Hi Gareth, welcome to the Actuarial Post. Before we delve into a typical day working with Solvency II could you firstly give our readers an insight into your background?
I came to Aon Benfield in November last year; previous to this I was working with Solvency II at Goldman Sachs where I was advising Insurance clients on optimal investment strategies under the Solvency II framework. Before this I was at Benfield doing some work in Solvency II, so I have been in the field for a long time. The new team at Aon Benfield is called Risk and Capital Strategy and the focus is on advising our reinsurance clients on how to optimize their balance sheet under Solvency II, so thinking about both assets and liabilities, and obviously on the liability side what reinsurance strategies will be most effective under the new regime. The day to day focus is helping our clients get ready for Solvency II, helping them to understand what strategic changes they need in their business and then if the time is right we can help them make those changes. Obviously, with the delays to Solvency II at the moment it is very much in the planning and getting ready in order to know what the real challenges are rather than necessarily jumping the gun and doing anything too soon.
What were you doing before Solvency II, what is your initial background?
Originally I was a mathematician and I am also a qualified investment actuary. I have had quite a lot of IT focus in parts of my career, so I have worked at length with software in the actuarial profession. For instance, at Benfield I originally worked in the ReMetrica capital modelling system area and I developed a large proportion of the business logic in ReMetrica to do with things like investment.
Your background involved investment and IT, so what initially drew you to Solvency II?
Within Benfield ReMetrica was a leading platform for essentially building models of both assets and liabilities for insurance companies; and in the UK the main focus at that time was the ICA, the Individual Capital Adequacies Standards, so we used ReMetrica to build these models under that framework. When the UK industry started looking towards Solvency II, we started to develop ReMetrica to be a tool to work out what we needed to put in place to meet all of the requirements of the updated regulations. So it has been a natural progression into Solvency II in that we were there before Solvency II and have been there throughout the transition period as it started to become more concrete.
Well thank you for giving a little background on yourself, could you now give our readers an insight into a typical day working with Solvency II
Each day can be very different, the Risk and Capital team get involved in many different things as we sit behind both the broking part of Aon Benfield and the Analytics. This enables us to support both areas in terms of methodologies,as well as doing a good deal of client facing work as well, so it can be an interesting place to work.
I typically start at 8am thinking about what is happening that day, catching up on emails I may of missed overnight, because we work closely with the US, and seeing if there has been any news stories relating to Solvency II that have broken during the night, sometimes it happens! The whole team then sits down together to discuss any key objectives for the day and then, as we usually have a couple of client meetings each day, we ensure that we are prepared by ensuring that certain materials are already printed and are ready to go.
We then might have some internal meetings, talking to senior brokers about particular clients or prospects and talking in general to different teams. We often join the weekly broker team meetings which are usually at about 8.30 each day and each team has a meeting on a different day so we try to join those meetings to brief the brokers on what is happening in Solvency II; the key things they need to know for their clients so that they are well informed on Solvency II. Then, alongside internal and external meetings, we obviously have projects which we are working on which can be in several areas. Some of it is related to the development of tools and methodologies, so as I mentioned we have ReMetrica which is our internal Solvency II model platform, and my team is very much focused on building up the capabilities which are needed as Solvency II changes and evolves. This involves building up new calculation methodologies within the Kernel to work on specific client projects that have issues with Solvency II. We can help them understand what is driving the capital in their balance sheet and how we can try to reduce those capital requirements through different asset and insurance strategies, and we then build presentations to demonstrate to those clients explaining our findings and to propose solutions.
Then there will be projects related to clients who we are further down the line with, so where we have already had those initial discussions and they actually want to implement some sort of Solvency II related solution. Often these are quite long term projects, for example the average solvency ratio under Solvency II is 165% across Europe under the QIS5 results, and if your company is only, say, 120%, you probably do not feel too comfortable as you are not in line with your peers. Add to this a time where there is a big market event, such as the Greek bonds default which has an impact on equity markets and corporate spreads and your assets go down in value, you could easily fall below that 100% level and then you have issues with your regulator. We take an insurer who completed their QIS5 study last year and perhaps found that they were only just meeting the requirement or they weren't at the level they wanted to be, and as it is important to build up a healthy cushion above the SCR level in Solvency II capital requirement, we therefore help clients think about how to achieve that cushion and then help implement a strategy to keep them on track. This, however, can be quite complex if your premiums are growing every year, and as risk grows with this you therefore need to inject more capital or have a dynamic reinsurance strategy over that period.
It's quite a dynamic environment and there are a big range of projects which we are doing throughout the day. As the day progresses we have a mixture of client meetings, analytics projects within the team, and also work with the general analytics at Aon Benfield. As the risk and capital team is a specialist function within Europe, we are supporting all the different analytics offices and broker offices throughout the whole of the continent, but as we cannot do everything we are working together collaboratively with other actuaries in Germany, Belgium and France and doing joint projects by assisting them and getting them up to speed with the bits of Solvency II that aren't necessarily easily accessible to everyone. Through this we are providing a lot of knowledge transfer and doing a great deal of internal training, and we are trying to make sure that every office has two actuaries who are the Solvency II 'Champions'. That in itself is a massive challenge because there are many offices across Europe, it's a lot of travelling, so on average we spend 25% of the month not in the UK, in different offices or with different clients across Europe.
