Monday, 30 May 2011

Basel experience - good reason for EIOPA?

I couldn't help feel when I read this in the FT that the inexorable wait for EIOPA's Omnibus II powers to get final clearance is actually an event worth waiting for, when contrasted with the Basel implementation experience for EU territories.

To hear a man of Mr Barnier's authority struggling to convince that the draft EC legislation doesn't play favourites, when evidently the bancassurers will hold the whip hand is very sad, particularly when coupled with the fact that there is no pan-European regulator which will police consistent application in any case.

The Tier 1 capital argument is of course the same debate that the insurance industry (indeed probably the same countries!) are having via the CEA et al with EIOPA - I suspect there will be a more equitable application of the final rules on instrument types and the transition length knowing that EIOPA will carry a pretty big stick...

FSA Special Projects fees - additional info

Just a few bits of additional information from the FSA special project fees for Solvency II
  • Focusing IMAP fees on confirmed model applicants only means small internal model applicant companies will obviously suffer the twin agony of losing the industry-wide "subsidy" for model application costs, as well as paying standard non-IMAP fees for 2011/12
  • No refunds if anyone withdraws mid year!
  • Straight line recovery based on premiums and liabilities
  • Any late entrants who try to join the model approval process will be levied
  • Difference in FSA costs between provisional and final budget is nearly £5m - is this vast difference due to the number of model application drop-outs (which must be around 20 companies)?
  • Some sniping comments from industry in the consultation responses, saying the differences between budget and requirement showed the FSA "had not budgeted effectively", are spending too much, and should give a more detailed cost breakdown.
I guess all of these comments were gathered before the two-tier approach was revealed last month. I suspect some smaller companies would be happy for the FSA to spend some of this underrun and staff ongoing model validation during 2011, rather than go fishing for more consultants!

Friday, 27 May 2011

FSA Solvency II Levy - details on calibration

The FSA have just published a mammoth guide on their levy calibration for 2011/12 - the Solvency II-specific section starts at page 111.

On the face of it, good news, as they didn't spend enough of last year's levy, leaving a cheeky underrun. There's a piece of Friday good news!

Thursday, 26 May 2011

Solvency II and Proportionality

For my own benefit I am posting my notes on the proportionality guidance issued by CEIOPS back in 2008 - feel free to use as you wish!

In particular, if the Internal Model levies are likely to be proportional to the nature scale and complexity of the undertaking, it is important to be able to argue the toss if one feels one is being overcharged!

Fundamentals

Level 1 – proportionality established as general principle, leaving details to L2

Article 28  - proportionality linked to “nature scale and complexity of the risks inherent in the business”

Nature criteria
  •  Classes of business (short/long tail)
  • Low frequency/high severity or vice versa
  • Reinsurance/captives get bespoke treatment
Scale criteria
  • Size criterion (assets. liabilities or risks)
  • Governance processes via scale and cost benefit analysis
Complexity
  • Cash flows of investments not interest-rate sensitive
  • Homogeneity of portfolio
  • Similar characteristics of policies mean valued using model points
  • Product lines with increasing complexity (Life business with/without options and guarantees, Non-Life with/without renewal options)
Applies to all provisions, and therefore by proxy, all future implementing measures

Applies to both implementation of directive and conduct of supervision

“The individual risk profile should be the primary guide in assessing the need to apply the proportionality principle”


Pillar 1
“Justifies simpler and less burdensome requirements for low risk portfolios”

“In order to be considered proportionate a measure has to be, at least, suitable and necessary to achieve its objective as well as appropriate”

“Lack of resources can never be an excuse for not complying with supervisory standards”


Pillar 2
“function” denotes that a person/s must perform the task, not that they are precluded from doing other tasks.

“high risk undertakings may also be expected to introduce a code of conduct” – this followed by a piece on “complex risk profile” undertakings needing expertise in ‘the development of an internal model’. Not sure if the implication is high/complex risk means all internal model applicants.

“Insurers risk management function should be closely integrated with its capital management function, and its risk management policy should describe how this interaction takes place” very important!

“there will be very limited scope for proportionality with regard to the quantity and quality of its regulatory capital requirements”

“One aim of documentation is helping communication between the board of directors, management and personnel. The description should be intelligible and comprehensible also to a knowledgeable third party.” – benchmark for policy writing

“Not only can the compliance function be outsourced but it may also be performed by members of the management or administrative body”


Pillar 3
“CEIOPS places particular importance on the proportionality principle where supervisory reporting is concerned”

“CEIOPS believes that public disclosure as a principle is required in order to enhance market discipline and thus must apply to all undertakings”


Internal Model
“Proportionality should never be put forward to justify a failure of the use test, not meeting the statistical quality standards or not properly validating the internal model and its use.”

“Proper segregation of duties, as appropriate given the nature complexity and scale of the business, can be viewed as a mitigating factor” – for key person risk on Internal Model

“As regards the validation function, CEIOPS does not consider that each company must have this task fulfilled by independent staff” – followed with “it is also essential that the individuals performing the validation possess the necessary up to date skills, knowledge, expertise and experience”


Wednesday, 25 May 2011

FSA Special Levy for Internal Models - Just like the Irish...

New levies on the way it seems, with a FSA-led consultation kicking off this week - having seen the Irish go this way early in the week it should be no surprise, but I guess it begs the question "did we not already pay you for this?".

