I’ve been talking to insurance and reinsurance group chief risk officers a lot recently in preparation for the publication of Reactions’ CRO Risk Forum 2013. It is surprising how collected they all sound – considering the pressures they’re under.
So many of the big problems besetting the industry today end up on the CRO’s desk, from helping plot a course for growth against strong economic headwinds to handling regulatory risk. The latter assignment is getting harder every day, judging from CROs comments, when it ought to be getting easier.
Kiln CRO Andrew Hitchcox is his firm’s designated Solvency II director. In the forthcoming CRO Risk Forum he writes: “The principles-based, risk-based approach taken in the regulation is good and the Level 1 text set out good objectives. But our experience is that every generation of activity since then has produced ever increasing requirements for documentation,” he says.
“The regulator says it doesn’t want a box ticking exercise but then asks so many detailed questions we are wallowing in paperwork. The regulator keeps saying it wants Solvency II to be proportionate and focussed on the big risks. But the reality is they keep asking for a lot of detail on every issue possible.”
He’s not alone in feeling that something has gone wrong with the project.
Eberhard Mueller, Hannover Re’s CRO, has similar issues. “Due to the loss of the vision of group supervision originally contained in Solvency II, an unexpected and massive bureaucratic burden possibly lies ahead of us. We are experiencing ever increasing requirements for internal model approval, with each country carrying out its own assessment, with limited relation to proportionality,” he says.
“This process consumes a lot of resources without creating value – it has even started to destroy value. And the situation might get even worse until the full formal implementation of all Solvency II’s three pillars in 2015/16 (or even 17).”
Like Kiln’s Hitchcox, Mueller says it is his sincere hope that Eiopa will have the power to convince local supervisors to stick to the original intention of implementing “a principle based approach following the principle of proportionality”.
There are similar concerns around the relevance and intensity of regulation in the US, specifically to do with the introduction of the Own Risk & Solvency Assessment proposal, Orsa.
Michael Mahaffey, CRO of Nationwide, says he views Orsa as a generally positive development thus far – if implemented properly. “The danger exists, however, for Orsa to turn into a high-cost, low-value exercise in regulatory compliance. This is an outcome we have all worked hard to avoid, although we are in the early stages,” he says. “We have made a good start, but implementation and operation will be the key. If this evolves into a tick-the-box exercise or a one-size-fits-all practice, Orsa will have failed to deliver on its promise.”
The introduction of Federal Reserve supervision is another big preoccupation. Mahaffey believes that the capital models that have been proposed to gauge insurer financial strength have very little to do with the varied liability-based risks that most insurance companies are in business to take. The proposed capital model really only looks at market risk, and only from the asset perspective at that, he says.
“With an incomplete and insufficiently tailored risk-based capital framework, one could envision unintended industry impacts and perhaps even an exacerbation of systemic risk – not necessarily a reduction,” he warns.
Swiss Re CRO David Cole has his eye on the FSB and IAIS plan to announce a list of so-called global systemically important insurers (GSII's) in April. “We are concerned that the IAIS is overly focused on the size and interconnectedness of insurance groups, and that this focus will undermine the benefits of risk pooling and diversification as well as limiting the way in which insurers invest their capital back into the economy,” Cole writes.
Cole believes that, because of a blurring of ideas between banking and insurance regulation, and no small measure of political pressure, insurers find themselves being measured by a similar yardstick to banks. “We are experiencing a mismatch between regulation and the economic reality of our industry,” he says in his op-ed.
Insurers (and reinsurers) are systemically important – though perhaps not in the way the FSB and the IAIS believe them to be. New numbers from Insurance Europe illustrate just how important the industry is. The European insurance sector paid a total of €930bn in claims to its customers in 2011, according to IE, the European insurance and reinsurance federation.
Life insurance benefits, which account for two-thirds of the total benefits and claims paid to policyholders, totalled €619bn, while non-life claims paid (including health benefits) amounted to €310bn.
The investment portfolio of Europe’s insurers had a value of €7,740bn in 2011 - equivalent to more than 55% of the total GDP of the 32 European markets that are covered by IE’s data.
The figures reinforce the real importance of the industry and suggest that supervisors everywhere should be careful not to destabilize an important pillar of the financial services sector – and the economy - with inappropriate rules.
CRO Risk Forum 2013 – out soon