Thursday, 11 December 2014

Solvency II Delegated Acts - Grinched by EU Parliament?

Short and sweet - the expected promenade facile of the Delegated Acts through the EU Parliament and EU Council, which looked certain up to a few days ago (p16 here and here), has apparently come to a shuddering halt due to the intervention of Parliament.
Grinch - coincidentally Green?
This document published on the Parliament's website today appears to have made the timeline-followers worst nightmares come true, namely that an additional 3 months of delay on the Delegated Act sign-off may prevent some of the "...from 1st April 2015" approvals from being written into law by, well, the 1st April 2015!

As yet I have seen or heard nothing on the matter in the mainstream media, but given how annoyed Sven Giegold appeared to be when the Acts were tabled, it shouldn't be too much of a surprise that some flabby parliamentary procedure exists that allows for the (presumably positive) opinion of ECON to be overriden when it came to clearing the document through Parliament's main hall.

Naturally, Herr Giegold's name is on the front cover of the motion, but I can't seem to establish whether an additional 3 month delay is a fait accompli, given my lack of knowledge on Parliamentary procedure. I believe the Greens alone certainly constitute "...a political group or at least 40 Members", so they certainly have enough bulk to put this on the table at next week's Plenary (Wednesday by the looks of it), but I imagine having enough pals to table this resolution is not the same as having enough to pass it!

More to follow I hope, given how sparsely populated my legislative contact book is...

Thursday, 27 November 2014

PRA Pillar 3 Working Group - testing commences

Bit of activity on the Pillar 3 front, with the PRA's industry working group publishing minutes from their 'recent' meeting (i.e. 2 months ago).

Rather than another bleat about late delivery in contravention of their Terms of Reference (bottom of last page!), let's enjoy the content for what it is, which is incredibly useful.

Data Collection and xBRL
A few basics were formally tabled, such as the PRA completing their vendor selection for a data collection system, and a note that the xBRL process chosen across the EU has "some commonality". Of particular interest is the commencement of a testing sub-group which has been charged with assisting the PRA in getting their technology up and running with sample data, and that work is apparently ongoing as we speak.

They have planned to allow selected submittors to dry-run their facilities in Q1 2015, before opening it up to all other firms obliged to submit material in the preparatory phase in Q2. Not sure how much lag this set-up allows, so let's hope they get happy before Christmas!

External Audit and Pillar 3
Another sore point has been the potential inclusion, on a short or long-term basis, of external auditors in the preparation and delivery of Pillar 3 reporting (raised on the Solvency II Wire last month). The PRA opine that external audit requirement guidelines "...are not scheduled to be included" in the forthcoming ITS, and that EIOPA has not decided when to issue public consultation on the matter, though they will at some point.

Clearly the PRA have ambitions to continue their existing requirements for the external audit of regulatory submissions, as evidenced by their preparatory phase approach to gaining comfort on Solvency II Balance Sheet components of all IM applicants and larger SF firms, which will pad out a few partner's wallets at the Big 4 (though perhaps for the right reasons).

Lobbying and questions
Effectively told the attendees to direct more questions to EIOPA rather than them, and in particular to wait for EIOPA's second set of ITS, due any day now. On the basis that ITS will (probably) be accepted by the Commission as delivered, the PRA are reminding firms that this is effectively the only window for the industry to bleat.

Board sign-off of QRTs
A huge bugbear across the industry was the implication, reinforced through the PRA's Pillar 3 Q&A document (Q20, last page), that June 2015 would see piles of QRT material tabled at Board meetings across the UK for them to formally approve. They confirmed at this meeting that the Board "...may choose to delegate aspects of the process for operational reasons" - CFO sign-offs all round!

Asset Data, and interaction between Asset Managers and Insurers
A slightly odd, but very relevant point was raised regarding Insurers interacting with their asset managers to ensure they get the right quantity and level of granularity in their asset data to populate the QRTs. The PRA are naturally concerned about this, given the shortening timeframe, and given that the asset management industry themselves appear to be making some voluntary efforts, it feels like the insurers have some work to do.