No doubt more to follow today and tomorrow on this one - in the meantime, UK followers may want to start taking notes on how the FSA approach them, because it looks like the levies will follow some kind of "proportionality" principle judging by the terminology used, and that could indicate future likelihood of proportionality reliefs in your Solvency II implementation.

Bernadino in the Telegraph - reiterates comments on Solvency II Deadline

Big shout out to Gideon Benari, whose excellent Solvency II Wire picked up on Gabriel Bernadino being interviewed by the Sunday Telegraph (I clearly don't check the mainstream press as vigorously as I ought to!).

Bernadino seems to reiterate his impressively terse outlook on deadlines, keeping his line on transitionals - strangely, they haven't managed to wheedle much more comment than that.

New features on the blog

Depending on how you like your news and comment, I have just plugged the blog feed into my Twitter account, and also dropped in a feed of my starred items from Google Reader - it is a maximum of 5 items, and I normally tag up 10 a day, but hopefully you can get some benefit out of it!

Reputational Risk in Germany - Nicht so gut...

A quite unbelieveable story on how to reward salespeople at a sub unit of Munich Re. If there is ever an incentive to inflate your figures (pun intended!) then this is it.

I am more interested to know if the remuneration committee had factored in any clawback provisions...

FSA update - Solvency II, Supervision Framework and death of ARROW

The FSA had a busy week, with a major conference in London on the future of the regulator in its new guise as the Prudential Regulatory Authority (PRA) .

Media commenced with an interview in which which Hector Sants discussed the obligations of the regulator to publish findings  such as those from their report into RBS (which has been taken out of the FSA's hands). Speeches given by Hector Sants and Andrew Bailey are available here and here respectively.

It is of course banking focused, but the new risk assessment framework (p9) shows much more agressive intent from the regulator, and it will be interesting to see any transference of experience between Solvency II preparations and changes on the Banking side when the PRA finally comes out to play

As a funny aside, Andrew Bailey confirmed in the speech that the ARROW supervision model was to be scrapped - having seen the number of site visits it generates dwindle as shown in these numbers, I am surprised it has taken so long to confirm it!

More excellent Solvency II materials

"Reassuring expensive" - not a bottle of Stella Artois, but subscription to InsuranceERM, who continue to produce cracking material to help validate your Solvency II approach on all three pillars. I picked out the following from last week (sign up for trial to view if you don't subscribe).

Dutch problems under Solvency II - Fitch ratings provide the research this time on Dutch preparedness for Solvency II. It highlights a couple of items; that AEGON and ING will be praying for the USA equivalence assessment to be successful (both of course have received state help on the capital front recently, so will be light on that front), and that secondly there would be a maximum of 12 Internal Model applicants, and potentially even less, due to resource scarcity.

CRO at Torus on his Solvency II approach - As a new company, he notes that the benefits of not having to incorporate legacy systems into the data warehouse is somewhat negated by the lack of historical data in producing the calculation kernel (relying on a deterministic approach in some areas). Very interested to see his approach to addressing the use test, which is by performing gap analysis between current and future state in 12 areas where model output could potentially be used.
Solvency II Balance Sheet volatility challenges - succinctly lists responses to the volatility expected when performing market consistent valuation as "raise capital, hedge, or change product lines". While UK already values in market consistent manner under IFRS, this will introduce SCR volatility across the continent. Makes a nice distinction between short and long term liabilities, and the ease of capitalising the former with reduced spread risk. Also suggests that asset-liability matching will become a more exact science across the board.

Corporate Governance - careful what you pay...

Noticed this from the ABI - alert to FTSE 350 boards to make sure they don't get too excited when catching up with executive pay after a couple of years of what one could call 'austerity' (tee hee!).

It isn't the only bit of hot topic in the UK governance world - the chairman at Prudential got a mild birching last week in protest at the failed AIG Asia bid (not unprecendented, but unpleasant I dare say). This follows a trend of dissent during the last few months (nicely collated here), and makes it that much easier to make the case for genuine debate, participation and use of the ORSA process under Solvency II.

Solvency II and the USA - start de-risking or close the door!

Very cute article citing Moody's research on how Solvency II is already driving asset selection (and even product viability) in the United States, a jurisdiction that still hasn't made too many steps towards jumping through the "equivalence" hoops!

It is of course a given that products with embedded options and guarantees are going to be pricey under the new regime, but to hear that it is already driving capital allocation away from a country which will no doubt get equivalence (thus avoiding extra capital charges) is quite something.

Solvency II Approach in Australia - APRA review

If all EU-based readers can wind their clocks back, I spotted this article on Australia's Solvency II cousin which seems to have all the hallmarks of the EU/IAIS experience.

I was very interested to read that capital requirements would be substantially higher - sadly I'm no expert on calibration, but this shows there is an intense lobbying effort ready to go. This may even mirror the history of the QIS exercises in Solvency II, where the calibrators have started on the conservative side and folded when necessary.

