France is surging ahead with preparations for Solvency II. Despite being unable to comply with the governance Guidelines, the French regulator has already set a number of initiatives in motion and is planning an intensive work programme for the next two years, embracing the EIOPA Guidelines and using them to prepare the market and testing firms’ readiness for Solvency II. “We fully support the principle of these Guidelines and we also fully support the fact that we need to be prepared and have a very strong preparation plan with our market,” Romain Paserot, Director of Cross-functional and Specialised Supervision and Head of Solvency II Project at the Autorité de contrôle prudentiel (ACPR) told Solvency II Wire in an interview at the end of last year. “In some areas we have decided to go further than the interim Guidelines,” he added. The ACPR will be expecting all firms affected by Solvency II to take part in the reporting exercises over the next two years, including look-through reporting on a best-effort basis. Firms are also expected to complete all three assessments of the ORSA in 2014 – not only the assessment of overall solvency needs stipulated in the FLAOR Guidelines. Mr Paserot dismissed the idea that the Guidelines will be counter productive and create duplication of work. “I think that this rationale has disappeared with the agreement reached on Solvency II because now they [firms] have to work to be prepared for 2016. So it’s not counter-productive, it’s productive because it makes it possible for firms to get prepared for their new prudential framework.”
Three principlesThree underlying principles are at the core of the French regulator’s approach: a holistic view of Solvency II, dialogue based on concrete information, and a firm belief that the interim period is as much about identifying gaps in firms’ systems as it is about preparing for implementation. The ACPR wants the market to be prepared for the full framework, which means working on all three pillars. “It is convenient to say there are three different pillars in Solvency II, but in fact the pillars are clearly connected.” To that end the regulator will expect to see progress across the board. There is also a strong emphasis on creating a dialogue between firms and the regulator (a stated objective of the Guidelines) based, as much as possible, on real information. Going beyond the EIOPA thresholds for reporting and ORSA is seen as a vital step for facilitating the process. “In our preparatory plan we would rather have people doing exercises in 2014 and 2015 – even if it’s not of a very high quality in 2014 – just to make sure that they have a dialogue with the supervisors on their preparation based on concrete elements in the year 2014 and also in 2015.”
Governance: une tempête dans un verre d’eauFrance caused a minor ‘tempête dans un verre d’eau’ last December when it announced non-compliance with the Guidelines on Systems of Governance (SOG) because it is waiting a change in the legislation that will only be made when the Directive is transposed into national law (by 31 March 2015). Even so, in its response to the comply and explain exercise the ACPR states that it is able to comply with five of the SOG Guidelines including those on Derivatives, Internal Control environment and Monitoring and reporting. And in line with its overall approach to the Guidelines the regulator intends to take action. “Even if we will be non-compliant on the Guidelines we will obviously conduct a close follow-up of undertakings and group preparation regarding governance so it doesn’t mean that we are not going to do anything from a preparatory point of view,” Mr Paserot explained. But the non-compliance may have a limited effect on the ground. According to Louisa Renoux, Head of Solvency II Project at Mutualité Française, a professional association representing French mutual health insurers, waiting for the change in the governance rules will have “no significant impact” on the preparation work of firms. “Our members are already mobilized. Most of them have participated in the 2013 exercise [conducted by the ACPR] and contribute actively to the various working groups organised around Solvency II.” The changes in the rules are also said to be generating a broader discussion about corporate governance in France where the management and the supervisory body must be separate.
From FLAOR to ORSAThe ACPR said it intends to comply with the FLAOR Guidelines (which are based on the ORSA). The intention rather than compliance is purely technical, as at the time it had not yet communicated its plans to firms. However, the ORSA is proving to be a challenge for the French market. The 2013 ACPR Annual Preparation Survey showed little progress from the previous year. [caption id="attachment_142313" align="alignright" width="313"] Preparation levels by Pillar in 2013
SOURCE:ACPR[/caption] Over 420 of the approximately 600 firms that will be bound by Solvency II took part in the survey. Relatively little progress was made on Pillar II work compared with the previous year (see chart). And although two thirds said they were “more than 50% ready” on their Pillar II work, only 21% declared themselves “significantly advanced”. More telling is the fact that two thirds of respondents to a specific question on ORSA preparation plans said they had completed less than 50% of the work (see chart). [caption id="attachment_142315" align="alignright" width="282"] ORSA preparation levels
Question: How far advanced are your preparation plans for the ORSA? SOURCE: ACPR[/caption] The ACPR also conducted an ORSA pilot study of ten undertakings to identify some of the key challenges prompted, in part, by the slow progress. Initial findings showed that industry concerns include questions such as the regulator’s expectations, how to define a good ORSA and the content and length of the ORSA report. The results of the study are now available on the ACPR website (in French). Ms Renoux said that as the ORSA is a new concept it has proved a challenge to adapt it to the scale and low risk profile of the association’s members. “We still have difficulties with the request anticipated by the French regulator to perform the assessment of deviations from the assumptions underlying the standard formula calculation.” To help manage the change a common approach was adopted. “As we have specific risk (on complementary health insurance) and democratic governance, we have decided to build and share a common approach on the structure of the ORSA report with an internal working group who worked also on profiles, risk appetite and scenarios,” she said.
Risk elements in placeBut, while overall ORSA work is lagging, Mr Paserot noted that the results of the survey showed many firms already have the risk management elements of the ORSA in place. Most firms surveyed said they already conducted a risk mapping, and about two thirds have formalised medium and long term strategies and conducted an analysis of changes in the economic environment and market.
“Be convinced and you will probably be able to convince us”Concerns around the ORSA are one of the reasons the ACPR will go beyond the requirement of the FLAOR Guidelines and expect firms to complete all three assessments. Article 45 of the Solvency II Directive defines three assessments in the ORSA:
- Overall Solvency needs, Article 45 (1) (a);
- Compliance on a continuous basis with the capital and technical provisions requirements, Article 45 (1)(b); and
- Assessment of significant deviation of the risk from the assumptions underlying the calculation of the SCR, Article 45 (1) (c).
Familiar trappings of the ORSA reportAs in other Member States the ORSA report is a sticking point in France. Mr Paserot said that so far they have seen a number of reports that are too long, cluttered with irrelevant information and fail to clearly identify the three assessments. “We think that it is better to have a much more focused ORSA and also to have the ORSA closely reflecting the real questions that you ask yourself about your strategy, your capital adequacy, your reinsurance policy and so on. So we clearly need to have more discussions on that.”
A rich profusion of reportingMuch of the thinking applied to the ORSA is applicable to the interim reporting requirements, although here too there are specific challenges. Results of 2013 ACPR Annual Preparation Survey show that work on Pillar III is the least advanced. This, again, is in line with the experience of Solvency II work elsewhere. [caption id="attachment_142321" align="alignright" width="211"] Entities declaring themselves more than 50% ready
SOURCE: ACPR[/caption] Encouragingly it is the pillar on which most progress has been made since 2012. The 41% of participants who said they were “more than 50% ready” last year compares favourably with the mere 9% reported in 2012 (see chart). The ACPR also ran a Solvency II reporting exercise in 2013, which may account for the dramatic increase in preparation work. Over 90% of the market responded to the exercise and the ACPR intends to go beyond the reporting thresholds set in the EIOPA Guidelines. “Obviously we don’t want to go back from this good result. But we will use EIOPA thresholds for the quarterly reports,” Mr Paserot said.