The FRC pushed this out today on progress in implementing the UK Corporate Governance Code (and of less interest to me, the Stewardship Code. Outside of the news of what is to come (more consultation in 2012 on Audit Committees, Risk Management and Internal Control elements of the code) some interesting trends are reported;
  • Code requirements on board and board committee composition all above 80% on the "comply" front - strangely the requirement for having at least half NEDS on the board was the worst area of compliance for FTSE 350 firms.
  • Still having "diversity" and "gender diversity" spoken of in the same breath - more to come on that subject from me another time
  • FRC are attributing some of the gripes from the industry on independence criteria and difficulty in recruiting good quality NEDs on their inability to look beyond "the usual suspects", and by doing so, they will enhance diversity.
  • 80% of boards put themselves up for re-election annually in their entirety (one of the more controversial elements of the last set of Code revisions).
  • Discussions regarding the expanded nature of the Board's responsibility for Risk (to essentially include consideration and setting of Risk Appetite) has led the FRC to schedule a revision to the old Turnbull guidance in 2012.
  • Still griping about "boiler plate" annual report text.
  • Some of the "explanations" given for non-compliance still said to be lacking
  • Chairman's Statement suggestions made by the FRC appear to be bearing fruit
  • Lack of consistency around the application and reporting of Board evaluations
  • Disclosure on business model, strategy and risk (massive for Solvency II disclosure policy/SFCR purposes) is, because of a lack of guidance, allowing companies to determine their own levels of disclosure. However, the FRC are expecting more from companies in this regard.
  • Very critical of the extent of reporting from the Audit Committee, hence the consultation due in early 2012. Also goes on to be untopically lightly critical of remuneration committee reporting in the same regard!

Tuesday, 13 December 2011

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

Friday, 9 December 2011

ABI Conference - FSA's Adams speaks on Internal Model Applications

The FSA have just published Julian Adams' speech on Internal Models from yesterday at the ABI Conference.

Worth noting;

On the potential to replace ICA with SCR for 2013 (which Lloyds et al have been lobbying hard on);

What we are in a position to do, however, is to invite firms to consider how they think their work on their Solvency II model could be used to meet those current rules, thereby removing the need for parallel running of two different models”

As the current requirements will remain in force, it will be incumbent on firms to satisfy themselves that the Solvency II model, alongside their wider system of risk management and governance, meets the existing requirements in our Handbook. By approaching the issue in this way, we intend to avoid the need for firms to apply for a complicated series of waivers or to seek specific permission from us to make the transition early. We believe this is both proportionate and appropriate, given the amount of review work we will have done with firms following submission of their Solvency II model application to us”

On the basis to be used for internal model applications (the original guidance, or EIOPA's L2 on Tests and Standards for internal model approval)

“It is clear that the Level 2 text – and, in due course, the Level 3 text which will supplement it – is more appropriate to use as a matter of principle, since this sets out much more clearly the basis on which we are expected to assess firms’ applications, and it is the standard against which you and we will ultimately be judged”

“On balance, we feel that basing our application approach on the Level 2 text is the most sensible way to proceed, and we propose to do this is by cross-referencing the Level 2 text in the guidance materials we will be making available to firms in February of next year”

“I am aware that this will mean that some firms may feel that their efforts in following the Contents of Application approach will have been wasted, and I would like to reassure you that this is not the case. We will expect you to submit documentary evidence that you meet the requirements set out in the Directive, and completion of the Contents of Application is likely to go a long way towards demonstrating compliance with the Level 2 requirements, but it is those Level 2 requirements which will be definitive”

Looks like anyone who is going to get pre-approval to use their model to meet existing FSA handbook requirements is going to have to jump through a lot of hoops, and even then may fall short

Thursday, 8 December 2011

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!

Tuesday, 6 December 2011

PRISM and Central Bank of Ireland - ORSA come early?

Towards the end of last week, Matthew Elderfield launched the Probability Risk and Impact SysteM (PRISM, summary here and detail here), which aims to usher in a new age of supervisory challenge to the Irish financial sector, well documented as having had an easy time of it before credit started to get crunchy.

One big challenge for the CBoI will be to get everything up and running before June 2012 (hopefully the recruitment drive wasas good for quality as it seemingly was for quantity!), so all the best to them for that. More pointedly, the acknowledgement that the ramping up of staff numbers will start to be felt in the industry levies asap, coupled with future income streams referenced in their planned aggresive enforcement and fining of non-compliant firms must have any of the stragglers still living in 2006 quaking in their boots.

Very interesting to see the take on Risk Appetite, Risk Tolerance, Risk Assessment Criteria etc applied by a regulator to its industry, rather than my normal vantage point of a risk consultant, either advising on or benchmarking the same facets of individual ERM frameworks within an insurance undertaking. I would have thought the way in which these things are described in Mr. Elderfield's speech should be good guidance for corporate governance code adherence over there (let's face it, it doesn't get better than from the horse's mouth!).

One thing that would make me very uncomfortable as an Insurance consultant is the extent of the crossover between ORSA, QRTs, SFCR and RSR and what is being proposed under PRISM. I would not be keen on, for example, defining 'Risk Profile' for my client in line with Solvency II definitions, only to be contradicted by the regulator's PRISM definition of 'Risk Profile', which is overall solvency needs by any other name.

If I get some spare time, I may run a cross-check between ORSA and PRISM obligations, and work out whether the CBoI is trying to tell the insurance industry how to do an ORSA via subliminal messages - for the life of me, I can't quite work out what this does for the industry that an ORSA run with "appropriate" frequency doesn't.

Monday, 5 December 2011

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?

UK Treasury - Consultation on Solvency II

I have had a look through the UK Treasury's transposition of Solvency II consultation paper today (the purpose of this is to ultimately confirm which UK law and statute changes will need to be made to accommodate it, rather than the FSA's consultation, which was focused on replacing the existing handbooks with SOLPRU).

Strangely, at 100 pages, it is a pretty good read, and you should not be shy in purloining some of their idiot's guide material at the start for board presentations and staff briefings. However, the really meaty stuff comes in around halfway through, where they get to cost/benefit analyses (much of which leans heavily of the E&Y research referenced by the FSA numerous times already).

A few things jumped out, namely;
  • £1.53bn as ongoing cost to UK industry (NPV over 10 years) - that's to go alongside the £1.9bn of transition costs!
  • Sat alongside £3.52bn of "key monetised benefits", NPVd over 10 years - I'm no mathematician, but I guess that means it's a winner for the industry!
  • Between 550 and 600 UK firms expected to be covered (Lloyds syndicates included) - this seems much lighter than the CEA figures from the other week, which had over 1,000 UK insurance entities. Are there relly that many below the de minimus level?
  • No "gold plating" of Solvency II - bare minimum "copy-out" approach confirmed.
  • Table included which shows the scale of the changes for firms with comparable data between Solvency I, ICAS and Solvency II.
  • Still includes an estimate of 100 model candidates who will "ultimately" use an internal model, though it states that only a third of these will look for day-one approval. I'm struggling to reconcile this [100 in IMAP at outset, now down to 77, but only 33 will be approved on day 1!]
  • Shows all the detail of how the FSA came to £110m as the cost between 09/10 and 13/14 (based on timesheets!) and the ongoing costs post-2014, broken down by FSA business area. Important note here is that half of the ongoing costs from 2014-2016 are for actuarial resource to assess internal models. Nice to know the logic behind the special project levies for those years
Plenty of flannel towards the back, which you are probably familiar with, but if not, knock yourself out!