Matthew Elderfield speech to European Insurance Forum

The European Insurance Forum has been the poor relation in terms of big events in Dublin this last week (Queen's visit, Obama's visit, Cup Final etc), but the big presentations given are available off this link

I haven't been through all of those yet, but I rushed to go through Matthew Elderfield's keynote speech on the regulatory landscape. Some media comment here and here might help sift through the 20 pages of detail, but my take was as follows;

  •  Take some comfort from his comment "rule book for banks should not be Xeroxed wholesale onto insurance"
  • Attributed Irish problems to lack of regulatory resource (and an adequate assessment framework) and lack of effective standards for Fit & Proper assessment ("gaping hole")
  • Having done the work on corporate governance standards at macro level, the Central bank will be looking at "internal governance standards" later this year - this is intriguing to say the least!
  • Only 11 "major institutions" in Ireland according to his definition (significant policyholder detriment and reputational damage to Ireland)
  • FAQ's will be publised on board participation requirements - truly staggering if this is correct, and flies in the face of the views of the IOD on skills adequacy just blogged on.
  • "Corporate Governance standards were improved due to the input of industry comments" - I analysed these at the time, and they barely changed after feedback ("Major institutions" definition notwithstanding)!
  • Fitness and probity standards under consultation compared to Approved Persons regime in UK
  • Big section on Variable Annuity providers who have set up en masse in Dublin - they have responded by setting up a bespoke VA team.
  • They will require all VA writers to produce an Internal Model for Sol II - no mention on whether, if a model fails the application test, it will be forced to move jurisdictions!
  • "Invested in building up staff levels" for Solvency II - yet can still only produce their Solvency Matters document quarterly, with virtually no "new news" in it.
  • General sympathy with deadline pressures at EIOPA/Commission level, noting that the intention is "to progress as much of the non-Omnibus II impacted work as possible"
  • "Need to give consideration to the phasing of particular obligations on supervisors and insurance firms" - asking for transitionals?
  • Emphasised the usual areas requiring change in the QIS calibrations (nothing new), EPIFP and Contract boundaries etc.
  • Central Bank favours a "middle course" for recognition of EPIFP in tier 1 - CEA estimated the gap would be €100bn of capitalisation if it was excluded, against €3bn if fully included across the whol industry.
  • Wants to "disabuse" the industry of the fear that a beneficial step change in capital requirements using an internal model will necessarily lead to model rejection - peer comparison will be used for reasonableness though.
  • VERY IMPORTANT - highlights that diversification benefits derived from correlation matrices or copulas that include "a significant degree of subjective judgement" are not currently given enough regulatory attention, due to excessive focus on risk buckets - "...the marginal impact of these changes are dwarfed by the impact of judgement calls on correlation or dependency".
  • VERY IMPORTANT - planning to introduce a special levy for internal models - unlucky Ireland!
  • Refers to the trend of hub-and-spoke models rather than subsidiaries due to loss of Group Support section of Solvency II. He wants to "...make sure that the hub [in Ireland] is substantial and has sufficient critical mass to exercise effective control over its branch operations". Basically negating any regulatory arbitrage plays.
  • As a hub supervisor, he will be "prepared to exercise effective direct oversight over branch operations",
  • Notes that, in the absence of the IAIS ComFrame framework that Solvency II as become de facto binding international standard on solvency
Change of model scrutiny focus to correlation is a big call, and the special levy is sure to go down badly in a country which has just hit pension providers with a separate one-off levy.



Corporate Governance catch up - Ireland: Elderfield, Gender and Captives

Busy in the last week, so catch up exercise required!

Ireland has been awash with interesting developments on the Solvency II and Corporate Governance front, so I have bulleted them below;

Captive Insurer governance – Ireland’s pre-emptive strike for proportionality parameters have been released in the regulator's consultation paper - nicely summarised by Lexology here


Society of Actuaries feedback on "Fit and Proper" consultation - interesting to get the views of the actuarial world on Fit and Proper requirements, particularly due to the relatively vague nature of the function's responsibilities under Solvency II. Also interesting that Matthew Elderfield referred to the impending regime as being very similar to the FSA's prevailing regime (more on this later).

Themed Regulator Inspection - product failings - Good example of how thorough the investigative work is becoming on the enerald isle, as well as how scathingly the findings are portrayed. This will surely filter through under Solvency II into the capitalisation side should similar weaknesses be found in guaranteed products.

Board Diversity and Gender - Institute of Directors research - some very sobering research on board diversity and quality in Ireland, which shows there may be some distance left to run before governance quality improves in reality. How 80% of responsdents can think they have an appropriate mix of skills, yet only half have some kind of skills framework in place is beyond me (although I appreciate measuring and monitoring does not necessarily ensure application).

More intriguing is the 60% of female respondents in favour of an imposed quota to ensure representation of both sexes on boards (against less than 30% of men). Solvency II, in both the Level 2 and 3 papers provides a ticklist of required knowledge in the management body, but doesn't go as far as to demand quotas.

I dare say that direction will arrive via other means...




Tuesday, 17 May 2011

Captives - Does ERM mean higher costs under Solvency II?

Can't help but think I am missing something having read though A.M Best's special report on Captive Insurers under Solvency II.

The report has some bright spots (covers proportionality and reasons not to factor it in to project plans very nicely), some weak spots (recommends participating in QIS studies which are surely now finished), and some great definition on why so many companies may be caught out (narrowed definition, lower diversification benefits, perhaps had hoped that parent would absorb the impact).

What is not so pleasant is the implication that by tightening standards in the Pillar 2 and 3 areas there will be higher operating costs ("significant impact" in their words). I may be missing a business opportunity here, but this is surely a 'proportional' one-off cost, where they can even get leverage from their parent company's project work?

Operational RIsk data - ORIC and the future

Spotted this ORIC slideshow from May's Solvency II presentation for the IRM. Not too much to glean from the light content other than the last slide, which gives a glimpse into the future of ORIC's work (develop consensus for industry use, improve data standards, develop best practices, increase usage levels).

All very noble aims, and can only aid the move towards stochastic modelling of Op Risk for the internal model users amongst us.

