Practical issues in implementing Solvency 2 for Lloyd’s Managing Agents: Governance and Internal Controls and Observations from the Lloyd’s Team
avantage held its second roundtable discussion on the practical challenges of implementing Solvency II in the Lloyd’s market on 7 July 2010. The topics covered during the roundtable included Governance and Internal Controls as well as Observations from the Lloyd’s Solvency II team on some practical implementation issues.
Iain Wright, Partner and Head of Insurance Practice at avantage opened the discussion by highlighting the importance of having a clear strategy, the need to prioritise and the practical challenges of Pillar I.
The key points raised included:
- Ensuring firms have a clear strategy and view for implementing Solvency II to enable firms to link the work they are undertaking to the firm’s strategy – this will extract the maximum business benefit from the programme;
- Having clear priorities for projects ensure that firms are applying resources to the right areas and will help avoid Solvency II resources blockages. Firms should also look to ensure that they identify synergies between projects to avoid unnecessary duplication; and
- There is a clear trade-off between the level of sophistication of the model and its ease of implementation and useability. A less sophisticated model will be easier to implement and be more useable as well as help firms pass the Use Test.
Following the introduction, Lisa Siggery, Head of Risk & Compliance and Programme Director for Solvency II at Equity Insurance Group, started the discussion on Governance and Internal Controls. Lisa raised a number of important and topical questions around Governance.
These generated a healthy discussion among the roundtables.
Observations included:
- Systems of Governance is the area which will require the least amount of change for firms under Solvency II as generally a lot of work has already been done in this area. It was agreed however that future practice would raise the bar for firms and lead to greater transparency. The challenge will be to evidence the governance culture documentation in place.
- A strong supportive culture that operates from the Board level downwards is necessary to make risk management and governance work effectively. Without this is could be just a tick box approach.
- Risk Management and Governance sit alongside each other; the overwhelming view was that Risk Management is part of Governance and not the other way around.
- Evidencing Governance practice (Use Test) will be easier through having a strong Committee infrastructure, appropriate authority levels and documenting decisions in Committee minutes.
Lorraine Harfitt, Solvency II Workstream Leader at Lloyd’s talked through some of the issues arising from the Dry-Run process so far.
The key points included:
Stage 1 Template Scoring Submissions – the overall submission scores had been higher than Lloyd’s were expecting with average overall scores of 5.6, 4.7 and 4.0 for Systems of Governance, Model Scope, Governance and Use, and Documentation respectively. Lloyd’s review of documentary evidence will validate the scoring or lead to it being amended. To date the documentation provided has not always supported the self-assessed scores. In addition the evidence detailed on templates has not always been available.
Next Steps
- Agents were due to be contacted on 9 July to confirm documents for submission in the second tranche.
- Agents should expect a continuous loop of discussion, review and feedback to ensure submissions meet the required standard. Lloyd’s would rather see early draft documentation so that they can review and provide feedback and support the development of work rather than wait for final versions of documents.
- Lloyd’s aim to provide full feedback on Stage 1 by end August 2010.
- Stage 2 submissions are required by 2nd August 2010– the resubmission of stage 1 will not be provided on this date.
There was also discussion on the most challenging aspect of the first dry run elements. Most viewed the model documentation, scope, governance and use as most challenging due to evolving requirements and needs. Documenting internal models while models are being built is proving particularly challenging for firms. However, the importance of documenting assumptions and methodologies while developing the models is important if any lessons are to be learnt from the difficult experience of the banking industry during implementation of Basel II who left this process to last. The key lay in designing a flexible template with key sections in place that can be adapted and changed as the model evolved.
Most agreed that systems of governance are simpler to evidence as much documentation already exists.
Lorraine further discussed the self-assessment scoring undertaken by firms which generated discussion among the attendees. It was highlighted how the scoring was subjective and potentially inconsistent depending on the Solvency II stakeholder who carries out the assessment. It was generally agreed that no aspect of Solvency II is currently at a stage where the highest score can be given. Lorraine noted that the scores that are self-awarded by firms would be benchmarked against peers to identify areas requiring attention.
You can download a copy of the presentations here.