Thursday, 1 December 2011

Should the CRO carry the can?

Normally after a high profile operational risk materialises, the end cost normally determines how high up the food chain the sackings go,but they generally would stay in the first line of defence.

This one therefore stood out for me as a bit of a outlier. I'm all for individual and collective responsibility, and would personally have fallen on my sword if I was within a square mile of this abomination regardless of my job spec. However, is it correct to dismiss the CRO because of an internal control failing (albeit a whopper!)?

Solvency II Forum in Dublin - Central Bank of Ireland

All manner of fun no doubt had over on the Emerald Isle today at the CBoI's Solvency II forum. Would love to have been a fly on the wall, however consultants don't get the luxury of days off! Five presentations were seemingly put on the table, and if any of you guys reading in Ireland have anything to add, I'd love to hear it!

First presentation features a nice calendar for 2012, but more importantly the results of a "preparedness for Solvency II" survey issued in September. The following seemed pertinent;
  • Around 15% didn't bother replying to and of those who did, over 10% said they were 'not preparing' at all!
  • Only 40% into the "implementation and execution" phase
  • Very high number of 'other' responses to questions on sponsorship and rollout responsibility, where the options provided were the obvious suspects (CEO, CFO, CRO, COO) - Appointed Actuary the missing link?
  • Three quarters were "quite confident" that they will be ready from end of 2012
  • Almost 90% think their boards (including NEDs) have "satisfactory" Solvency II knowledge - seems generous to say the least, however these were responses to the Central Bank, so one would be unlikely to say different!
  • Top ranked aim of Solvency II programmes was regulatory compliance - that's the spirit, no flannel about business benefits and policyholder protection, just comply!
  • 6% not very confident that the CBoI will be ready to conduct supervisory reviews "effectively and appropriately"
  • Over 20% "not very confident" that their governance structures are Solvency II compliant (odd, as the requirements of the corporate governance code mirror or indeed surpass Solvency II requirements, and they ought to be complying with those now!)
  • 50% haven't defined their ORSA Process yet!
In addition, some other CBoI preparation detail was laid down, most notably;
  • Looking to build processes in order to formally accept internal model applications from 1st June 2013 which instinctively feels very late
  • Liaising with the industry on the ORSA Supervisory Reporting requirement (which might lead to some element of prescribing content, bearing in mind the ORSA Consultation paper opens up the possibility of using one's ORSA Report to meet that requirement)
  • Details on what the CBoI expectes in the "transition year" of 2013 yet to be finalised
Interestingly, in the Internal Models presentation, they are very explicit that Validation must cover all aspects of the models inputs, processes and outputs, not just the internal model itself - this "narrow vs wide" validation scope is something which I haven't seen the FSA be this specific about.

Friday, 25 November 2011

CERA and the challenge to the Risk Profession

Very reassuring article in the Actuary magazine regarding one aspect of the inevitable land grab between risk and actuarial professionals (which I have blogged on several times), this one covering the thoughts of a few CERA students as to whether this qualification was likely to enhance their career prospects.

Judging by the responses of those students likely to be CERA-qualified in the near future, I suspect that the Risk profession will still be gainfully employed for some years to come - particularly liked the reponse about selling the qualification in one sentence "It counts as verifiable CPD!"

PS The score on CRO hires moved to 4-0 to the Actuaries this month with Aviva UK's new guy - however, the hunter has become the hunted, with the new top man at the Institute and Faculty of Actuaries being a chartered accountant!

Wednesday, 23 November 2011

FSA interpretations and Q&A on ORSA, Supervisory Reporting and transposition

Couple of very nice Q&As out today from the FSA (well spotted by Gideon on the Solvency II Wire) which cover last week's releases from EIOPA on ORSA and Supervisory Reporting.

The ORSA Q&A gives a detailed interpretation of what the regulator thinks the processes and reporting entail. Stand-outs for me were;
  • Process of recalibrating one's internal model from economic to regulatory capital purposes must be included (difficult if your EC measure is not a straightforward read off a later point on the PDF?)
  • National supervisor "cannot act" if actual capital is below EC, and it "cannot be used as an intervention point" - not really sure why they need the information then!
  • Sadly don't elaborate on the potential for the ORSA Report to form the basis of the supervisory report - would have been ideal comment
  • IMAP does not require ORSA output - I had heard this on the grapevine, but nice to have confirmation
  • Confirms the expectation that the ORSA Process must include a process for recalibrating one's internal model to the standard formula SCR
Also has a handy "what you should do now" list - would hate to think anyone has not ostensibly done any of these things by now, but reassure yourselves by having a look! Q&As on the last page may be handy to show your project managers/execs/NEDS, but they are a little light.

The piece on Pillar 3 reporting is more concise, and probably worth running by your execs - however, it is a little 'scattergun' without much opinion, and you may find the summaries from the big consultancies of more use

Finally, The FSA's documents on the legal transposition of Solvency II into their Handbook is probably of little use to anyone outside of the UK (fascinating though it is!), so grab what you can if you're based elsewhere!

CFOs, CROs, conflicting messages and strategy - FERMA paper

A couple of pieces of work caught my eye this week on the subject of risk leadership and participation in strategy, with a distinctly financial twist.

The first, a joint effort between FERMA and Finance Director Europe covers a number of themes leading on from FERMA's conference a month back. Some of this report seemed to fly in the face of best practice ERM (for example, broader strategic ERM has evolved through executives realising they need to manage downside risk better? Does it perhaps represent a little more than that in 2011?).

A FERMA board member is cited as believing risk should be "supporting strategy development" rather than participating (which would leave a CRO where exactly?). The next article indeed directly contradicts this view, quoting a risk executive who actively participated in the GRC strategy formulation for his firm, followed swiftly by the AIRMIC/Cass Business School research which bemoans the 'glass ceiling' which prevents risk managers addressing issues in a company's top echelons!

That article also has the UK "...leading the way in enterprise risk management and corporate governance" (I would probably go US and Ireland respectively with a 2011/12 hat on).

The VP of FERMA is then quoted in day-job mode  noting "risk partly about comforting non-executive directors so that they are less risk-averse" - personally I like a bit of conservatism in my NEDs, and I wouldn't like to think I am employed to teach them how to gamble! This is accompanied by the CFO of the same firm notes "the CFO and CRO may have natural conflict, the former driving growth and the latter controlling risk" - again, are Risk, as the second line of defence, really there to 'control' risk?

Finally, the CFO at Old Mutual is quoted as suggesting the complexity of proposed EU regulation (citing Solvency II specifically) might be contributing to elements of risk it is supposed to be preventing.

Tuesday, 22 November 2011

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

KPMG Survey - Solvency II Benchmarking Survey

Decent piece released by the guys at KPMG covering Solvency II benchmarking. No difficulties in picking out the salient points, so just serve yourselves, but I've hauled some out for my own benefit (NB at 18 in the sample, its a tad light).

For my money, the 40% who feel their budgets are not on track feels instinctively light, but then the survey was taken in September before an extra year was stuck on it! The priorities and areas of concern (documentation, ORSA and governance) all seem fair in relation to other media, and the difference between small company projects (two-thirds resourced internally) and larger insurers (over 90%) in their staffing shows where the extra year's project costs may disproportionately fall. Also 56% feel they still have a lot to do on Pillar 3 (bit easier after last week's papers were released by EIOPA).