Solvency II "Boom" - but some missing out?

Saw this incredible piece today in RM Professional citing some research by Kinsey Allen on risk professional demand at the moment. I wasn't startled by the trend, more that a number of the questions  regarding pay increases, team size increases etc did not elicit 100% responses!

Also shocked that only 85% thought Solvency II knowledge increased their value - I can only assume they haven't checked the market...

More reasonable was the 66% who thought there would be board-level promotions for Risk in the offing. I cannot imagine that, even in face of Solvency II, everyone will be clamouring to make another executive appointment.

More on IRM issues with Risk Function under Solvency II

The FSA presentation that appears to have caused the mild outrage with the IRM has actually already featured on this blog - at the time I didn't pick up any undercurrent of an attack on risk professionals in general, so I guess you had to be there.

Having reviewed the IRM's lobbying letter, it certainly has the tone of a rebuke ("recent debates have caused unnecessary confusion" being my favourite line). The presenter was a relatively big hitter at the FSA, so no reason to think this isn't the FSA party line.

What I noted from the rest of the letter was;
  • Felt that the directive is being interpreted to assume a CRO must have risk and actuarial skills
  • Rather harsh contention that the development of ERM-related actuarial qualifications shows that their profession does not provide "sufficiently broad training".
  • "Trend in the market" for hiring business-focused CRO's. Not substantiated, but having looked at the CVs of a couple of the CRO membership it does stack up.
  • Struggled to find an example where risk and actuarial have to collaborate at the moment, using Op Risk modelling as the easy case study.
  • Suggests that actuarial could not perform independent oversight of reserve risk, when via chinese walls or basic separation of duties one would think they could
  • "There have been suggestions that there are no suitable qualifications for risk management professionals" - this must have come verbally at the presentation, as I cannot establish this from the slides. If this was said or even insinuated it is pretty outrageous.
  • Ticklist of risk function attributes under Solvency II matches up largely with the Level 2 and 3 guidance
  • Strange comment that the IRM wants "further guidance" on what constitutes a fully effective risk function, presumably as the FSA and Solvency II views are perceived to have diverged.
I suspect there is a few miles left in this one...

Risk Managers vs Actuaries - place your bets

I couldn't have put it any better than this brilliant article on the spectacularly blurred lines between actuarial and risk functions under Solvency II.

The letter referenced  sounds like it was directly inspired by an FSA closed-door presentation (which I cannot find a copy of) on the subject of the risk function's future. The theme of that presentation must have been very certain in order to have generated such a swift and piqued response.


Being of a non-mathematical persuasion I would not say that I felt uncomfortable by the Level 2 & 3 covert (and in some places, overt) direction that the best person to run a risk function/be the CRO under Solvency II would be an actuary who knows a bit about risk - indeed, with the advent of the CERA, I suspect there ought to be a conveyor belt of suitably qualified people.

However, it would be incredibly disconcerting to find at UK national regulator level  that a professional who followed the strategy/soft skills path to risk management may not be considered able to gain enough understanding of actuarial concept in order to discharge their obligations with regard to ORSA, Model Design and Validation etc in the same way that a pure Capital Allocation actuary could do it the other way.

The work on gaining that knowledge must start now though if it hasn't already - start with the kernel, and work your way out risk-guys!

In the meantime, I'll look out for that presentation, as this dismissive approach to risk professionals in the Solvency II context was not one I had come across previously.

Monday, 16 May 2011

German Corporate Governance - "Alle ist gut"...

Great news on the corporate governance code front in Germany, where the verdict on the 2011 refresh was a firm "keine Ă„nderungen"!

I am not familiar with the full text, but this is a refreshing approach, what with the obligations of Solvency II and the EU Corporate Governance code to contemplate over the next two years - the UK and Irish approach has been rather to pre-empt these requirements, keeping me busy, but at the expense of duplication of effort.  


Two other points of note - a strange reference to making the review process more inclusive in future (which suggests there has been little consultation in the past) and the favourable comments on progress with inclusion of more women on supervisory boards - just like in the UK, the larger German companies are also operating under government direction on the matter!

Solvency II Lobbying - ECIROA say "All together now"!

Came across this wonderful (i.e free!) publication today which, while commercial risk-orientated, seems to have good access to influential Solvency II players.

This article in particular reflects my own thoughts on how the lobbying process (and indeed the legislative process as a whole at the moment) is so fractious that it can only lead to higher implementation costs, lower quality project outcomes, and more ultimately unsatisfied stakeholders upon conclusion.

As the captives appear to be gettiong the rough end of the stick under Solvency II, I am not surprised that he feels the silo approach to lobbying is ineffective, and I like that he has had a go at providing a proportionality guide - sadly I suspect it is a little voice in a big shouting match at the moment.

Directors' Pay - Standard Life get the amber treatment

I had spotted a rather subtle but meaningful change in the remuneration policy at Standard life laxst year when the new guy took over, which appears to be a little to juicy for the ABI and PIRC on the grounds of over-generosity as well as best practice divergence.

This ties back into the vesting criteria for their LTIP package, which has shifted from the conventional RoEV-type measures back to the more easily explained (and some would say manipulated) IFRS number.

The angle for corporate governance and Solvency II is the way in which the IFRS result is down for scrutiny (in order to ensure that it hasn't been attained by excessive risk taking); namely the remuneration committee.

Whilst the awards have 2 year clawback provisions, and the remuneration committee will have the advice of the risk committee when deliberating, it smacks a little of an executive that is maybe struggling to communicate the Embedded Value story to the institutions (affecting support for share price), so has therefore gone back to basics.