Approved Persons in UK under Solvency II - "SIMF-ly The Best"?

The UK prudential and conduct supervisors doubled-up this week with a barrage of paperwork regarding "Fit and Proper" assessment of senior staff members in Insurers under Solvency II.

This was already acknowledged as an area where intelligent copy-out wouldn't quite cut the mustard for UK plc, so no doubt the Compliance functions of insurance entities have been looking forward to these publications appearing. Given the light touch on the topic in the Directive (Art.42) and Delegated Acts (Art.273), this is very much welcome gristle.

Evidently "Proper" - but "Fit" enough?

While the maintream media has cranked out some comment already on both the FCA (here) and PRA approach (here, here and here), they are naturally broad with their brushes. I thought I would cut it up into my much more insular world of "what does it mean for Key Functions under Solvency II".



PRA Consultation Paper
  • The regulatory framework for individuals will be called the Senior Insurance Managers Regime (SIMR), and will come into force from 1st Jan 2016. 
  • The CP is targeted at ensuring fitness and propriety of individuals running an insurer, or performing a Key Function.
  • NED's have been left out of this paper, as there is a wealth of comment already provided on a separate joint FCA/PRA consultation from the Banking industry.
  • That said "...the regime for insurers should not be identical to the regime for banks". 
  • While Controlled Functions continues to exist as a PRA term, it will be interchangeable with the term Senior Insurance Management Functions ("SIMFs"), which I have used below.
Going into detail, we find the following;
  • CEO, CFO, CRO and Head of Internal Audit are all SIMFs, with Chief Actuary, WP Actuary and a couple of Lloyds-specific roles also lined up.
  • Some Group-specific SIMFs also created.
  • Any Solvency II "Key Function" holders who are not SIMFs will simply be assessed within the business, with the PRA having right to overturn. I thought this would include the Head of Compliance, but they are picked up by the FCA (below). Not sure who else could be Key Function but not a SIMF, unless some SIMF role-holders don't plan to also do a day job.
  • List of new Core Responsibilities provided which need to be allocated to one or more SIMFs (2.21). These include the old chestnuts of remuneration policy and "culture" in its broadest sense, as well as performance of ORSA.
  • A form will follow which needs to be completed by firms for all prospective SIMFs and Key Function holders containing "relevant information" on them - I suspect this will be a LinkedIn cut-and-paste job.
  • Obligation to make and maintain a "Governance Map" listing the positions and key functions which run the firm, the allocation of management responsibilities (including the new ones in 2.21 presumably) and relevant reporting lines. Oddly, the PRA think "...there will be some costs in compiling and maintaining the Governance Map", when it feels like a lazy Thursday morning for Company Secretarial to me...
  • Some reinforcement of Conduct standards for SIMFs and Key Function holders, with Key Function holders having an additional policyholder protection-related standard added to their armoury.
  • Emphasise that Fit and Proper needs to be assessed on an ongoing basis, as opposed to periodically, which effectively gives the regulator a get-out-of-jail when a bad apple SIMF mismanages a firm (i.e. "why didn't you pick it up internally first?").
  • Solvency II brings in a legal requirement for firms to satisfy themselves of a candidate's fitness and propriety before sending applications to the PRA. They therefore plan to assess whether firms recruitment processes are "appropriately rigorous", which feels like a step into the un-assessable (if that is even a word).
Proposed Supervisory Statements are appended to their document covering the assessment of fitness and propriety, and the application of new conduct standards. From those I would highlight;
  • "The norm" is for single individuals to perform SIMFs
  • That firms may add to the list of conventional Key Functions using a bullet-point checklist
  • Firms can "...freely decise how to organise each function in practice"
FCA Consultation Paper
  • The existing Approved Persons Regime will be adapted to fit Solvency II and PRA/EIOPA requirements, as well as existing application forms.
  • "Pre-approval" will therefore still exist in 2016.
  • While the PRA pick up approval of most Key Functions under Solvency II, the FCA keep hold of the approval of Compliance Function heads, which don't feature in the SIMF list.
  • Give themselves some leeway to impose approval and conduct obligations on "certain other functions" in insurers
  • Appear to be combing over conduct-related rules from their work with the banking industry
Frankly, the amount of crossover between prudential and conduct regulators, existing and new rulebooks, and banking and insurance industries, makes this particular topic an awkward read, which is why I don't work in Compliance!