On the actuarial front, some very varied responses to Risk Margin calculation, and they flagged ORSA as the main area of cross-functional collaboration. They have also flagged Strategic, Liquidity and Reputational Risk as the main non-modelled risks going into ORSA.

The last section on validation is perhaps the real eye-opener - KPMG advise separating validation from production, and even with this small sample, a range of routes being used (on validation responsibility, ownership of the validation team, and responsibility for producing the validation report, including for the first time in my experience, the roping-in of Internal Audit)!

Friday, 18 November 2011

Risk specialists - FSA can't buy your love

Very telling snippet picked out by one of the IFA magazines covering Hector Sants's comments to the Treasury Select Committee that the FSA are struggling to recruit for a 200-strong Risk team, with an agency cited as saying they were around 50% off industry levels. If they can just wait for the Solvency II goldrush to subside, there would be plenty of candidates, but if it keeps getting extended, you'll never get anyone!

Joking aside, the increasing staff turnover, extension to Solvency II, and one eye on the future carve up into FCA and PRA, the case for spending some of this special levy money on some high-end talent must be close at hand - they have certainly priced it in for post-2014!

FSA's Internal Model Page - Q&A, ABI and EIOPA speech

Having already blogged on Julian Adams speech, I had neglected to pick up on the other goodies in the specialist IMAP section on the FSAs website.

There is, for the IMAP enthusiasts out there, a 6 page Q&A on common model application themes. I would highlight;
  • "some uncertainly following the release of the text from the Rapporteur [Burkhard Balz]", but currently as confident as they can be on current timelines
  • Decent summary of EPIFP problem
  • Don't appear to close the window to "significant change" to existing model plans, but dependent on schedule (i.e. 2013 class maybe have room to tinker?)
  • FSA materials for model application submissions will only be released in Feb 2012, which I guess is hard luck on those who are first up - however, I suspect the March/April 2012 class will not be short of insider information!
  • Allocated application slots have been influenced by outstanding lobbying matters, such as matching premium (i.e. if your book of business is affected by matching premium, EPIFP etc, then you probably gained some advantage here)
  • A pretty sketchy answer to how a company can evidence Use Test adherence before having the model signed off (q12) - I can see where they are coming from, but this answer should really have hooked back in to ICA to be useful to the industry, particularly in light of their using ICAS as "quantitative tools"
  • Confident that early applicants will not get "two bites at the cherry"
  • Some uncertainty as to what approvals, if any, the FSA can actually give firms before Omnibus II is passed.
  • And of course the cherry on the cake about using model as an ICA replacement if they have conducted "an appropriate amount of review work" and are minded to approve the model.
Second is Otto Thoresen's speech at the event last week - a kind but firm smack on the back to encourage the FSA to allow ABI members to use their internal models for ICA in 2013.

Finally the presentation from the last minute EIOPA stand in (actually their model committee chair) - interesting bullet point noting that a challenge of the pre-application process  was to stop "undertakings playing with supervisors". Also shows the number of pre-application initiatives being run by EIOPA.

Thursday, 17 November 2011

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!

EIOPA 1st Annual Conference - Anything of note?

EIOPA had their first annual conference today in Frankfurt (happy birthday!). Looks very heavy on politicos as you might expect, and there has been a few drips of information from it, in particular;
  • Sr Bernadino's comments that insurers should not "pretend to play God" by implementing onerous counter-cyclical tools in addition to the facilities already in play to avoid pro-cyclicality
  • Mr Barnier's introductory speech where the delay to 2014 is seen as "a plus point, enabling insurers, national supervisors and EIOPA to prepare better"- doubtless all you project managers looking at an additional year of expense will rest easy at that! He also mentions that equivalence is not looking to force countries to adopt a regime identical to Solvency II, as well as emphasising the party line on Group supervision in the context of IAIS ICPs and the ongoing SIFI debate.
  • Sr Bernadino's keynote speech - May 2012 scheduled for public consultation on technical standards, which he stresses does not pre-empt the trialogues and Rapporteur Balz's Omnibus II paper going through EU parliament
  • Elliot Varnell has had a busy day tweeting, so serve yourself at his feed. Interesting to see that Karel van Hulle thinks there isn't enough cross-border sales going on - having worked in that area, a good helping hand might be to remove local language requirements!

Thursday, 10 November 2011

FSA, SOLPRU and Costs

Just when you thought it had gone quiet, the FSA throw out a 200 pager covering the regulator's transposition to Solvency II!

Some important pieces in this on;

  • FSA has budgeted £110m over the 5 years 2008-2013 for Solvency II implementation (which supports their statement back at a June FSA management meeting where they commented that contingency would need to be enacted (p3) if go-live date was extended past 2013). They had said in their business plan for this year that the estimated implementation cost would be £100m-£150m, so they are on the light side of that estimate. 
  • Frighteningly, they are budgeting for another £178m of spend between 2014 and 2016 (on nursing internal models through assessments and  improving IT) before reverting to current equivalent levels - for those people who got a special levy refund this year, you might want to cancel the trip to Vegas!
  • Estimating cost to the industry (of around 550-600 undertakings) of £1.9bn, with this estimate creeping up due to extra contractor and IT cost.
At 200 pages, some of the detail can wait, but those 2014-16 FSA costs (which will be the PRA by then I guess) are an eye opener, particularly for anyone in IMAP who will (possibly?) be coughing up a special levy for the model assessment-related element.

Wednesday, 9 November 2011

Julian Adams speech on IMAP and Solvency II delay

The speech from Julian Adams is worth picking apart for crumbs of comfort for any organisation who will be potentially running up bills for another 12 months in light of the extension announced by the FSA at the start of October for their IMAP processing.

Spectacularly, one of EIOPA's guest attendees was, you've guessed it, delayed! As I didn't attend, I cannot confirm if this raised a chuckle in the hall, but more important than the comedy value of an unexpected EIOPA delay are the things put on the table last week, namely;
  • That the workload anticipated by the FSA both pre and post Solvency II appears to be higher than anticipated (more entity level ORSAs/SFCRs than expected for a start).
  • "...very likely that some form of Solvency II reporting will be required during 2013", regardless of the delay.
  • "Submission slots" were allocated primarily after assessment of each applicant's SAT, but alos taken specific Solvency II outstanding issues into account (which must mean preparation on the college of supervisors front is severely lacking to be cited here alongside matching premiums! This is not necessarily a UK failing however)
  • No more applicants will be accepted for day one approval just because of the delay, and no changes to model scope will be allowed without express permission.
  • More to come "in coming weeks" on the big question about whether ICAS can be jettisoned by the industry for 2013, to be replaced by a provisionally approved model - also doesn't cover if Standard Formula firms will have the same option open to them as, say, the Lloyds syndicates and other lobbyists for a 2013 early start.
More to come soon apparently, so let's keep our eyes peeled!

ORSA - Stateside view from NAIC's "ORSA manual"

Having already dropped a few words down on EIOPA's new ORSA consultation for us Solvency II folk, I also spotted that the guys in the States have also made a few moves with regards to their ORSA Manual (from p12 of this NAIC bundle from their meet up the other day).

What had jumped out at me earlier last week was this article quoting AIA's assistant general counsel which very much framed the US ORSA as a periodic filing requirement with which he had "privacy concerns", voiced that it “should not be compulsively adopted”, and was very much a poor cousin to the existing framework.

This of course flies in the face of the ambitions of the Solvency II ORSA which, while clearly creates a regulatory filing requirement, is intended to demonstrably drive the decision making of the undertaking.

