Bringing Solvency II alive in the boardroom are you doing enough?

Transcription

1 FINANCIAL SERVICES Bringing Solvency II alive in the boardroom are you doing enough? Results and commentary from our Solvency II Board training and communications survey July 2012 kpmg.co.uk/solvencyii

2 Foreword Many insurance companies are grappling with what the regulators are expecting from Directors in relation to Solvency II and what can realistically be achieved in the remaining time. Boards need to have the necessary skills and experience collectively, to be able to move past the numbers, use them strategically to gain competitive advantage and manage the business in a volatile environment. Board training is all about preparing the Board for business in a Solvency II world and we undertook this survey to explore this further. We focussed on the extent of Board training carried out, the range of topics that Boards covered and also looked at how organisations are communicating the key Solvency II messages across the business and externally. Companies from both the Life and non Life sectors participated in this survey and we would like to thank them for taking the time to respond. Michael Crawford Partner, Head of Insurance Risk Phil Smart Partner, UK Head of Solvency II 2 BRINGING SoLVENCy II ALIVE IN ThE BoARdRooM 2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. Use of this system is

3 Contents Executive summary 4 Extent of Board training 6 Understanding and evidencing 12 Embedding the right behaviours 14 Now is the time to consider these questions 15 The crisis exposed significant shortcomings in the governance and risk management of firms and the culture and ethics which underpin them. This is not principally a structural issue. It is a failure in behaviour, attitude and, in some cases, competence. Extract from speech by Hector Sants, FSA, Chief Executive, 24th May 2012 BRINGING SoLVENCy II ALIVE IN ThE BoARdRooM KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. Use of this system is

4 Executive summary Using Solvency II to gain real strategic benefits brings it alive in the boardroom This survey provides a clear indication of the Board s level of Solvency II preparedness in UK insurance firms. The key messages are: The majority of firms are not yet doing enough to bring their Boards up to a suitable level of Solvency II understanding for both compliance and to steer the business. 80% of Boards have received less than 15 hours of training and only 19% are intending to increase the level of training in the next year. The bias to date has been on Pillar 1 which is perhaps not surprising given market pressures and the continuing Eurozone economic crisis. Those firms that are doing more and are able to move past Pillar 1 and into Pillars 2 & 3, are able to realise both the regulatory and commercial benefits, such as: The IMAP application will be smoother and face less challenge from the regulator; Better understanding of the 3 year business planning cycle and showing the dynamics of the risk profile in both strategic and quantitative terms; and M&A targeting and divestment activities leading to a stronger and more capital efficient balance sheet. our Solvency II Life Survey 1 highlighted orsa as one of the key areas of concern and this survey appears to support those findings. Although 57% have covered orsa already, an additional 26% of firms plan to undertake orsa training with the Board in the next year. having an effective orsa process in place and satisfying the demands of the Use Test are key to bringing Solvency II to life at the Board level, enabling strategic and regulatory benefits to be extracted from its implementation. only 30% of firms have covered the Use Test in training. Firms need to be sure that their directors have been appropriately trained for their role and ensure that both understanding and application is tested and evidenced to the FSA. There should be more emphasis on embedding change across the organisation setting the right tone from the top is an essential part of this. Setting objectives within Board members personal development plans is an effective way to support change - only 44% firms say they have done so to date. Many Boards are going to need to focus on both improving their collective level of understanding of the new regime, and ensure that they can demonstrate that they understand and are meeting the requirements. 1 Source: Solvency II Benchmarking Survey, Life Insurers, November BRINGING SoLVENCy II ALIVE IN ThE BoARdRooM 2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of

5 30% of firms have covered the Use Test and 35% of firms have covered IMAP 90% of firms have started their Board training 61% have a Solvency II communications plan in place and 33% have rolled out company-wide training programmes 70% aim to include Solvency II objectives in performance measures and reward structures across the business 44% intend to set Solvency II objectives in Board members personal development plans Questions posed by Julian Adams, FSA, April 2012, City and Financial Conference, London does the Board truly understand what would break the business? how are such risks quantified and reflected in the firm s risk appetite? What are the management actions which would be available should certain events occur, and how satisfied are senior management and the Board that they would be genuinely effective? 2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of BRINGING SoLVENCy II ALIVE IN ThE BoARdRooM 5