Levity aside, the outcome of these consultation papers will have a significant effect on insurers existing onboarding and approval processes, content of executive job specifications, and indeed the fundamental operacy of governance systems, given the level of prescription involved. Now would be a good time to start briefing!

Tuesday, 4 November 2014

EIOPA's Implementing Technical Standards on Internal Model Approval - ready to "submit"?

EIOPA have kicked into life at the end of October like Freddy Krueger on laughing gas, releasing a swarm of consultation papers and summaries. While the releases on Colleges of Supervisors or the calculation of the risk-free interest rate will be of interest to some, my own interest was in a subset of their draft Implementing Technical Standards on Solvency II Approval Processes

I have tried to cover the distinction between ITS and the other weaponry in the hands of EIOPA and legislators here. The aggregated feedback received by EIOPA on the suite of Solvency II approvals covered by ITS is neatly summarised in this doc, with EIOPA adding dollops of proportionality into the summary, to effectively remind supervisors not to treat the applications of giants and pygmys with the same vigour. Given the audience reaction to the UK regulator's industry event a couple of weeks ago, I think 'proportionality' may need to become the PRA's middle name (though it probably works better as its first name...)

Clearly, two big moans have been common threads in the responses received, and both have been rebuffed. The concept of supervisory requests for supplementary information "stopping the clock" on one's approval window has been retained, while the idea of "no answer in 6 months equals approval" has been firmly rejected.
Internal Model approval
- "Easy, Easy"
Of more interest to me than the other approvals covered by the consultation is the Big Daddy himself, Internal Model Approvals. From a UK perspective I have covered this in multiple posts previously (here, here, here and here for a start) , and was interested to see if any more whistles and bells had been added to what is already an area causing serious fatigue within the UK's potential applicants, not to mention a few dozen corpses from the c.100 interested parties back in 2011 (slide 4 here).

I thought the following was worth highlighting;
  • Given that the Delegated Acts are already loaded with granular Documentation requirements for IM applications (articles 243 & 244), the ITS insists on a few more pieces! Having cross-referenced between the DAs and the ITS, I reckon the items listed in Article 3 d, h, j, p, q and r are all new requirements, though none would be a stretch to produce.
  • Expectations that your model has been in use prior to application (Art 2 (3 a ii)), and is integrated into your current system of governance (Act 2 (c)) - perhaps this is the effort which firms with capital add-ons will be compelled to do in 2016 & 2017 in advance of model applications?
  • Results of your "last" Validation Process must be submitted in a Model application (Art 2 (m)) - again, suggests there will need to be a year's worth of "live" modelling in advance of making an application
  • The supervisors have 30 days to assess the "completeness" of an application - this feels weirdly generous, given those 30 days count towards the overall 6-month assessment window (provided the application is complete).
  • Despite the PRA's firm assertion on Oct 17th (slide 8) that conditional approval for Model applications is not available, Articles 3 (8) and 5 (4 b) both suggest otherwise, namely that proposed "adjustments" or "terms and conditions" can be accounted for in their decision. 
  • As much prominence being given to Model Change process and Model Change policy as the initial Model Application process - applications can actually be rejected on the strength of the change policy (Art 5 (2)). Despite that, the articles designated for these areas (Arts 7 & 8) are relatively straightforward.
There is no real reason why these ITS for IM approval won't sail through at the Commission, so best to prepare accordingly. However, UK applicants with 2016 modelling ambitions will of course need to wait further for EIOPA's Common Application Package before they can finalise this montagne de papier.