Having had a leaf through the ORSA Manual, a few things jumped out;
  • Primary goals are different to the Solvency II version (though both drink from the IAIS ERM ICP cup, the US ORSA stays on message with ERM effectiveness).
  • Not compulsory, rather a requirement to be subjected to (subject to minimum premium income limit of $0.5bn as entity, or $1bn as a group)
  • Can also be imposed on entities who would be considered on the "ladder of intervention" in Solvency II-speak
  • Allows for cross-referencing documents, rather than summarising within an ORSA report (which gives it the look of a Pillar 3 document on Solvency II side)
  • Potential option to satisfy US regulatory demands for ORSA by using any which are produced for "non-US jurisdictions" - see, Solvency II preparation is not a waste of energy for any groups with subsidiaries over there after all!
  • Great comment that, wishing to use IAIS ICPs to assess the quality of non-US ORSAs, that "one of the NAIC's goals is to avoid creating duplicative regulatory requirements for internationally active insurers".
  • Very concise prescriptive summaries of content - agin, they veer towards Pillar 3 requirements over here (SFCR in particular, though I haven't been through today's Pillar 3 consultations yet, so they may have changed!), but these are still very useful for people on both sides of the Atlantic.
  • They go with Credit, Liquidity, Operational, Market and Underwriting risks as main "material risk categories". I'll come on to the fantastic paper on risk classification I recently attended the public rollout of later, but it has a lot of relevance to how one might approach this aspect of the proposed ORSA, including avoiding any double coverage.
  • No prescribed suite of stresses, such as for the SCR standard formula - this seems to imply that "internal models" are either obligatory, or are considered to be whatever is in place currently (i.e don't need a phenomenal amount of resource to validate to the authorities). The regulators therefore are able to "provide input" into model component calibration if they don't like what is presented via ORSA.
Would love to hear from anyone over in the States to see how this is going down industry-wide, as I can't quite gauge how much of an additional imposition this is to business as usual!

Tuesday, 8 November 2011

ORSA Consultation Paper from EIOPA - bon effort!

As I don't expect everyone had the time, inclination or even the document to see how the pre-consultation team of CEA/AMICE/CRO Forum/CFO Forum etc got on with the ORSA document, I had a cross-cast of the two to see if any substantive changes were made. The following caught my eye in the public consultation paper released yesterday;
  • Almost complete removal of the participation of the supervisory authorities in ORSA - this is now being left to Supervisory Review Process guidelines (it was shoehorned in to the pre-consultation in a way that made its removal inevitable sadly).
  • ORSA Policy content trimmed down in one respect (removing some actuarial-themed material, which will inevitably end up in the ORSA Report), but added in a section on data quality.
  • Made the section on checking SCR assumptions to make sure they fit one's Risk Profile much more confusing by neglecting to state whether "SCR Calculation" in the paper means "Yours" or "Theirs" - it does eventually come out in the wash that they are talking about any mismatch in reality between the assumptions one uses to generate their SCR (whether internal model, partial model, some USPs or full standard formula) and those which would actually fit the business, but it is a poor piece of drafting.
  • More rigorous on being able to justify frequency of regular ORSAs
  • New section on applying the proportionality principle for methodological complexity, frequency and granularity of ORSA
  • Finally had the courage to write the words "ORSA" and "Report" in the same sentence! This was skilfully avoided in the pre-consultation, I guess to enforce the (still legitimate) fact that ORSA is a process, not a boiler-plate report production job
  • Having removed the pieces on supervisory participation, they naturally had to lose a piece on how the ORSA output would make its way to the regulator. It was planned to put it in with RSR (and was very convoluted), but now there will seemingly be an opportunity (not guaranteed) to put forward the internal ORSA Report to satisfy regulatory obligations
  • More explicit on covering less-than-easily quantifiable risks, and allows for mitigants other than capital to be used in their regard over the business planning period, provided they are not material. I hasten to add here that they have changed the language on reputational and strategic risk from being "less quantifiable" to "non-quantifiable", which is a bit of a cop-out.
  • Much more explicit on capital management, both planning and execution over the business planning period - I guess this is a result of pressure from both the SIFI angle as well as Eurozone/Credit Crunch
  • Leaves an open ended question on whether the ORSA Process includes or uses the outputs of tests which are associated with ongoing compliance with Articles 120-125, but the option is there for both
  • Spectacular typo on page 25 - looks like one of the bullet points has not made the cut, as we jump from A to C!
  • Late Psot Script - missed the omission of the requirement to independently assess the ORSA Process - no doubt everyone's internal audit functions are breathing a sigh of relief!
All in all, a good attempt and I feel more than prescriptive enough for the public consultation to drive it further forward. Perhaps a missed opportunity on the regulatory requirements front to iron out what they ought to get out of the industry's ORSA reports from a wide range of stakeholders, but hey, you can't have everything...

Monday, 7 November 2011

ORSA Consultation - out now!

Short and sweet - get your EIOPA ORSA Consultation paper here,  and your template for comments here - let's get to work!

Thursday, 3 November 2011

FTSE Insurers - Q3 results and a Solvency II whisper...

Busy week on the IMS front for all the UK Q3 guys - Standard Life, L&G, St James Place and Royal London all coughed up with some pretty underwhelming stuff (though it was nice to see the Isle of Man-based 360 keeping the Royal London numbers honest!).

Normally Solvency II stays low on the agenda in the odd quarters, however Aviva threw a Christmas bonus in with their news on the legal restructure of Aviva UK's general insurance business, which is freeing up a whopping £200m in IGD surplus, halves the number of entities and will reduce in a "significant reduction" of Solvency II capital required.

Hub and spoke - its the way to go

Irish Corporate Governance Code - updated FAQs

I'm guessing the "video conferencing" absentee-landlord insurance company directors have lobbied hard over in Ireland in the last few months, as the very extensive FAQs already issued have had to be supplemented.

Lexology do a nice summary of the main additions to the FAQ doc, which other than a couple of more genuine clarifications centre around the very important topic of attendance at meetings. Video and teleconferencing are now permissible, provided directors attend "wherever possible".

Troubling in some respects, particularly with Ireland likely to be used for hub and spoke purposes under Solvency II - I would ready myself for a series of "family issues", "plane delays" and "medical emergencies" that prevent a decent number of directors from fulfilling their physical attendance duties over 2012, followed by a themed inspection from the Central Bank!

Wednesday, 2 November 2011

Beware the Risk Manager - part of the problem or the solution?

Piece in Risk Management Professional today about the pitfalls of reliance on risk managers, from a presentation given by Psychological Consulting a couple of days ago.

While of course they have a product to flog, and so benefit from this particular angle, I certainly wouldn't agree that "[Risk managers] are the people who decide where the net is, how tight it is, and how big the holes are" (we facilitate that decision, and my god we'll police it), but his point on groupthink amongst like-minded risk professionals probably have some grounding.

Never thought of myself as part of the problem before though - does that make a maverick executive part of the solution?

Tuesday, 1 November 2011

Sessional Event at the Staple Inn Actuarial Society - Common Risk Classification system for insurers

I will blog on this in extensive detail once I replace my broken laptop - for now, please find the paper presented at Staple Inn yesterday from Patrick Kelleher and Paul Klumpes (et al) here.

I have blogged positively on the abstract of this paper in the past, as it seemed to be the panacea to a number of categorisation issues for ERM practitioners in insurance companies, and having attended last night's presentation of this in person, I am no more disinclined to think this has genuine ERM merit for anyone in the insurance sphere. The age-old problem of checking off the easily quantifiable "Big 5" categories then wondering how to pick off the scraps is addressed here in no uncertain terms, so I implore you to have a read.