What would you say is your biggest daily challenge when working with Solvency II?
I think time management is the biggest challenge, particularly in this role. I have people calling me from many different offices, and we have hundreds and hundreds of brokers across Europe all speaking to clients about Solvency II issues; due to the fact that solvency II is the number one issue which is on the insurers minds at the moment. There is a huge volume of contacts across Europe and trying to carefully manage time so that we are able to delegate appropriately across different offices is tough. In a typical day there is a large volume of internal and external meetings, so ensuring there is time available to direct the team properly in carrying out the analytics work in the background, and plan ahead correctly, is essential.
What would you say is the one thing you see on a daily basis which Insurers should be doing but perhaps are not doing in respect to Solvency II?
It very much depends on the insurer, the bigger insurers have very large teams of actuaries and contractors working on Solvency II, so the bigger companies are much more up to speed, particularly in the UK most are ready to go. Then at the smaller end of the market there are quite a few companies who are not prepared and when you think about the way Solvency II works, it rewards diversification and penalises being a monoline, so some of the monoline insurers are probably quite worried, and rightly so. If you compare the amount of capital needed to provide five lines of business instead of one there is a very big difference per unit of premium.
You spoke of the delays to Solvency II, what are your thoughts on the implementation date seeing as that a recent Aon study saw that 60% of European Insurers think 2014 would be a better starting date for Solvency II?
There is probably some frustration in the UK about the delay as people have invested substantially in this project only to find that, through no fault of their own, that the delay erodes some of the value that has been added by pushing ahead. We had an international analytics conference in which we invited around 100 different delegates representing different insurers and 60% of those voted that they felt 2014 would be a better date. This was interesting due to the fact that as we were preparing our press release the actual date was proposed by the European Council to change to 2014. The European Council have a pretty strong voice in regards to this, but there is still a lot of uncertainty.
I think Omnibus II is a key part of this. This is the process by which some aspects of Solvency II will be delayed past the start date; so what will kick in from day one and what takes maybe up to ten years to be fully phased into the rules is still surrounded by uncertainty. I think the UK FSA have been quite vocal recently about trying to work towards 1st January 2013 because I believethat legally the date at present remains October 2012, which was originally stated in the European directive. Omnibus II was supposed to change that date but until this happens then it still is October 2012. The FSA have obviously invested a lot in Solvency II and they have one of the more established teams out of all the regulators so they are probably keen for the UK industry to move ahead. It's quite painful to have the ICAS process to run side by side Solvency II because we just want to move on and get onto the new rules really.
You have mentioned that there is a great deal of uncertainty surrounding Solvency II, how do you deal with this uncertainty on a day to day basis?
Every couple of months or so you get an email with 10 or 15 consultation papers which the European bodies have produced, and when you receive a large set of consultation papers we have to react very quickly, digest the information and work out what really matters to our clients. We then try to get messages out very quickly on what it means and what they need to do to react to that. The volatility of Solvency II comes periodically, there could be a period of silence and then suddenly a big announcement is made. The next announcement we are waiting for is the changes to the QIS 5 standard formula; from the CAT side there is a specialised taskforce who are working on changing part of the CAT formula, the level two implementing measure is still in draft and has not been published yet. Everyone inside the industry does see draft versions but we cannot comment on them publicly and we cannot direct our clients to make any changes until the final version comes out for public use. There will still be big changes to come.
With the current turbulence in the financial markets, do you think that this crisis could impact the shape of Solvency II, or the way it will be implemented?
Who knows? It is a hard one to call. I think one of the biggest criticisms of some parts of Solvency II is the assumption that sovereign debt is risk free. Under the European directive for Solvency II, which is in law, there can be no capital charge for EEA sovereign debt. That means that, for example, with the Greek debt, there is no requirement to hold any risk capital to support the possibility of downgrades that spread risk inherent in that. Perhaps that could change, if the stress test that was done on European insurers included a test for sovereigns. Maybethat's an indication of things to come for the final version of Solvency II.
Do you think the unified system applied across Europe will be better than a single system per country and, hypothetically speaking, in the absence of Solvency I and the European directive would the industry of steered towards a unified system anyway?
There are definitely advantages to having one system applied across Europe, obviously there is single currency in most parts plus a lot of cross border activity and obviously reinsurance is global, so having a single regime is helpful in terms of minimizing the regulatory burden for groups who operate in multiple areas. Where would we have ended up if we were not a single system? Well the UK was already far down the road with a risk based capital system but I suspect that the rest of Europe would not have moved on very much. The rating agencies have also been pushing this quite heavily over the years for ERM and they are starting to incorporate the capital coming out of internal models in their rating process, in all probability we would have ended up somewhere similar to where we are now. But having a European wide Solvency II directive has accelerated the process far beyond where it would have been otherwise.
Well thank you Gareth for taking the time to speak with us and giving an interesting insight into your daily life working with Solvency II. Hopefully the uncertainty will clear and Solvency II will soon be upon us!
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