Interesting to see how it materialises, and indeed how many other EU listed entities try something similar before Solvency II goes live!

Saturday, 14 May 2011

IRM - Risk Appetite and Risk Tolerance consultation

Only got the tip-off on this today, so still have some reading to do, but clearly the obligations of exec and non-exec directors have turned Appetite and Tolerance into fertile ground, hence this consultation from the IRM.

I am personally not against a prescriptive approach to these topics, provided no board members exempt themselves from learning new things - I may throw a few comments in, especially on Risk Appetite, which there is a distinct danger under Solvency II will become a documentation process which has the dust blown off it periodically, rather than enjoying pride of place on the decision-makers table.

Omnibus II postponement to 2012 - second reference

I am still struggling to find media on this subject (having blogged the story earlier in the week from InsuranceERM website), but I found a second reference to the January 2012 postponement of Omnibus II in this KPMG timeline briefing note.

A handy document without that reference just to keep eyes on the parliamentary passage mechanism (that explain why January 2012 parliamentary passage leaves very little time for change, publicly or privately).

Allianz CFO - Making Solvency II waves...

Press seemed to give a lot of air to Herr Baete's comments yesterday on Solvency II progress when doing the standard Q1 update to the market. Doesn't sound like the influence this particular big hitter would be expected to have in the lobbying stakes is doing much good.


However, I was loving the presence of mind to drop in "The only positive thing is that the deadlines are running out" - couldn't have put it better myself!


Strangely, this sardonic approach ran contrary to the rather tepid Solvency II comments in the Q1 text, namely that they are  "optimistic that the current uncertainty over its final shape will lift"...

Crisis Manager in Crisis!

Savour the delicious irony of a risk and crisis consultancy firm going bust - I guess some business models require a more elaborate cost base, but doesn't reflect well on the risk consultancy industry sadly.

Operational Risk losses - one for the tail

Great effort from the guys at AEGON, who have managed to ball up their accrued op risk loss in the UK division (from their Scottish Equitable business) into a £20-something million loss.

The first substantial press I saw on this was from when the FSA delivered an almighty behind-kicking at the turn of the year after AEGON UK coughed up to a cavalcade of errors over a number of years.

Bearing in mind how many insurance undertakings will have data cleansing projects ongoing to prepare for Internal Model requirements etc under Solvency II, I think there may be a few more of these around - for now, chalk this one down in your scenario analysis!

PS - Thanks to the massive outage on Blogger yesterday, I am catching up!

Wednesday, 11 May 2011

EIOPA in Cologne - as odd as it gets

EIOPA gave this presentation around a month ago in Cologne (any of the German blog readers attend?) - seems a little self-satisfied, maybe with some justification, about participation rates for solos and groups. They also acknowledge the work to do on SCR calibrations, EPIFP and Groups.

Would love to know more about what was said at the conference, and more importantly, who sanctioned a slide in the presentation showing a photo of 3 little pigs next to a Supertramp album cover?

Omnibus II - Officially moved?

Again our friends at InsuranceERM are breaking the story that Omnibus II is being shifted from June 2011 sign-off at parliamentary level to January 2012 (I would add that this is breaking news, and had not been reported elsewhere as yet).

This was already on the cards unofficially but is a seismic change to the timetable - Level 2's cannot be adopted and Level 3's cannot be consulted on publicly before this has gone through, and the timetable for implementation does not officially move until it goes through!

I would like to think otherwise, but this means the opportunity for Pillar 2 and 3 to be considered and debated in an appropriate and inclusive manner is pretty much lost. You guys should feel comfortable dusting off the existing draft L2's and pre-consultation L3's on Pillar 2 and 3 for guidance, as I suspect this is now all about the maths...

Irish Corporate Governance - Grant Thornton research


As the perfect accoutrement to Mr Elderfield's vigorous approach, the Grant Thornton corporate governance review for 2011 indicated just why the stick has to be larger than the carrot right now.

The review is in the context of Ireland's acceptance of the Corporate Governance code of the UK (still "comply or explain"), supplemented with an "Irish Annex" which aims to discourage the copy-and-paste mentality of listed entity disclosure in their AR&As (good luck with that by the way!).

You will need to register in order to download, but this was my read on the 60 pages of content, which are focused on 35 major Irish-linked companies (some primary listed on the ISEQ, though most are either dual listed or primarily listed elsewhere);
  •  19 diverged from director independence requirements in some way
  • Compromised independence and lack of majority of INEDs  were the most popular divergences
  • 7 had their explanations rated as 'uninformative'
  • Average NED tenure of over 7 years!
  • Percentage of NEDs who appraise their Chairman's performance has actually gone down since 2009 (only two-thirds do)!
  • 'All NED' Audit Committee percentage fell since 2009, as well as number with at least one member who has "recent and relevant" financial experience
  • Decent result on paper for Risk and Internal Control disclosures, other than detailing weaknesses and any remedial action (around 60% didn't make much, if any, effort).
Certainly an air of 'going through the motions' in this, and I suspect that this will be a fertile area for consultants once the whip starts cracking.

