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3 July 2014, 16:00 – 18:00, Paris
The meeting was attended by members of the following organisations: Fédération nationale de Mutualité Française (FNMF), Milliman, Societe Generale Corporate & Investment Banking, Standard & Poor’s.
Chair: Gideon Benari, Editor, Solvency II Wire
The Solvency II Wire Regular Meeting Group brings together a wide range of practitioners to discuss Solvency II and related matters. The following is a summary of the key discussion topics addressed at the meeting.
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The meeting was underscored by a theme of continued preparation and growing momentum in Solvency II work, building on initial steps noted in April. One participant summed up the mood saying that for every new initiative they now asked, and were being asked, “How is it treated under Solvency II?”
Participants noted that firms were starting to look at the practical implications of proportionality and were seeking clarifications from supervisors on the meaning of “best effort approach” specified for the interim period. The industry was also seeking an official closed simplifications list but, according to one participant, at this stage these decisions were likely to be taken at a national level with the local supervisor.
Mutual insurers are continuing their cooperation in preparation work and it was noted that some mergers are likely, although these are not only due to Solvency II but are also linked to other local regulations and strong competition.
Despite the overall drive forward, participants said that uncertainty remained about several aspects of the Directive and how supervisors would implement them. For example, mutuals are still facing lack of clarity in relation to the transposition of the rules on governance and group definition and there are still unanswered questions on some of the Long-Term Guarantees measures. But there was also a broad consensus around the table that there is now a clear general direction that makes the uncertainty more manageable and allows work to progress.
Higher engagement with the ORSA
Participants noted an increase in activity of Pillar II work across the industry. One commented that the precise outcomes of Pillar I calculations were of interest to a relatively small number of companies (e.g. fragile insurers or insurers with mandatory financial communication) and that most insurers were mainly interested in making sure they were covering the capital requirement using the Standard Formula with a buffer that would be comfortable enough to avoid falling below the bar following small stresses. In contrast, participants said engagement with Pillar II and the ORSA was higher because for many this was about doing business rather than just calculations. Insurers have begun asking themselves and their management meaningful questions about the organization, its business model and potential risks. One participant reported that undertakings were enjoying the challenges of exploring the different risk parameters and scenarios. They also reported that many were beginning to look at stress testing realistic scenarios that were relevant to their specific business model and not just generic risk scenarios. Overall there was a strong consensus that the Pillar II work is useful.Looking at reporting in detail
Participants also remarked that firms were beginning to get to grips with aspects of the ORSA report. One noted that there was a particular challenge in the evaluation and quantification of risks on mid-term and long-term basis. The discussion also addressed how to communicate that information in the ORSA report. Challenges are also starting to materialise in presenting complex information to senior management who did not have actuarial or other relevant technical background. Some mutuals are embarking on training programmes to help members of the Administrative, Management or Supervisory Body (AMSB) understand these better.Lack of clarity on the Volatility Adjustment
Participants noted that there was still lack of clarity on a number of aspects relating to the Volatility Adjustment, especially the assets that will make up the reference portfolio. The various texts available publicly (EIOPA Guidelines and Implementing Technical Standards) or semi-publicly (Commission Level 2 Delegated Acts) appear conflicting at times. For example, the EIOPA texts make various references to the Delegated Acts, but it is not clear if these related to the January or March version or to an even later text.Sovereign debt
As firms advance work on their capital calculations they are starting to address the question of the zero per cent capital charge for EU sovereign bonds. One participant suggested that because it was not possible to change the Standard Formula at this stage, supervisors across the EU were pushing firms to add a capital charge either in the Internal Model or through the ORSA. During the discussion that followed it was noted that in some cases firms might choose to add the risk charge voluntarily as a way of showing they were “best in class” amongst their peers. The question, as one participant explained it, was how to communicate that add-on to the market in a positive way. Another participant said that the charges related to the various asset classes were unfair on firms. On one hand they were being asked to support the EU economy (by investing in some the classes like sovereign debts) but at the same time they were being penalized for doing so with an additional capital charge.Complexity
One participant noted that the grandfathering arrangements of own funds were creating some unforeseen complexity as firms seek to issue new debt (and modify existing debt contracts) that will work in all circumstances. This was especially the case for new debt with duration longer than 10 years – going past the grandfathering period set out in Omnibus II. As a result they were seeing increasingly complex documentation aimed at working under all foreseeable circumstances. — To subscribe to the Solvency II Wire mailing list for free click here.
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