More extensive coverage of the sessional event will follow, I just need a quick trip to PC World*...

*Other electrical retail outlets are also available - we don't do product placement at Governance Matters!

Tuesday, 25 October 2011

Capital Management in the new regulatory environment - Towers Watson

A cracking piece from TW on capital management in Solvency II context, highlighting a number of critical areas for consideration as we approach ORSA public consultation. I noted;
  • Experience of the Swiss Solvency Test on capital, which TW suggest caused such an immediate shift in capital strategies to accomodate (i.e de-risking Asset/Liability mismatches and purchasing additional reinsurance), that one's current capital plans should be revisited for future-state appropriateness , and not just taken as read.
  • A suite of 7 key questions on capital management - all of these worth asking at any juncture, but even more so now.
  • The capital management toolbox depicted is worth considering in the context of potential management actions in the ORSA
  • Big section of branching and redomiciling, in the context of (publicly commented on by the head of the Irish regulator) "hub and spoke" approaches to reducing capital requirements, in the absence of the Group Support elements of early Solvency II drafts. The Central Bank is having to think specifically about the practicalities of supervising such arrangements, I guess on the premise that, with 12.5% corporation tax, they might be the main landing area for such schemes!
All in all a very good, and very timely effort

PwC, Central Bank of Ireland - ORSA Briefing

For anyone who just cant wait for the ORSA public consultation next month, PwC and the Central Bank of Ireland have clubbed together to publish this presentation on ORSA (given last week).

From the CBoI section I would flag;
  • Firms already have "some" of the components of ORSA in place - in a country where the Financial Condition Report is alive and kicking, you might expect more confidence than that!
  • Most of the rest of CBoI's presentation very plain vanilla - concerning if you are looking for firm guidance.
  • Not sure how the Q&A went - if anyone attended, I'd love to know!
From the altogether more monied PwC, I would flag;
  • Nice process maps that should visualise the suite of work that will ultimately comprise of an end-to-end ORSA process, including the reporting which spews out of the back end.
  • A decent attempt at prescribing an ORSA Report structure (of course, if you have seen one punt from the consultancy firms at an "ORSA Report", you have seen them all, buit this does elaborate on each section).
Useful for anything you can extract from it, most concerning perhaps is the divergence in certainty and standard of presentation between the big 4 consultant and the regulator.

AON research paper - Solvency II revealed

AON have fired out another worthy paper regarding the changing landscape for insurers during Solvency II implementation, as well as what an "optimal" insurer will look like post-Solvency II.

I enjoy reading anything that looks at post-Solvency II implementation, as well as anything which touches on the reinsurance potential on the capital requirements front, so this was right up my street. I particularly liked;
  • Their process for optimising insurance risk and asset strategy in tandem (rather than the two, being the preserve of the actuarial and investment functions respectively, being operated in isolation)
  • Articulation of "risk appetite" as a percentage of own funds surplus volatility above and beyond SCR (interesting way to communicate it)
  • Table on capital changes for market risk and implications for insurers by sub-module - easy to digest
  • Good sections on Catastrophe risk (if that is your cup of tea!)
  • Ratings agency drivers, which stress the importance of transitional measures (for orderly transitions to preferred Tier 1 capital vehicles), the likelihood of ORSA-related criteria on future solvency sliding into their assessments.
Nice sales pitch for ReMetrica at the end as well - for all your ORSA needs...

Towers Watson paper on Extreme Risks - useful for Reverse Stress Testing

For anyone who has reverse stress testing on their agenda, this release from Towers Watson should help you on the "unlikely but extreme" events front.

They categorise these events into three types - Financial, Economic and "Other" (being environmental and political), and provide 15 solid risk events, some ideas on ranking, hedging and parameterising impact and likelihood., all of which are valid in the face of a lack of guidance from EIOPA on the subject at this juncture (remember ORSA requirements!).

Certainly worth using in your next FSA-driven reverse stress testing exercise if you are UK-based, and considering in the context of the forthcoming public consultation on ORSA for the rest of you Euro-landers.

Friday, 21 October 2011

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).

Wednesday, 19 October 2011

PwC Annual Corporate Director survey 2011 - more time for Risk?

PwC kindly fired out the findings from their (US-centric) poll of corporate directors. Decent sample at 834 respondents, and two-thirds were sitting on boards with $1bn+ in revenue, so worth heeding. Both RM Professional and Norman Marks have taken it to task, so I won't dwell on the findings other than the following;
  • 72% would reconsider pay awards in the face of "significant shareholder dissatisfaction" - just wondering what "significant" is.
  • Relatively little planned change in reaction to clawback legislation embedded in Dodd-Frank
  • Almost 60% of boards wanted to spend more time on Risk Management, putting it third behind Strategic and Succession planning
  • Less than 10% plan further than 5 years ahead
  • Almost half discuss strategy viability no more frequently than annually
  • Amusingly, both racial and gender diversity is referred to as a "Skillset/Attribute" - 23% find it very difficult to obtain directors with the racial "attribute", while 15% struggle to get the "gender" one!
Handy in its own way for the Europeans amongst us as a proxy, a more pertinent document for the statesiders.

Solvency II Internal Model Validation slides - from the US!

Of use to anyone working on internal model validation, I clocked this presentation from one of Ernst and Young's finest across the pond. Some useful context within it, particularly showing where the E&Y guys have come across gaps in validation policies, methodologies, documentation.

This is all in the context of the States' own preparations for ORSA under the guise of the NAIC (indeed I touched on it the other day), but is of course very handy on our side of the Atlantic!

Institute of Risk Management - presentations on Risk Culture and embedding risk management

Delivered last week at the Solvency II Special Interest Group were a couple of presentations regarding embedding risk management and "risk culture". I generally think that "culture" is something you find in a yoghurt pot, but to be fair there is some good stuff in the materials below;

IRM Chair's presentation - some nice elements in this, such as
  • Risk culture being "at its 'risk management' is factored into decision making" - I would go further and make this the most complex definition, rather than elaborate
  • Nice transposed diagrams of how certain risk cultures need to implement ERM in certain ways
Survey on risk culture and embedding risk management - remember at 28 participants it is a small sample, but flags the following;
  • Around half are lumping "risk culture" and "embedding risk management" into their (Risk?) Solvency II Workstream (i.e weren't planning for it otherwise)
  • Quarter had no sponsor for risk culture work
  • Around 30% cited "lack of access to management time" as a challenge
  • No real favoured technique for assessing risk cultures or embedding risk management - number of options cited
  • None of the 9 relevant participants had received a "poor" rating from S&P for their ERM structure
  • Not many outliers on the questions regarding risk governance, risk resources, risk transparency and responding to bad news - most were 2/3 out of 4
  • Few more outliers in questions on risk competence, making risk decisions and rewarding risk taking - suggests that, while companies are relatively competent at 'playing at doing risk', at the sharp end the relevant skills and attributes are by no means compulsory
Not exactly my cup of tea this subject, but this is still useful stuff.

Monday, 17 October 2011

Van Hulle, Bernadino, SIFIs and Solvency II "chafing"

It was raining comment on the Thomson ILS news today (may need to subscribe, but it's free and worth it). Both van Hulle and Bernadino are quoted as playing down the significance of any decisions made on SIFIs, or "too big to fail" insurance institutions (as I recall there is some kind of decision pending, or may indeed have been released, on SIFI criteria).