Monday, 20 October 2014

PRA's Countdown to Solvency II Implementation Event - When I Need U(SPs)

PRA Implementation countdown
- "Feel like dancing" now?
So along with the entire UK Solvency II sticky-beak brigade, I had the unbridled pleasure of attending the PRA's 'Leo Sayer' on Friday, confidently titled Countdown to Implementation, despite going on to list a range of matters which have probably given both Internal Model and Standard Formula firms plenty of enthusiasm to try and turn the clock backwards rapidly!

Paul Fisher, Julian Adams' replacement as Executive Director of Insurance at the PRA, kicked off with a set of Solvency II vox-pops;

  • Solvency II is the "main game in town"
  • "The end is in sight"
  • The PRA are "not gold-plating the Directive"

A nice bit of reassurance at kick-off time then - unfortunately, the clarity which was to follow from the technical specialists on a range of topics was probably not what everyone wanted to hear, given the tone of some of the audience questioning that followed! In particular (and with everything in full quotation marks below having been said by a PRA rep on the day);

  • That the PRA will "have to prioritise" if everyone in the IMAP queue for 'from 2016' approval drops their applications in at the end of June, and that applicants should be "striving to submit" sooner. Suggests to me that the smaller firms in IMAP may get bumped to squeeze in the big boys.
  • The reinforcement of Mark Carney's message from the other week that they will have no problem refusing permission to use models, though this was couched by Fisher in the more appropriate context of failure to meet any of the TSIMs simply "cannot be allowed".
  • That, although over 90% of the UK industry was down for using Standard Formula, the PRA will be equally aggressive when challenging their preparedness as they will for IM firms.

I didn't hang around for the afternoon sessions as I had a hot date with BA, so pull whatever you can out of the Other Approvals and Regulatory Reporting slideshows. However, I would draw attention to the following from the earlier sessions:

Implementation and Policy overview

  • The Old Lady of Threadneedle Street protested through multiple speakers about how they recognise that bank and insurance internal models are different, and how Insurance Supervision is now "embedded into the Bank" - I would assume to justify the credit crunch-influenced aggression now being taken by the PRA on assessing capital models (visible from Adams's speech around the time of BOE/FSA merger right through to Bailey's speech at Mansion House on Thursday night).
  • An interesting slide 3 about how much more work Solvency II will generate for the PRA from go-live!
  • Referred to FLAOR only once before switching to ORSA, suggesting that this disposable acronym is as much of a pain in the neck for the supervisor as it is for firms!
  • Highlight what "Good" and "Bad" ORSAs have contained to-date. Clearly some firms are box-ticking, leaving an unusable report which is only skin-deep compliant as output. They were particularly scathing on Stress and Scenario Testing efforts, and implored that Reports should not be written for the PRA's benefit (though naturally must cover what the DAs and EIOPA have already set out).
  • A nice piece was discussed around the expected depth of director-level knowledge of their internal models. Andrew Bulley made a useful distinction between "conceptual" and "technical" knowledge, where your dithering 80 year-old INED from the fishing industry might not be expected to understand correlation matrices, but should probably know their significance, and alternatives to them.
  • For model applications to date, far too big ("encyclopedic" in cases), with too much process description, and not enough on assumptions and expert judgements.
  • That it is a firm's responsibility to "ensure compliance" with the Delegated Acts, and given their lessening proximity to the legislators, the PRA flag in advance that they will not be able to give "concrete advice" to firms in future.

Standard Formula

A particularly good ground-setter, given the dearth of work published previously on Standard Formula firms and the PRA's expectations. Calendar included on the slide pack, which will be of massive use to your PM/PMO staff!