Tuesday, 10 May 2011

Munich Re on QIS5 - Bravo

A fantastic summary of QIS5 changes was released at the end of April by Munich Re (my fault for blogging late on it!) - nothing especially new, but it is so concise, as well as simplifying the key messages such as;
  • Ticklist of state of readiness issues on p2
  • Brilliant comparison of Sol I and Sol II balance sheet changes (not as clear on any EC/EIOPA docs in my view
  • Highlights the issue on Op Risk calibration, which despite being over-simplified, is preferred even by model-participating companies as it is so generous!
At 8 pages, it is absolutely the document to have for QIS5 summation, as well as the likely lobbying points for near future.

Irish Corporate Governance - Elderfield in business

Doing some recapping of bits I didn't expand on from late last week - in particular, there was an explosion of governance related material on the Irish side, as below;

Matthew Elderfield keynote speech in Galway- Introducing PRISM to the world

The telling quote here was;
" Based on [international best practice review] and our own experience we will assess credit risk, market risk, operational risk, insurance risk, liquidity risk, capital risk, environmental risk and conduct risk at our firms going forward, in addition to the business model and governance risks... " 

This is of course considerably more in the world of categories than Solvency II asks for in both capital allocation and governance policy terms


Matthew Elderfield press comments

Central Bank of Ireland shutting down the sales force of a non-compliant insurance undertaking

Quinn Insurance investigation - no Actuarial function in house before it collapsed due to pricing errors!
http://www.independent.ie/business/irish/administrators-note-lack-of-an-actuary-at-quinn-insurance-2639222.html


All balled together, this is one kitchen which is getting inescapably hot - the price one has to pay for low corporation tax I guess...

Reputational Risk Insurance - just in time

I like the option and the thought of paying the premium to cover reputational issues simply in order to get away from this irrational thought that the costs cannot be quantified, and therefore modelled. It never felt right to me when viewing it in the directive and the Level 2 & 3 guidance, and with the UK banks about to cough up en masse on PPI misselling, we may be about to see some organisations other than BP who may have benefitted from spending £10m a year on this type of coverage!

Monday, 9 May 2011

Solvency II Level 2 Public Consultation release - New news is old news!

As eagerly awaited as the Eurovision result this Saturday (it's Jedward's to lose!), the EC released the results of the November 2010 public consultation at the end of last week.

Most of the substantial argument has been well and truly aired by the local regulators, CEA, EIOPA and the chief forums, but always healthy to list the sticking points.
  • Risk-free interest rate curve - application of illiquidity premium
  • Cost of capital rate - lower than CEIOPS 6%
  • Risk margin - divergence on which of the options is most realistic
  • Own funds - treatment of EPIFP
  • SCR Formula - Many aspects
  • Holdings in particpations and subs
  • SCR Internal Model - all looking for least burdensome option
  • Pillar II dampener for Procyclicality - divergence in length of time
  • Capital add-ons - working on what divergence between profile and SCR is a "significant deviation"
  • Actuarial function - some tension on what will consist of applicable 'standards' for the profession post-Solvency II, including EIOPA's role as an enforcer
  • Supervisory reporting - some fishing for less frequent reporting to evidence "concrete application of the principal of proportionality", due in part to Level 3 indications of complexity. More telling, a desire for 5-6 years of transitionals is also shown., as well as debate on what data should be audited, and how frequently
  • Public disclosure - Straightforward defensive position from most respondents on avoiding disclosing competitive information, as well as views on what should be disclosed in order to benefit consumers and stakeholders
  • Supervisory co-operation - coverage on how colleges should work
It also covers the following impacts;
  • Products - low capital charge products become high priority sales, with price rises likely for long-term guaranteed products and innovation in unit-linked world. End predicted for cross-subsidisation.
  • Markets - diversification benefits will work against niche and smaller insurers. Maximise branch networks, more level playing field, and issues again with impact of proportionality if not applied adequately. Captives singled out as not deserving of special treatment
  • Social - long term guarantee products the key issue flagged, namely whether they become prohibitively expensive and pressurise social security systems instead. Also a whole suite of suggestions about how it will impact on investment strategy, both asset type and duration.
It is a handy document in that it shows the wide divergence on a number of matters (which is shown by the length and complexity of the lobbying process). Also important is the small participation (68 responses, the vast majority being Industry, Public Authorities or Interest Groups).

Thursday, 5 May 2011

Marsh & RIMS ERM Survey - so good I can't get at it!

You will need to register to get this in full (and incidentally, I still can't, even after registering!), but a very strong survey from Marsh and RIMS on opportunities for Risk Managers to get their feet under the top table was put out today. I suspect it will be a little US-centric (hence the c-suite references!), but I got out of this some strong Solvency II-themed messages;
  • Lot of respondents not even on firm-wide risk committees - this is the time to insist upon it for Op Risk and Cyber Risk managers for example (assuming your CRO is already there!)
  • 61% of execs want to see risk managers work integrate deeper with operations - absolutely bizarre: if they are not in the c-suite, where else are they!
  • 58% of execs want risk to lead ERM actvities within the organisation - pure crazy: if Risk is going to lead, you need Risk on the exec board, it's not rocket science!
  • 54% of execs want Risk to improve its quantification techniques and knowledge of non-insurance risks - really like this, and it leads in to ORSA demands on the function beautifully
  • Only 30% of respondents said their Risk Committee was "very effective"
 Over 1,000 respondents, so decent sample, but if I ever get to see the full thing, I suspect it will be more of the same - the key difference is that Stateside they seem to be inviting Risk to come and participate, whereas the ORSA on the EU side will make it compulsory!

FSA presentations from Solvency II day - last one!

One of the FSA's Solvency II Day presentations from mid-April was a little late in arriving, but can be obtained here.