Sr. Bernadino (our EIOPA big-hitter) is more concerned with low investment return and high inflation than the threat of SIFI classification on the insurers under his watch, while the thought of additional capital burdens for any EU insurers that qualify as SIFIs is "complete nonsence" to van Hulle, the Commission's Solvency II scribe.

This all despite KBW claiming that only a couple of insurers will fall inside the net (though I think this may have been US-HQd only).

Finally, AM Best got in on the act after the delays announced to Solvency II implementation last week - as well as highlighting the benefits of preparedness from a mergers and acquisitions angle (which may now also be put back a year), they also add that, while smaller companies are probably happy to receive an additional year of prep-time, the larger companies "may chafe" at the delay.

I have a nice cream for that...

Solvency II and CRO jobs - speech from president elect of the Institute and Faculty of Actuaries

Some very intriguing words spoken by the incoming president of the IFA regarding the challenges and opportunities for the Actuarial profession in Asia (summarised at the Actuary Magazine). As you know I keep a watching brief on the likely collision at C-suite level between the Risk and Actuarial professions, and so I pulled the following out from the "opportunities" themes in Mr Scott's speech. They were;
  • The skills of actuaries helped keep the insurance industry out of the headlines during the "enormous economic storms" (pulling a rabbit out of an empty hat for an encore I guess...)
  • Acknowledges that Solvency II does not require an actuarial function to be run by an actuary
  • "...Many [actuaries] will expect to be able to find employment in the risk function
  • Lines up a few soft skills which will need to be enhanced in this regard (improved comms and decision making understanding, as well as "becoming more risk focused")
  • Skills from the CERA qualification "should open up a whole range of career opportunities for those who take up the challenge"
  • Looking to define (with CERA) "the distinctive contribution that actuaries provide as practical, mathematically skilled, rigorous and regulated risk professionals"
I guess it is the last statement that would perhaps put one or two IRM/FERMA/GARP noses out of joint* - is the Risk profession itself so disregarded that the Actuarial profession can usurp the established offerings with CERA?

* I say this somewhat reluctantly as someone who, thanks to a rugby players errant knee, literally has his nose out of joint currently!

Allianz CFO and Solvency II

Few nice nuggets of truth from the Allianz CFO on both Solvency II and IFRS, where he candidly stated that he has "expressed his concerns several times" on Solvency II from the perspective of onerous treatment of long-term guarantees.

NAIC, ORSA, ERM and SRQ - Acronym day!

Saw this nice piece from Towers Watson on ERM developments Stateside (I had blogged on this from an ORSA perspective a couple of weeks ago). The pressure from the AM Best ratings agency seems to be pretty intense to this regard, and indeed Towers Watson's article here highlights what AM Best consider "leading" and "lagging" practices.

"Leading" practices have all the hallmarks of the IAIS/Solvency II world that we all know and love ("tolerance", "appetite", "risk-adjusted return", "modelling used in strategic decision making" etc etc). What is more enlightening is the section on "lagging" practices, as it seems pretty bold to say that by not adhering to the AM Best standards you are a laggard.

However, the stats are pretty sobering (and mouthwatering if you are consulting over there!). 90% of respondents' risk tolerance definitions were "too broad", 12% had no ERM Committee/CRO and 72% do not use internal models.

Towers (who have issued guidance on the 2010 iteration) go as far as to say that the new ERM section on Best's SRQ (Supplementary Ratings Questionnaire) will '...become more influential on ratings outcomes' and that this evolution will compel insurers to 'stay ahead of their peers and Best's evolving ERM criteria'. How the SRQ obligations marry into the ORSA guidance due out soon is another thing, but fascinating times ahead for the North Americans...

Thursday, 13 October 2011

Solvency II/FSA reference documents catch-up

Thanks to a dodgy laptop, I am a bit behind with blogging, although to be fair all of the real drama happened last week! I came across a number of handy documents this week which you might find handy, listed below;

Clifford Chance document "Guide to the European Union" - very useful if you have board training/briefing requirements and need to explain why Solvency II is taking so long!

Lloyds ORSA Guidance - in order to assist their syndicates in preparation for their December ORSA submissions, but obviously useful for all of us. In particular, they are not asking for a a great deal (15-25 pages), which seems a touch light, but probably proportional for a lot of syndicates.

SCOR Presentation at banking conference - Some cracking stuff in here related to risk, capital deployment and strategy in preparation for Solvency II. Model enhancements for Solvency II, diversification benefits, and risk appetite all touched upon in the slides, and should give you some good ORSA/MI ideas.

Milliman paper on Pillar III - Nice summary on the forgotten pillar and likely requirements!

Milliman legislative update - Generic and very useful Solvency II  presentation from Messirs Claffey and Coatesworth which again should be useful for anyone who needs to explain to their Boards what the hold up is! Three slides on proposed timeline divergence between Parliament, Commission and Council are very sobering...

FSA Newsletter - Fresh from the horse's mouth, the Solvency II update (including last week's news on internal model application timeline changes) confirms that "we must maintain the momentum and stay focused on implementation", despite adding as much as 14 months onto some firms' model submission windows! The Small Insurers Seminar on October 20th sounds like it will be a hoot. Also a nice piece on reverse stress testing which should help anyone in ORSA land.

PwC piece on FTSE 350 strategic/risk reporting - Claims that, having studied the FTSE 350, less than half explain the impact of identified risks to their business model (despite almost all detailing what their principal risk are), and subsequently portrays the downside of this being felt in a marked-down share price.

Gender diversity on boards feedback statement from the FRC- a topic I have blogged on before, and one which is seemingly the zeitgeist. This came out almost hand-in-hand with the Cranfield school monitoring report on Women on Boards which is reasonably critical of progress to date (bearing in mind the political pressure commenced around February).

From a Solvency II project planning perspective, the issue in hand is reconciling the Fit and Proper requirements in the System of Governance articles with "decision making bodies" in 2014/15 being artificially loaded with female Execs/NEDs/function holders. Likely that I will blog more extensively on this from a pure governance perspective another time, but some good media comment already out on this document (see here and here).

GCAE minutes for September - Quiet month by the looks of it, though it does mention that at the International Actuarial Association meeting in Zagreb, they discussed ORSA and ERM "including the need for educational material and standards" - land grabbers!

FSA ask risk and internal audit to "step up" - Slightly provocative language from Andrew Bailey, where wimpy Internal Audit and Risk functions appear to be the "untold story" of the financial crisis (provocative but pretty fair?). His point on the role and influence of both functions not being as it should be is also fair, though I would have some truck with the suggestion that companies want the FSA to do risk and internal audit for them (I would actually rather they discharged their Solvency II obligations in a timely manner, cheeky beggars!)

"First Class" FSA - last but not least, delightful story on how much it costs to fly the FSA Chair and Chief Exec around - it certainly puts my annual Flybe bill in the shade, though there isn't a business class option to be fair!

Thursday, 6 October 2011

More on FSA Solvency II delay to 2014

Some cute contradictions beginning to emerge off the back of the FSA's pronouncement on extending the IMAP window to 2013 and the go-live date itself to 2014 - EIOPA's top man Carlos Montalvo warned the following day not to "put Solvency II in the fridge" (chillingly?), which is all well and good when Omnibus II appears to be pretty well refrigerated itself!