  • PRA will review ALL firms ahead of 2016 for SF appropriateness - "priority" firms assessed by Q1 2015, everyone else by end of 2015.
  • While SF SCR is apparently close to current ICG numbers for GENERAL insurers in the UK, it is noticeably larger in LIFE firms 
  • PRA is "not promoting" SF ahead of internal models
  • Vigorously directed all attendees to EIOPA's Underlying Assumptions of SF Paper - expectation that some firms won't read it, and just expect SF plus any add-ons?
  • Very vocal on the "significance of the deviation" between SF SCR and one's own Risk Profile - as we know, the Delegated Acts quantify what 'significant' is in the context of capital add-ons
  • An expectation that ORSAs will be used in the assessment of SF appropriateness - qualitative for sure, possibly quant elements as well?
  • Range of examples of where significant divergences are being found, by Risk Category, and by Life vs General Insurer.
  • A lot of emphasis on Capital Add-ons being used "only as a temporary measure", which will ultimately allow firms to PIM/IM or de-risk. They are however "patient and realistic" on how quickly that change can be done, so it sounds on the face of it like 2016 and 2017 will be targeted for Capital Add-on elimination.
  • In the following session on models, a piece came up on Capital Add-ons, where the PRA confirmed that their process for handling these in future is "still developing", though they expect them to be "a lot, lot rarer" than the existing regime of ICG.

Internal Models

Calendar also provided for IM firms (slide 4), showing how tight their schedule is, and explaining why they threw the earlier curveball about all firms expecting to drop their applications in on 30th June 2015. They also touched on the following:

  • Highlighting weak areas identified to-date such as over-optimistic (new?) business plans being used in capital calculations; ENIDs; omission of certain "Key Risks", and suspiciously low correlations
  • That Use Test is "fundamentally important", and is an opportunity for firms to "put their money where their mouth is". They do not expect to see either end of the use spectrum i.e. no use, or blind use!
  • Too much technical actuarial validation seen. Usefully suggested that validation questions may be better posed as "where might this model be inadequate", rather than "why is it OK".
  • Confirmed that the PRA's SAT has now been replaced by EIOPA's CAT, which won't arrive until the back end of this year - surprisingly, no-one laughed when they said this "might create some work" for existing IMAP programmes!
  • Importantly, they stressed that their powers are to Approve or Reject applications, with no "conditional" powers whatsoever. Attendees were therefore encouraged to delay applications which were thought to be unlikely to succeed, both now and in future.
Though they instinctively feel like they could have been supplied sooner, the clarifications provided in the presentations I witnesses will be hugely welcome by programme directors and PM's alike. I would venture a guess that they will be less welcome by executive committees, who may have hoped for more flexibility on the risk quantification front post-2016.

Wednesday, 15 October 2014

PRA on Solvency II Approvals - One in the "IMAP"

The PRA today released a consultation paper on applying for Solvency II approvals (with the checklists for firms thinking of applying here), covering such juicy topics  as;
  • Matching adjustments
  • Ancilliary own funds
  • USPs
  • Group shenanighans (single ORSA for Groups, and excluding entities from Groups)
  • SFCR dispensations
And of course the big man on campus - Internal Model Approval.


I had covered on here back in March that EIOPA intened to bring in a common internal model application package (press release here), whilst also noting that while EIOPA "expected" NCAs to accept and use it, it was not compulsory.
IMAP - waste not want not
With the UK being the largest Internal Model application handler by some distance, the stupendous amount of money, management time and administrative effort which had been injected into the IMAP Process since 2011, there was at least a theoretical possibility that the PRA might say "no thanks", and ask its applicants to continue as they were, albeit with an Excel template amended to reflect the Directive and Delegated Acts as they currently stand

Therefore the rather vicious tearing of hair and gnarling of teeth coming from the UK today is the sound of 60-odd internal model applicants finding out that 3 years of IMAP work is now redundant! Section 2.11 of today's CP states;
EIOPA is expected to publish an internal model application template which the PRA will require all firms to use for their formal internal model applications.
...[firms] will be expected to transpose data onto the new EIOPA template when they make their formal application. The PRA will not be updating the SAT to align with EIOPA's application template
Perhaps I am being a touch harsh to call IMAP efforts to-date "redundant". The UK will naturally have dominated EIOPA discussions around what a template should contain, and how it should be structured to assess applications with maximum efficiency, as they have had the Chair of the Internal Model Committee since 2009!

