Practical issues in implementing Solvency 2 for Lloyd’s Managing Agents: Programme Management and ORSA

Practical Issues in Implementing Solvency 2 for Lloyd's Managing AgentsIain Wright, Partner and Head of Insurance Practice at avantage opened the discussion by welcoming the attendees to the roundtable series.  Iain then provided an analysis of the practical issues facing Lloyd’s managing agents and syndicates in Solvency II implementation, including:

• The logistics of analysing CEIOPS papers, as well as the resourcing bottlenecks caused by overlapping timelines of the dry-run and the QIS5 in late summer;
• Planning for implementation with a number of areas where uncertainty in the rules still remains, for example, definition of capital and calibration of non-life standardised capital;
  
• Data - what data do you have, is it adequate, is it reliable and is it consistent?
• Validation and documentation of models.

Phil Whittingham, European Group Risk Manager at XL Capital, started the discussion on the programme management challenges of Solvency II and shared some of the experiences of his firm on the programme management challenges of Solvency II.  Phil has been on both sides of the fence having worked as a consultant until recently and now working in the industry.  He listed 12 items as key in Solvency II programme management, with particular reference to securing adequate resourcing, budget and stakeholder management.

Areas which attracted further discussion from the roundtable participants in particular were:

Ownership: The implementation plan must be owned by the board.  This is where a senior owner can really help to make things happen and ensure the programme is given a top priority by functions.

Resources and budget: budgets signed off last year will now need updating.  Data and Systems workstream budget requires particular attention as it tends to be largely underestimated and ends up eating into the overall programme budget.

Other pressure points noted by participants included: actuarial resource; consulting resource, especially where several firms use the same firm; ensuring FSA understands your planning timetable so it can factor this into its own plans; and the challenges of getting independent review of the programme and validation of deliverables.  

These highlighted the importance of planning early and ensuring the plan is reviewed regularly.

Paul Element, Head of Risk at Catlin, started the discussion on the challenges posed by ORSA.  Points arising from the presentation and subsequent discussion included the following.

Firms will need to have processes in place by which management can evidence:

• The business risk profile is understood;

• Capital requirements and technical provisions during the reporting period have been met continuously;
• The model has been used for strategic decision-making;
• Capital plans to meet the solvency position projected over the required planning period are appropriate, including under stressed conditions.

ORSA should be a key tool for the management of the business and its risks but will also be provided to the regulator and therefore needs to be in a form and of a quality that meets those two purposes.

Specific issues arise for the Lloyd’s market, for example:

• Economic capital – ORSA is intended to be a company’s view of its own capital, but in Lloyd’s the capital requirement is set by Lloyd’s.
• Time horizon – ORSA is forward looking with a time horizon of 3-5 years, but this time horizon is not necessarily applicable to Lloyd’s syndicate structure.

Of particular relevance for Lloyd’s syndicates is the recent release last week of a detailed and prescriptive spreadsheet template by the Bermudan Monetary Authority.

Some very practical questions came from the audience, particularly around the length of the ORSA submission.  The recommendation from London Market Association’s working group submitted to Lloyd’s was a template 8 pages long, which had sections and relevant questions.  Also, this working group looked at the banking equivalent, ICAP, and as a benchmark the feeling was a length of 25-40 pages was appropriate (plus appendices).  However, this will clearly vary between firms.

Finally there was a general a discussion as to where firms were with preparation of ORSA submissions.  Some firms have completed submissions, with others submitting drafts to the FSA.  Other firms are preparing “mock-ups” to give senior management a feel for what the final output will look like and get their views and feedback on how it could be improved.  Views from the audience were that the firms should already be working on ORSA preparation.

You can download a copy of the speaker presentations here.

The next round table will be held on 7th July 2010. For further details and to pre-register please refer here.