Similarly, Post magazine have reported that smaller firms will be relatively happy at the FSA's news on the basis that they are not as far down the road. Interestingly one of the "Big Small" firms, LV+, has an executive quoted in the Wall Street Journal no less to express his dissatisfaction at the "unhelpful" prospect of delay, and noting that they plan to crack on with a 2013 target.

It should be noted that the quote was pulled from a press release from some Marketforce research due to be published in November which seems to be focused on supporting the very early adoption ruled out in the same week!

IAIS - Revised Insurance Core Principles

Only an optimist would think that, at 400 pages, the revised ICP document is a light read, but it has been approved after the IAIS meeting in Seoul (press release here). May be worth a quick cross-cast against Solvency II CEIOPS/EIOPA advice in the ERM, Capital Adequacy and Internal Model-related sections, but as these borrowed heavily on Solvency II at outset, the final revision is not likely to contradict.

In addition, the latest IAIS Annual Report and Accounts has also been published - some good commentary within this around the purpose and scope of the ICPs and ComFrame. The latter perhaps has more significance for anyone in the UK, on the basis that the FSA are citing groups as one of the reasons for extending the go-live date and IMAP approval process.

Tuesday, 4 October 2011

CRO to CEO - what's your skillset?

As flagged on the Reputability blog, Allianz Re have recently promoted their Chief Risk Officer to the top job. Fantastic news for those super-ambitiousin the function, and tactit recognition perhaps that the balanced skillset of the latter day CRO is coming the boil nicely. You will notice that the blogger doesn't prescribe to CRO-to-CEO promotion, seeing the role as a destination, not a hub.

As an avid follower of activity on the CRO front (in particular the sustained attack on the role from the Actuarial profession as an alternative avenue to the C-suite), and was delighted to see that his background was...errr...Actuarial! To all you "Riskies" reading, please see the earlier comments from the FERMA VP on upskilling...

A nice translated piece was published by Clifford Chance regarding CROs in the EU (specifically with Germany in mind) - covers the EC green paper angles on risk governance and risk executives, as well as correctly highlighting that "Solvency II is a key ally in institutionalising the new role of the CRO"

FERMA Risk Conference - various content

Seems to be a good amount of debate and activity over in Stockholm for the FERMA conference - I heartily recommend the blog.

So far the VP of FERMA has blown FERMA's trumpet, a futurologist (now there's a profession!)recommends looking out for "ninja" trends whilst referring to risk professionals as "sexy magician types", and the head of an enormous German bank telling us that "risk management deficiencies" were at the heart of the financial crisis (as opposed to avaricious bankers). The phrase schadensh*zen springs immediately to mind...

In addition, there was a nice piece on Captives under Solvency II (I liked the parallel between a tightening reinsurance market alongside the expense of allocating additional capital to captive vehicles looking like a double-whammy), and FERMA's VP in the action again recommending that the risk profession engages in some 'upskilling' in order to be engaged more fully with the board, noting "It is all about talking the language of the board...and that is financials".

I wouldn't agree with that, but I appreciate the sentiment in the context of the actuarial professions' upskilling exercises with the CRO/Head of Risk Function role in mind.

FSA Deadline for IMAP - formal extension to "mid-2013"

After a week of innuendo and winks, the FSA have finally committed to removing the deadline for IMAP submission from end of May 2012 to "mid 2013" for anyone who needs the extension, with allocated slots being issued "which we and they must stick to" instead.

This has a whiff of issues around Group supervision, with the word 'group' standing out amongst the other criteria depicted that will determine allocation slots.

The press release of course confirms 2014 as the official go-live date in the UK, leaving 2013 as a parallel run year at this juncture (summarised in Actuary Mag). There will surely be a few dummies spat out at this, as this is very much a penalty for any early adopters or successful project managers.

This may have increased the likelihood of Lloyds et al's requests for approval to start using the model from 2013, as they will surely need to be thrown a bone after this news.

PS - More for the industry's benefit, or for the institution that is struggling to stay staffed?

Friday, 30 September 2011

NAIC - ORSA and ERM developments in North America

Spotted this over on the Casact website, and though it was worth sharing - emerging ORSA approach over with our North American chums at the NAIC, which seems to be spooking some insurers who are quaking at the thought of a 2012 ORSA imposition and lobbying for more time (same on this side of the Atlantic fellas!).

Seems to be a bit of draft ORSA guidance on the go (along the same lines as our Level 3 document in the EU), and the one stand out piece for me was the projection of capital requirements between 2-5 years out - seems instinctively light for insurers to project no further than 5 years, but maybe the long-term guarantee piece isn't such an issue Stateside.

There is also an enlightening piece from AM Best on the same document regarding their Supplementing Rating Questionnaire, how best to prepare for it and respond to it, and some benchmarking stats on positive responses to the questionnaire content. Sadly I don't get to dabble too much in this area, so if any of the Stateside readers have any experiences to share on ORSA progress or ERM SRQ completion I would be interested to hear.

Thursday, 29 September 2011

GCAE Minutes - "effective co-operation between European institutions"

I had almost forgotten to post the link to the Groupe Consultatif's minutes for September - concise and clear as ever. Some interesting plans on a potential position paper on ORSA, and some IFRS/Solvency II convergence work.

Nice of them to plant a seed of uncertainty with the headline "Planned implementation of Solvency II on 1 January 2014 depends on effective co‐operation between European institutions and on action by member states". This has the air of fighting talk from EIOPA, who they met with in the month.

CROs and the Society of Actuaries in Ireland - from the President's mouth

A subject very dear to my heart (from a self preservation perspective more than anything!) was the subject of additional comment in the President of the Society of Actuaries in Ireland when giving the president's address for 2011.

Whilst he naturally states (p8) that the head of the actuarial function roles will be the preserve of the current holders of appointed/signing actuary roles, and that "any other outcome would be bizarre", he then goes on to talk of the "big Solvency II prize for us as a profession" of leadership of the risk management function, which anecdotal evidence suggests is a role favouring the actuarial profession ahead of other disciplines.

Of course while I would love to counter the argument with the Institute of Risk Management's suite of arguments in favour of the risk management profession (blogged on extensively already), I then found that the latest CRO hire was of course an actuary (making the score 3-0 to the actuaries since I started keeping it)!

Time to step up our game 'Riskies'...

Wednesday, 28 September 2011

ABI Report on Board Effectiveness - board diversity

The ABI pushed out the findings from their research on board effectiveness, predominantly covering diversity, succession planning and board evaluation. The document itself will be available from tomorrow (the ABI press release link is the best I can do), but I had a look through an advance copy.

The purpose of the report is to focus on the three areas above that they believe "can help ensure an effective board and ultimately contribute to the success of the company", and they make a suite of best practice recommendations. Diversity is more on topic for me, as I suspect smaller insurers may struggle to meet any formal or informal quotas by 2015, while simultaneously meeting the Fit & Proper requirements of the management body under Solvency II, without padding out board with token non-exec female representation (and indeed the ABI allude heavily to tokenism in their advice).

The recommendations cover making the achievement of diversity a key objective when making appointments; stating steps taken to achieve it, and expanding on these in AR&A documents; widening the search for NEDs; developing more women throughout the corporate pipeline; and setting and reporting on objectives to promote gender and other diversity in companies.

I found that the advice is a little light and contradictory - while extolling the virtues of diverse boards, the ABI are against quotas for example, citing the likelihood of "two-tier" boards (two-tier, but better surely?). Norway is cited negatively, which is surprising, and the "marked increase" in 2011 female appointments does not appear to have been linked to two-tierism, despite the speed at which it has materialised pointing towards a "quantity not quality" scenario.