There is an implication in the CP though that the transposition between the two "templates" will not be as seamless as I had imagined back in March, so I suspect that internal model applicants will need to go back to the market looking for expensive IMAP cajolers in the not too distant future. A shame for UK plc, who will rightly feel they have spent a lifetime's money on this topic already.
 

Tuesday, 14 October 2014

Solvency II Delegated Acts - Commission publish, world shrugs

Delegated Acts - handle with care
On Friday, the European Commission  released a "provisional" version of Solvency II's Delegated Acts via their own website.

Given how long they have taken to arrive, they rather surprisingly aren't chiselled into pyramid slabs or written on parchment - less surprisingly, they feature very little in the way of changes since the July 2014 version, so for those who want to know why it has taken 3 years for these to officially emerge, the January 2014 version is a better contrast (I summarise some of the changes between 2011's starter document and the January version here).

There has been enough comment since Friday (here, here, here and here for a start) to highlight what has changed since the summer, and more importantly, what has driven those changes - namely, encouraging EU insurers to plough money into long-term infrastructure assets by making them cheaper from a capital perspective, thus solving the European Union's economic woes in one fell swoop!

Bear in mind the first scrounging letter from the Commission came to EIOPA over two years ago, reminding them of what a "...potentially powerful financing channel" European insurers could be, provided any necessary "...adjustment or reduction" was made to Solvency II's capital requirements.

Little wonder then that it has taken a while for them to ensure that Solvency II remains prudential, while simultaneously unlocking long-term capital pools, though it sounds like the empirical basis of EIOPA's earlier calibration attempts has been overriden to get there.

Is it likely to get through the baying mob in ECON? The insurance industry's Green Party sparring partner had already flagged his distaste at the capital discounts now being offered, as well as the due process applied to recalibrating them.

It remains to be seen whether it is controversial enough to delay the inevitable in early January, but given the Acts seem to have been received with customary ambivalence by most affected parties, this is probably 'job done'.

Monday, 13 October 2014

ORSA and Independent Review - Misunder-stud?

Independent review of ORSA
- banging the drum?
I listened in on a Solvency II readiness webcast a couple of weeks ago which pricked my ears like a low-budget high street beauty parlour. The specific theme was independent review of ORSA, and the broadcaster confidently included it in the list of "things we all need to do" in the Solvency II preparatory phase, both 2014 and 2015.

While most familiar with the topic would immediately cry "that got lobbied out in 2011", the speaker's argument was that, while EIOPA's Guidance no longer says firms should "independently" review its ORSA, it also doesn't not say it, therefore we must do it, and do it annually!

I would have chuckled and left it at that, but having read InsuranceERM's recent roundtable on preparations for Solvency II, the topic again reared its head, albeit in a more controlled manner, as a number of attendees explained how they have used Internal Audit (and dismissed the idea of using external firms) in reviewing their ORSA processes during the preparatory phase.

My problem is this - as an industry we were happy to, erm, relieve ourselves and moan when CEIOPS's first attempts at ORSA Guidance in 2010 included a guideline which compelled annual independent review of the ORSA Process (included in slide 32 of Mr Bernadino's pack here in Summer 2011, as I can't find the original CP anywhere).

This was lobbied-out by the time the re-badged EIOPA released their 2011 CP (here), and when their Final Report followed in June 2012, "independent review" was a distant memory.

Any compulsion to review the ORSA Process is now  covered only by EIOPA's System of Governance Guidelines (here), specifically Guideline 8 asking that a firm's SoG is regularly "internally reviewed on a regular basis" (5.11).

EIOPA continue in 5.11 that "...the review undertaken by the internal audit function on the system of governance as part of its responsibilities can provide input to this internal review" - i.e. this is not work considered to be performed automatically and exclusively by one's Internal Audit function.

In terms of frequency, EIOPA elaborate in section 4.26 of the Guidelines, namely that your AMSB, given your firm's nature, scale and complexity;
...determines the scope and frequency of the internal reviews of the system of governance
 So three things - no 'annual' requirement; AMSB's choice on frequency; and that this is internal review, not "independent", "external", or indeed any other word which gets me contracted past 2016!