6 Extent of Board training The FSA expects the Board to have the appropriate skills and experience collectively to discharge its Solvency II responsibilities. Diversity and balance are key to delivering this. Boards need to receive a sufficient level of training, commensurate with their respective backgrounds and skills. What we have seen work best in practice is a mixture of training as a group and at an individual level. In practical terms this means: Individuals should focus in-depth on areas directly relevant to their Executive or Non-Executive role; Boards should collectively have a solid understanding of what the Solvency II components are and the implications for the organisation; Boards need to be collectively equipped to provide the required challenge and oversight and know what questions to ask, particularly on the internal model, capital management, pricing and reinsurance decisions. our survey appears to show a relatively small amount of Board level training, with over 80% of firms providing less than 15 hours training in 2011 (Figure 1). The survey also indicates that most firms do not plan to increase levels over the next year - only 19% are planning on increasing Board training whilst 24% are planning on maintaining the same level. 50% of firms have had one-to-one training sessions with Executives, and 56% with Non-Executives. This suggests Executives and Non- Executives have received about the same level of training is this right? Board members should know who to turn to within the organisation for expertise; and Figure 1Time spent on training in previous 12 months 35% 25% % of firms 15% 5% Number of hours 6 BRINGING SoLVENCy II ALIVE IN ThE BoARdRooM 2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of

7 organisations should check that the Board is adequately equipped to deal with the FSA s requirements Set out below is a summary of the extent to which key Solvency II implementation areas have been covered as part of Board training. Internal Model The FSA are likely to expect Board members, including Non- Executive Directors, to have a good understanding of the Internal Model. Specific responsibilities will include: Understanding its structure, how it fits to the business and its integration into the risk management system; Confirming that it appropriately reflects the risk profile; Understanding the model assumptions, limitations and diversification effects; Reviewing the model scope and purpose on a regular basis; Ensuring that the model methodology reflects the business and that this is applied appropriately in calculations; Approving the Internal Model application and, where relevant, approving the transition plan from standard formula to Internal Model; and Providing evidence, rationale and confirmation of model changes to supervisors. Approximately 60% of firms have conducted training on the Internal Model and QIS 5 implications (Figure 2). Given these are highly complex topics and that Boards have generally had limited training, organisations should check that the Board is adequately equipped to deal with the FSA s requirements in this area. Figure 2 Percentage coverage of the Solvency II topics Standard formula QIS 5 Implications Internal Model Number of respondents delivered Planned No response 2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of BRINGING SoLVENCy II ALIVE IN ThE BoARdRooM 7

8 Continued Extent of Board training IMAP submission The IMAP submission is made under a covering letter from the CEO. The Board needs to be confident that the contents meet Solvency II requirements, and also be able to communicate with the regulator. Experience shows that those firms which have a good understanding of the IMAP submission and its complexity have sought assurance (both internal and external) to give them comfort before sign-off. As part of the approval process the FSA will be interviewing Board members and, given the IMAP submission dates currently fall over 2012 and first half of 2013, we would expect Boards to be preparing now. only 35% of firms said that they had delivered training on the IMAP, with a further 35% planning on covering it in 2012 (Figure 3). Figure 3 Percentage coverage of the Solvency II topics IMAP Number of respondents delivered Planned No response 8 BRINGING SoLVENCy II ALIVE IN ThE BoARdRooM 2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of

9 Tax offers a real opportunity for firms to achieve capital optimisation advantages Tax implications overall, Tax is probably most closely linked to Pillar 1 activities. despite the potential opportunities on offer, Tax has received the least amount of training according to the survey - only 13% have covered it and 35% plan to cover it during the next 12 months (Figure 4). The Board should be considering their approach, their regulatory stance to tax and tax-relief and the implications of the decisions that are made. This offers real opportunity for firms to achieve capital optimisation advantages. Figure 4 Percentage coverage of the Solvency II topics Tax Implications Number of respondents delivered Planned No response 2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of BRINGING SoLVENCy II ALIVE IN ThE BoARdRooM 9