There are a couple of good bits covering attrition rates at FTSE 250 firms (smaller boards, lower attrition, and therefore should evidence their plans and objectives, rather than be obliged to artificially meet target level of gender diversity. They also show a good example of the problems on the hiring front, where one company was previously receiving almost exclusively male long lists for NEDs (now rectified by the recruitment firms voluntary code which requires 30% female representation on the lists).

Finally, a couple of amusing best practice examples - the Man Group and Mothercare are both cited for good work in this area. Coincidence, or does someone at the ABI have a sense of humour!

Clear Path Analysis - Van Hulle interview, legislative path, Omnibus II and more

Fantastic body of work released by the guys at Clear Path Analysis (need to sign up) - extensive interviews with Karel van Hulle, EIOPA representation and insurance industry senior figures (and as a sponsored piece, surprisingly unaffected by hard selling!). A few revealing pieces from the van Hulle commentary;

  • Sovereign debt - confirms the Solvency II approach on zero capital for EU national debt instruments copies the CRD4 approach in banking and that "we need the same approach", while going on to say cryptically that "when events change then the regulation will have to change as well"
  • Go Live date - "believes it is the final revision"
  • Omnibus II - end of the year for clarity, once parliament and council conclude discussions, with "early 2012" down for the parliament vote
  • US equivalence - notes that "all discussions with the US are difficult" (saucer of milk?), but has optimism as they "seem to be moving in the direction of Solvency II". Not quite the message being sent across the Atlantic, even if true!
  • EU regulator - "We have to see how [EIOPA and sisters] work first before we can go to the next stage"
  • Transitionals - national regulators should not be able to vary the transitional measures to create regulatory arbitrage
  • EU Parliament's advice on reintroducing regulatory technical standards - "The Commission does not believe that this is necessary"
The following was also useful for calendar planning/expectation setting on your project plans;

  • Trialogues between Council, Parliament and Commission commence in November to develop common view on Omnibus II (my last point from van Hulle's comments I suspect will be high on the agenda!)
  • EIOPA major consultations will commence in November this year (on ORSA and the Reporting Package/templates) and mid 2012 on standards they are expected to write.
  • EIOPA still focused on Jan 2013, regardless of phased approach in Omnibus II

Monday, 26 September 2011

ABI, Lloyds & the FSA - behind closed doors...

Flagged elsewhere on Friday, I read through the FSA committee minutes which noted that “contingency” may be required (p3) if Solvency II is not implemented by 2013 – no mention of what that will consist of, though it sounds ominous and probably ends with the words “-million pounds”.

Also reported on Friday, the ABI and Lloyds are looking to lobby for a 2013 go-live date, regardless of the content of Omnibus II, so that Lloyds’ existing ICA process can be jettisoned and replaced by Internal Model SCR (thus restricting the dual ICA/SCR obligations to one year). I suspect they will have plenty of people who would ride on their coat-tails if they can squeeze this one through!

Omnibus II update - implementation plan shenanighans

The European Council pushed out the July version of the Omnibus II draft at the end of last week (a little late perhaps, but the Europeans do go on holiday for August I guess!).

Changes from the June version include;
  • Introductory paragraph added on ensuring that continuity and development of long-term guaranteed business is not impaired when developing this text.
  • EIOPA now obliged to produce technical information on the Equity Risk sub-module of standard formula
  • Supervisors will be applying laws and regs required to comply with implementation plan requirements from 1st April 2013 (this was from 30th June)
  • Guidance from EIOPA on what the “implementation plan” requirements are still expected on 31st March 2013 – must now also contain guidance in the context of proportionality.
  • The implementation plan must specify which, if any, transitional measures will be utilised.
Most significant one seems to be the third one – I can’t fathom why they have expressly said that regulators need to be able to police the implementation plans in April 2013, if they are not due to be submitted until June 2013.

It may be that the national regulators have lobbied to be able to check up on companies pre-submission to make sure the implementation plans are compiled to their liking first time round. With little room for latency, I suppose that would make sense.

Tuesday, 20 September 2011

Business Innovation and Skills department – “Strategic Report” – anything to borrow for SFCR/ORSA/RSR?

This came out in the week from the Business Innovation and Skills department in the UK - the recommendations clearly impact on the presentation of materials for listed entities, with a "Strategic Report" replacing the various patches of random guff that normally turn up in statutory releases to the market (boiler-plate and pretty offensive in its lack of stakeholder appreciation).

I'm thinking along the lines of Pillar 2&3 in the context of this, particularly if there are some economies of scale which can be generated by sharing information between the Strategic Report and ORSA/RSR/SFCR for insurers - one for your project plans maybe?

North American ERM/Solvency developments

The guys over the pond are having a busy week (actually two ponds for me, coming from the Isle of Man!), so worth summarising here.

RIMS Conference is underway over in Canada, and while I will need to wait before I go hoovering up material, the Risk Management Monitor dropped this curious piece out on top ERM mistakes - a little hard to substantiate some of the examples, but relevant nonetheless, in particular #5 on the difference between risk appetite and risk tolerance (lack of definition somewhat addressed in the IRM's release last week).

The Canadians, US and Bermudans got together for a group hug in the inaugural North American CRO Council. A very handy looking agenda to start with, particularly "industry leading" emerging risk research and 'harmonizing regulatory capital requirements across jurisdictions' - is this the promised "equivalence on a true outcomes-basis" as alluded to by Mr. Leonardi from the NAIC last month?

Last thing was the NACD Directorship roundtable on the new realities of risk management summarised here. Of particular interest was the attitudes noted, such as; which elements of risk oversight need to be addressed by the full board; need for specialist risk committees (not required outside of financial services); directors saying the are receiving more information on risk than ever before (quality a likely casualty I suspect); Risk managers said to be "less than optimally familiar" to the directors, and then some very generic comment on CRO's, risk and strategy alignment, risk appetite, material risk and risk culture.

My concern with this is that it sounds very much like the output from a lot of these round tables, where the 'risk rabbit' on good practices fills a gap where a more substantial discussion on defining terminology and responsibilities would be more useful.

Guy Carpenter briefing - succeeding under Solvency II

Nice all round document from the guys at Guy Carpenter on Solvency II, which touches (naturally) on impacts on the reinsurance industry, but also covers broad trends across the insurance industry, particularly in the world of cost-effective/capital lite risk mitigants. The following aspects stand out;
  • Benefits of transparency and security felt to be outweighed by the challenges of Solvency II
  • Nicely merges the added cost of compliance for reinsurers with the additional business which will be generated by market demand for reinsurance as mitigant.
  • They feel Solvency II will help with consistent analysis of reinsurer strength
  • ILS market again cited as one which benefits from Solvency II pressures on capital bases
  • Stress the drawbacks of the current standard formula for cat risk, which pretty much forces carriers of non-EU cat risk to apply for internal model approval due to the capital charges as currently calibrated
  • Strange stats on UK multinational Solvency II costs (£100m quoted as being set aside) - I am assuming this is non-Lloyds reinsurers only, as that barely covers the last 6 months for the Tier 1 companies.
  • Section entitled "costs may be exacerbated by potential regulatory inefficiency" made me chuckle!
  • COver the main mitigants available (and of course where their expertise can help!) such as reinsurance, ILS, hedging, diversification techniques and M&A
  • Good material on the underwriting cycle and how the standard formula simplifications work contrary to it.