The pioneers in green – guest post

In this guest post, Allan Christian, author of the Governance Matters blog shares his thoughts on Solvency II in Ireland and reviews a presentation given by Matthew Elderfield, Deputy Governor (Financial Regulation) of the Central Bank of Ireland in May this year. Allan is quick to post insights and views on Solvency II. His richly sourced and detailed blog is both a good read and indeed an “online repository for Solvency II”, as its tag line says. ——————————–

The pioneers in green

[caption id="attachment_1585" align="alignright" width="136"] Matthew Elderfield, Deputy Governor (Financial Regulation) of the Central Bank of Ireland[/caption] The change in tack of the Central Bank of Ireland from its rather cuddly predecessor, IFSRA, has been as swift as it is has been uncompromising since the arrival of Matthew Elderfield from the Bermuda Monetary Authority in October 2009. Mr Elderfield has spoken publicly of his shock upon taking the job at staffing levels and, despite the Celtic Tiger being reduced to an incontinent house pet, has embarked upon an extensive recruitment drive, coupled with a root and branch in-house reorganisation, in order to keep up with international best practice. This at a time when the 300+ (re)insurance undertakings supervised on the Emerald Isle are preoccupied with the small matter of Solvency II preparation! Whilst most of the ire and fire of the Central Bank has been directed squarely at the Irish banking industry (the authors of the country’s misfortune), the desire to produce ‘best in class’ regulation to counter ‘worst in class’ banking governance has the potential to cramp the style of the systematically insignificant insurance industry, who are already second-guessing at how the Level 2 and Level 3 guidance and EC Green Paper direction may need to filter in to their governance structures. However, my initial read on the Irish Corporate Governance Code was actually one of gratitude – the proposals pretty much ticked the Level 2 boxes, but forced the changes into a much shorter timeframe, reducing the scope for the executive heel-dragging that the shifting Solvency II timescales has sponsored. With the code now in place, it was with great interest that I read the presentation of Matthew Elderfield at the European Insurance Forum last week on Ireland’s changing regulatory landscape, looking to see what phase two of Elderfield’s grand plan had in store. I have blogged on this presentation, but a couple of issues which were raised are worthy of elaboration from a Solvency II angle;

• The “Gaping Hole” of Irish Fitness and Probity standards – having read the Level 3, specific Solvency II requirements are ‘to be developed’. The rest of the section mirrors existing FSA requirements, and as the Irish have borrowed heavily from these, they should comfortably fill this hole. Literal application of the new code is causing a few rumblings however.

• All VA providers forced to enter internal model process – the compulsion for VA providers to model is fair in principle, but as model approval is far from guaranteed, I would like to know what the response will be to any Irish-based VA providers (of which there are many) who are thrown out of the process.

• “Invested in building up staff levels” for Solvency II – the Central Bank headcount increase since his arrival, whilst not busted out to cover Solvency II staff, is impressive. That said, the level of Solvency II output (as highlighted in the 2010 annual report released this week) is fairly underwhelming and reactive.

• Wants consideration for “phasing particular [Solvency II] obligations” – I haven’t found specific reference to any transitional arrangements he may favour, but as he sits on EIOPA’s executive board, his views on this will carry considerable weight, and are worth tracking.

[caption id="attachment_1586" align="alignright" width="227"] Central Bank of Ireland, Dublin[/caption]

• “Middle Course” for the inclusion of EPIFP (expected profits included in future premiums) in Tier 1 Capital – In the QIS5 summary, most Irish companies were happy with full inclusion in Tier 1 (though due to the contract boundaries issue, most reported zero EPIFP!). It remains to be seen where this will end, but the lobbying from the CEA has been fiercely supportive of full inclusion.

• “Judgement calls” on correlation matrices more significant than risk buckets– I found thiscomment hugely significant, as it could be indicative of a shift in focus in the Irish model approval process. The expert judgements used to create correlation pairs, previously terra firma for the actuarial function, could potentially get the five star scrutiny treatment, so I would strongly recommend collecting evidence of validation of the process without delay.

• Internal Model Levy – Whilst the model-specific industry levy is now fairly equitable on the FSA side, there is no indication as yet as to who is footing the bill for the Irish model levy (i.e. participants only, or all undertakings). I look forward to hearing more on this.

I see the work of Mr. Elderfield as pioneering in many ways (PRISM, Risk-based supervision metrics and the Irish Annex of the corporate governance code) though the consultation processes seem to be very much cosmetic exercises under the new regime. What price we are looking at a future chief executive of the Prudential Regulatory Authority once Mr Sants calls it a day? He is of course ex-FSA, and while attention is frequently drawn to his involvement in Northern Rock’s supervision in 2007, the theoretical quality of his recent work and his ascension to the EIOPA management board couldn’t have gone unnoticed. The author is owner and principal of Governance Matters, a Solvency II, Ernterprise-wide Risk Management and Corporate Governance consultancy firm focused predominantly on the UK and Ireland. The views expressed are the author’s own. ]]>