A few bits of note in this rather contradictory slide set;

  •  Companies asked to "stay informed" - this despite FSA saying that sharing any draft delegated acts which arrived through their EIOPA membership was "not within our gift"!
  • Asked to "wait for final versions" before acting - this while the timetables for Level 2 and 3 are shifting, the Omnibus II draft is apparently changing to move deadlines back, and lobbying is being done behind closed doors.
You can't help but think we could be doing more for each other right now, because "wait" and "stay informed" has the sniff of "duck and cover"  from the old cold war films!

Dodgy Governance - The Big One?

Plenty in the press today about the decision to send in a couple of heavyweights to establish the FSA's role in RBS falling over back in 2008 - this will be a case study for the regulatory bodies I suspect, as well as an axe-sharpening exercise for the Irish and UK bodies, who will both have experienced a very recent and public humiliation once this research is published.

Guy Carpenter briefing - jumped the gun here guys?

I was quite alarmed to read this document from the Guy Carpenter crew on Reinsurance and Counterparty risk thoughts under Solvency II.

In particular, they are assuming the transitionals will actually materialise and be applied at their (currently draft) stated limits (bottom of p2) - "Allowed up to 10 years to fully implement areas of Solvency II such as the fair valuation of assets and liabilities"!

I still think I must be reading this wrong, as that would be a hideous and, according to the EIOPA Chair, utterly inaccurate way to interpret the purpose of the transitionals.

They do however give a nod towards the obvious regulatory shortages, as well as an intriguing piece about a conference call with the French regulator about the potential of a "trial year" with parallel operation of Sol I and II

Online Solvency Supervision - can't beat the Chinese

While the EU squabbles over data quality, submission templates and own funds, the Chinese have just cracked on and sorted out quarterly online submission of Solvency supervision information - congratulations!

Insurance Mediation Directive responses - done deal?

Having read through the mercifully brief responses on IMD consultation today (and having plenty of experience in cross border selling under the directive), I noted the following;

  • UK and Ireland pitched in with around half the responses - guess we know where the beneficiaries are!
  • Standard arguments on distributor pay, policyholder hidden charges and coverage of the directive to include bancassurers and PRIPs all in
  • Amusing piece from (I guess) the IFA industry on lower commission possibly leading to lower quality of advice
  • Little drive on efficiency of process, though some support for a central permissions bureau, which from my experience would be an excellent idea.
Strangely, no cross references to Solvency II, despite both pieces of legislation being ostensibly for the benefit of EU insurance consumers

Follow up on Towers Watson paper

Following up on yesterday's post, Towers Watson threw in a supplementary paper to help support the quantification of value from an ERM programme (although the flaws identified in the responses from some recipients should be borne in mind, namley that more thought they had a ERM programme than had defined their Risk Appetite!)

Whilst it is not cricket to use the recipient percentages to support TW's arguments when only 2% of those invited actually participated, they have some cogent points in this doc, namely;

  • Desire to quantify starts with moving away from heat maps and annual risk assessments
  • Defining risk as "exposure to an adverse deviation from an expected result" - simple but strong
  • Risk Appetite Statements representing "integral governance steering mechanisms" - true under full ERM and Solvency II-specific approaches
  • Key Risk Indicators should be reviewed more than annually

CRO Forum - lobbying hard

CRO Forum put out lobbying papers on currency risk and liquidity premium this week that compliment the CEA docs (late as they don't have the RSS on their site) - nothing new in them from my end, other than they are much more accessible to the layman on the drivers for liquidity premium and the faults behind the current plans for accounting for currency mismatches.

Gender diversity on UK Boards - you had your chance...

The FRC's intervention today means gender diversity on boards is no longer likely to be a fruity sideline , and as their turnaround time is pretty quick these days, they should have this in for 2012. I do remember seeing some murky stats on how diversity improved performance (compulsory quotas of female members in parts of Scandinavia being par for the course) , and provided it is as inoffensive as "comply or explain" it seems  like a decent idea for UK plc.

Value adding - another matter...

Wednesday, 4 May 2011

Risk and Finance Manager Survey 2011 - US-flavoured but EU-useful

Not useful in its entirety due to the specific target of the detailed content (addressing risk using external assistance) and its US-centric focus, this survey from Towers Watson just released contained a couple of remarkable stats from its 164 respondents;
  • Only just over half employ actuarial consultancies based on their technical skills/resources!
  • Just over half had an ERM process in place, but under half had a formal process for determining risk appetite/tolerance/limits - how these numbers cannot match up is beyond me, unless there are some pretty sketchy excuses for ERM programmes out there!
  • Almost half of those without ERM reasoned this with "no-one has been able to articulate the value"
  • Of those with a programme in place, over 80% have assigned ownership of key risks, and two-thirds have regular reporting to boards on the subject
  • A participation rate of 2% of those invited (alkmost 10,000) - not exactly a hot topic then!
Seems to be a real divergence in approach stateside, perhaps a side-effect of not having to worry about Solvency II, and more the rigours of Dodd-Frank etc, which I guess are more of a compliance worry.

The messages on communicating value of ERM are however quite easy for EU risk functions to deliver now - it is the cost of staying open in Jan 2013...

Aon Global Risk Management Survey

One for you ERM purists, AON released their Global risk management survey this week, and as a biennial event, we should be delighted to benefit from their largesse (think twice about printing it all - half is arty photos!).

Remember for the purposes of the Insurance sector we get a little diluted by small companies and non-financials in these surveys - 960 in the total count, so great for benchmarking, though half of respondents were "risk managers", so a little light on seniority.

