Practical lessons in preparing for Solvency II

The plenary session was opened by Neil Cantle, who applied theories of behavioural enterprise risk management to own risk and solvency assessment (ORSA).

Mr Cantle said: “Modern business is complex and fast moving, especially in financial services. People suffer from biases in the way that they perceive and assess risk. Yet most risk frameworks still rely quite heavily upon those people’s views. Applying science from complex systems, and diverse areas such as psychology and bio-informatics, it is possible to bring rigour to the study of risk by compensating for biases and looking beneath the surface of headline performance. These techniques help to identify and understand the all-important interactions occurring between risk factors and to provide early signs of unusual company performance.

“Typical risk systems at worst look for outcomes, and at best look for individual drivers of those outcomes. In order to spot emerging risks, early research points to the need to look for the interactions between risk factors and to understand how they can generate uncertainty in the delivery of business goals.”

Paul Martin, of Catlin, continued the session with a presentation on his firm's involvement in the IMAP (internal model approval process) pilot scheme, explaining what he saw as the benefits of the process. Mr Martin said: "Catlin chose to enter the IMAP process as early as possible because we believed we had already made significant progress towards a group-wide integrated risk management and capital modelling framework. By seeking regulatory approval for our model we would ensure that our regulatory capital would reflect our specific risk profile. Although the IMAP process is a significant work program it continues to challenge and develop our thinking with regard to risk and capital management."

Vishal Desai, senior actuary at the Financial Services Authority, provided a perspective from the regulator. Vishal highlighted some of the key lessons learned from Basel II and the implementation of the Capital Requirements Directive (CRD) and how the FSA has attempted to reflect these in the design of its pre-application framework.

He said: “Pre-application is proving to be just as positive and informative an experience for us as a regulator as it is for firms intending to apply to use an internal model.  The ability to compare and contrast firms' approaches is also informing our view as to how firms may evidence satisfaction of the Directive's internal model tests and standards. Usefully, pre-application is providing us with early sight of potential areas for review with individual firms. Collaboration with other supervisory authorities is also gathering momentum and will no doubt pave the way for more effective group supervision down the track, looking more widely than just model approval.”

He added: “The FSA doesn’t view IMAP as a mere box ticking exercise and firms should not either."

The GIRO conference took place at Celtic Manor in Wales from 12-15 October 2010.

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Enquiries: Tel. Michael Scanlan on 020 7632 1453 / 07798 804 871 or email michael.scanlan@actuaries.org.uk

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