10 Continued Extent of Board training ORSA The importance of ORSA training cannot be underestimated, particularly given the anticipated level of regulatory scrutiny that the ORSA is likely to attract. The building blocks of governance in Solvency II mean that Boards are expected to focus on: Governance of key functions, including review and challenge of management information, reporting and policies; Understanding all material risks the firm is exposed to; and Articulating how setting the risk appetite links with the strategic planning process, and how it cascades through the business units and across risk types. our recent General Insurance Survey 2 highlighted the need for the Board to tackle difficult technical issues. Aligning the process for allocating capital with the Board s view of risk appetite will benefit the business, however this requires the right culture and a pragmatic view from the Board. The orsa incorporates all of these aspects to become a key tool in managing the business and we have already started seeing this work in practice in some firms. Boards must take an active role in directing and challenging orsa implementation. 43% of firms have not included orsa training to date (Figure 5), whilst 26% plan to provide training in the next year. The regulator expects the orsa to bring to life the links between risk and capital management and strategy. Boards must be able to demonstrate: An understanding of the orsa; What the orsa means for their business (both on a solo and group basis); and how the orsa is used to manage the business. Figure 5 Percentage coverage of the Solvency II topics orsa Number of respondents delivered Planned No response 2 Source: Solvency II Programme: Still fit for purpose? April BRINGING SoLVENCy II ALIVE IN ThE BoARdRooM 2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of

11 Reporting and disclosure is now becoming businesscritical and should be given more consideration Use Test The Use Test is intended to ensure that Boards understand the Internal Model, and use its outputs to manage the business. If Boards do not have a real understanding of the Use Test, they may risk not being able to challenge the entirety of internal model development or being able to embed it within the business. only 30% (Figure 6) of firms said that the Use Test had been covered. We would have expected this to be higher, given that 61% of firms have said that they have covered the Internal Model and the Use Test is a key element of model approval. Firms need to be confident that Internal Model training, including the Use Test, is fit for purpose. Figure 6 Percentage coverage of the Solvency II topics Use Test External Report / Stakeholders Reporting and disclosure Number of respondents Reporting and Disclosure External stakeholders, such as shareholders and analysts, will use newly disclosed information to assess the impact of the new regime upon the business. There are a number of business-critical matters to which Boards should turn their attention: What information about risks, capital and performance in the business will be available to the market, competitors and supervisors? What does the new information say about your business that was not previously disclosed? how will you use the information to manage your business more effectively? our survey shows that reporting and disclosure has not had a high priority with Boards (training on external reporting to stakeholders is 44%, and regulatory disclosures 22% (Figure 6)). Perhaps this is to be expected given timetable delays and that reporting begins after some of the other requirements need to be delivered. however, this is now becoming business-critical and should be given more consideration. Boards should consider in detail the reporting they will provide to both supervisors and the market to make sure the business is presented in the best light. delivered Planned No response 2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of BRINGING SoLVENCy II ALIVE IN ThE BoARdRooM 11

12 Understanding and evidencing Solvency II requirements mean that the Board will be expected to have a good understanding of the governance and assurance processes within the organisation, which will enable them to provide an effective challenge. Board members must be able to: Articulate the past, present and future capital, solvency and liquidity requirements of the firm; Understand and provide oversight on key issues such as setting strategy and other financial measures; Understand the market response to any adverse performance and link to risk appetite setting; demonstrate adequate level of questioning when performance does not meet expectations; and Understand investment management performance, and that asset quality and performance strategy is satisfactory. Testing Board understanding Appropriate forms of testing are essential to demonstrate both a good level of understanding of the Solvency II requirements and that they are embedded in the organisation. The objective must be to identify any gaps in knowledge or skill which can then be actioned. War game scenarios can sometimes be more effective than a formal assessment as it provides an environment that enables theory to be brought to life and for the Board to practice their understanding. More traditional forms of assessment can also be effective, such as questionnaires, one to one evaluations and on-line selfassessments. Individual training sessions may be preferable to group ones, as they can be bespoke and focussed on individual needs and roles. 12 BRINGING SoLVENCy II ALIVE IN ThE BoARdRooM 2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of