My eyes were caught by the following;
  • Insurance sector has Regulatory change down as number 1 Key Risk - thanks guys!
  • Preparation for business interruption and talent management key risks have gone noticeably backwards across the board since 2009
  • TCOR (total cost of risk) not necessarily used in any growing pattern for evidencing value-added by risk management, and seemingly too hard for some companies to consider. Amazingly, less than 40% use internal risk management costs in calculating TCOR, which smacks of laziness on the function's part (or maybe even nervousness).
  • Senior management intuition as the primary method for identifying and managing major risks - try that one under Sol II guys!
  • CRO role becoming more popular, though not dramatically so. 60% have no plans to recruit one.
  • Majority of respondents still have risk reporting and functionality as finance-centric (over half report risk through CFO)
  • Latin Americans don't have regulatory risk in their Top 10 - as the recent actions of the Argentinian and Brazillian protectionist regulators have shown, this is well founded!
  • Less than a third of respondents had "Increase Shareholder Value" or "Increase Return on Investment" as primary benefits in investing in risk management. Again, a frightening lack of ambition in my view, and incredibly regressive.
  • "Increased focus from regulators" one of the main drivers for strengthening risk management in the last 2 years - I suspect this would be number 1 for Insurance-only respondents.
  • Number of respondents with a risk management function actually fell since 2009! They note the profile of respondents has probably driven this, so amusing rather than startling!
The TCOR piece is probably my main carry-forward from this. I like the detail on who uses it, why/why not, and which components could be used or reasonably left out. I can't help but feel the measure will help in Solvency II, maybe just for functional reporting on value added.

Generali not the only one this month...

After blogging on the travesty of interlinked, self-interested vainglorious boards that mock the very concept of decent corporate governance, it is only fair to throw one in with a UK flavour.

What is most breathtaking about the 3 year cavalcade of incompetence, greed and ineffectiveness that lead to over 3,000 old guys and girls almost "losing the farm", is not that Compliance flagged the sales as unsuitable (they are paid to be suspicious); not even that their report never made it to the agenda of the main board (who pay lieutenants to execute their obligations day to day). It is the overwhelming lack of desire to be publicly sorry for it, which maybe takes us away from regulations and principles into ethics, and of course we can't legislate for that...

Keydata is one of the best case studies around for Solvency II, and indeed general corporate governance project workers, so have a look round on Google - at almost every step you will think "that's where they will stop it"!

CEA Solvency II lobbying - never say never

As with the last post, the Omnibus II draft has clearly hit the consultancy and lobbying firms, hence the burst of new media at the turn of the month.


The CEA of course had their own views on the timetable shifts in the context of transitionals. Strangely, they seemed to be more concerned with legislative draft quality than this persistent dithering between the main policy protagonists. They are still insistent on receiving transitional benefits for areas far away from Sr Bernadino's agenda at EIOPA (3yrs for governance and supervisory reporting for example). The divergence in requirements at national supervisory level is also a key concern, as arbitrage opportunities could open up in the unlikely event that transitionals are applied, but done so at national level (as I posted earlier, Italy or Poland could be a good place to be headquartered!).

The additional request for a temporary internal model transitional seems fair, especially since the FSA have made it clear they are not staffed for model approval - one for the UK to keep an eye on!

Maths isn't my strong point, but quite a forceful point is made about allowing EIOPA to lay claim to setting risk-free rates ("impossible for capital planning and ALM strategies") - the political arguments only supplement this vigour.

The gap in perspectives between EIOPA and the CEA is beginning to look canyon-esque, that's for sure...

Solvency II timeline moving - handbrake off the Omnibus?

As ever, our well connected friends at the Big 4 get the news first, but it would appear that the deadlines for Omnibus II may be stretching even further away from the industry's preference.

With aspects of Levels 1, 2, 3 and EIOPAs "technical implementing standards" still difficult to pin down, this is becoming increasingly fractious and awkward to manage at project level. I have no idea why EIOPA and the Commission have begun moving so many deadlines, but it is certain that the opportunity for reasoned and balanced public consultation on Level 3 and the technical implementing standards has passed if the Jan 1st implemntation date remains unchanged. Very sad.

Irish proportionality for captives - can't say fairer

Decent attempt announced by the Central Bank to keep everything proportional on the corporate governance front for the captive industry. They might not get this generosity when it comes to SCR calculation despite their lobbying, but at least the industry is trying.

Guernsey and Isle of Man take note...

Onerous EU regulation - anyone for arbitrage?

Spotted this in a release from EIOPA on reporting requirements for IORPs, and without being too cheeky, the table on page 32 looked like a map for plotting regulatory arbitrage under Solvency II!

Of particular interest were the list of countries who insisted on most, if not all, of the 30 items of corporate reporting listed (bravo Austria, Germany, Belgium, Latvia, Slovenia and UK) against those who asked for barely half to be submitted (Ireland, Italy and Poland).

Any danger some branches may get a harder time than others after 2013?

Rank Corporate Governance - Get it while it's hot...

Our friends in Italy played a blinder with this gruesome piece of corporate governance at Generali. No doubt justifiable in executive circles, a €14m pay-off that includes 'loss of corporate jet' money is not just hard to swallow, it barely fits on the dinner plate to start with!

The egomaniacal dual-role board leaders should enjoy this indian summer while it lasts, because if Solvency II doesn't get them, the EU Corporate Governance code surely will.