13 56% of firms stated that they were formally testing Board members on the extent of their Solvency II understanding Evidencing Board understanding Boards will need to produce evidence to demonstrate they have an understanding of the requirements. Can Board members evidence the following? Understanding of the key Solvency II concepts; Training details and levels of testing; Governance and engagement with senior managers on key conduct issues; Encouraging a culture of challenge where the senior management team spar with the Board; and decision-making, for example robust discussion undertaken by individual Board members on key issues. Good sources of evidence are: Training plans: incorporating key topics, length of sessions and the timing of the topics covered. Firms should be able to demonstrate that there is a plan, training has taken place, and that it has been effective. Review and challenge: Board meeting minutes document the discussions and challenges that have taken place. It is key that minutes record details of the decisions made and how the Board is making use of management information KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of BRINGING SoLVENCy II ALIVE IN ThE BoARdRooM 13

14 Embedding the right behaviours Firstly, and most importantly, there needs to be an effective Board that sets the right tone from the top Hector Sants, FSA Chief Executive Cultural change and setting the right tone Effective governance and setting the right tone from the top must become part of the overall culture. It is important that behaviours of the Board are taken into account rather than focussing solely on the technical aspects. Training, or elements of coaching, should also be focussed on this. To support these behaviours, we would expect to see Solvency II specific objectives within Board members personal development plans - our survey shows that at present only 44% of firms have plans for this. Right behaviours include being able to ask the right questions and interpret information - challenge is important. Where the Board is involved in the orsa dry-runs, we have seen this drive new behaviours at both Board and supporting team levels. Company-wide communication and training Communication plans should be integrated within a longer-term campaign to ensure a risk culture is embedded into the organisation. Plans should be tailored to meet the specific needs of an organisation having clear objectives and timelines. This is necessary to raise awareness of Solvency II and the changes that will impact specific stakeholder groups across the organisation. 39% of firms indicated that they do not have a formal plan in place and only 33% have actually rolled out company-wide training programmes. however, it is encouraging that 70% intend to embed Solvency II objectives within performance measures and reward structures - although this must be combined with an overall communications plan. 45% of respondents are actively monitoring behavioural and cultural change across the business as part of Solvency II implementation 14 BRINGING SoLVENCy II ALIVE IN ThE BoARdRooM

15 Now is the time to consider these questions Do you feel you are setting the right tone from the top for Solvency II implementation? Is training proportionate i.e. focussing on priorities, both at overall board and individual level? Are you making it real e.g. dry runs, war games etc? Do Board members know which questions to ask on technical issues such as internal models, capital management, pricing and reinsurance decisions? Can you articulate how risk appetite setting is linked to the firm s strategic planning process? Does your risk management information allow the Board to enhance and optimise decision-making? Can you evidence the extent of robust discussion undertaken by individual Board members on key issues? What level of independent assurance of Solvency II compliance has the Board received? How have you cascaded the key messages through the organisation and started to change the risk culture? What steps are taken to ensure that there is consistency in strategic communications with stakeholders and Solvency II disclosures? our advice is that firms must take the initiative now, rather than waiting for more clarity and failing to stand up to supervisor challenge BRINGING SoLVENCy II ALIVE IN ThE BoARdRooM 15

16 Contact us if you have questions on this or any other Solvency II issues Phil Smart Partner Tel: Michael Crawford Partner Tel: Nick Dexter Partner Tel: Danny Clark Partner Tel: Paul Brenchley Director Tel: Rob Curtis Director Tel: Andy Lyon Director Tel: Pierre-Francois Rodriguez Senior Manager Tel: Kim Mehta Manager Tel: Website www kpmg.co.uk The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. Printed in the United Kingdom. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. RR Donnelley RRD June 2012