Managing capital through the fog of Solvency II

Transcription

1 Managing capital through the fog of Solvency II Delays and doubts about Solvency II implementation have created fresh challenges for insurers in managing their capital. In this InsuranceERM/Towers Watson roundtable, participants discussed how it can be an opportunity to do things better Participants Graham Fulcher, practice leader, P&C UK & Ireland, Towers Watson Ian Farr, global ERM product leader, Towers Watson Julian Ross, chief risk officer (CRO), Talbot Heloise Rossouw, head of Solvency II, Old Mutual Mark Chaplin, group enterprise risk manager, Aviva Simon Gadd, group CRO, Legal & General Justin Skinner, enterprise risk management director, QBE European Operations Penny Shaw, CRO, Hiscox David Weymouth, group CRO, RSA Andrew Pryde, CRO, Beazley Chaired by Peter Field, InsuranceERM We see the opportunity to ensure that what we do adds real value to the business, as opposed to following a quasipolitical timetable David Weymouth, RSA Solvency II becomes less of a distraction Field: What are the general effects of the delay in Solvency II implementation? Gadd: I think it has to be considered now if, not necessarily when, it comes in. I think that gives a slightly different emphasis in terms of how much priority you give to it. It has probably had a disproportionate amount of emphasis in all of our firms over the last couple of years, and distracted some of us from our core role of developing risk management capability. I think now there will be less of an emphasis around necessarily Solvency II as such, but more an emphasis on risk-based capital generally on a more economic basis. Field: How would that differ from what you would have done had you been preparing for Solvency II for next year, say? Gadd: Probably less time for arguing about the rules and more time thinking about what we think is the right basis for our risk-based capital. Ross: For us, a Lloyd s entity with Bermudian parent, our capital management will be no different over the next few years because it s not driven by Solvency II. It is driven by our desire to maintain our rating from the rating agencies in the US, which is no different now from how it was pre-delay, obviously. Chaplin: In some ways there is no change, just the benefits we were hoping to get to where there was a greater alignment between the regulatory regime and our internal economic capital-based measures have been pushed further out, and perhaps even called into question. That can create tensions, simply because you are trying to serve two masters or operate to two regimes. Those regimes can conflict, particularly in the life business in some of the continental European countries, where the local regime and the focus on book value accounting and smoothing is quite different and incentivises quite different risk management actions to those incentivised under an economic capital-based regime. Skinner: On the non-life commercial side, regulatory capital is less relevant, so any delay to Solvency II doesn t make a difference. It is all about rating agencies managing the economic capital, which does have some alignment with the regulatory capital, but unfortunately not a huge alignment. A number of these insurers would breathe a sigh of relief, because it means they can take longer over projects and they can do model development over a long timescale. You do not need advance permission from the FSA [Financial Services Authority] for restructuring, and then a six-month model-change approval process. It makes insurance companies focus on what is important, which is managing risk, not doing submission after submission and reviewing consultation papers. Weymouth: We see the opportunity to ensure that what we do adds real value to the business, as opposed to following a quasi-political timetable. In particular we believe that Eiopa [European Insurance and Occupational Pensions Authority] should reassess the burden of reporting, which is particularly onerous for those businesses with a multi-national corporate structure. This is also the area where we have slowed down our systems investment. Dealing with the doubt Field: How do you make a business plan that deals with the doubt about when Solvency II comes in? Ross: I think it is somewhat academic. Our regulatory capital regime is already quite like Solvency II. So much has been invested in this by the FSA, and in our case, Lloyd s, that it will carry on looking something like Solvency II. Rossouw: A large part of our business is in South Africa, so we are in a different position, given that SAM, which is the South African version of Solvency II, is going ahead with dual reporting during 2014 and a go-live date of 1 January Our South African business is preparing for this date, and well placed given the work that has been done in preparation

2 The change of regulatory regime and the harsh calibration of Solvency II is just another stress that you test your plan against Simon Gadd, L&G for Solvency II. We perform economic capital calculations twice a year, and are focussing on further embedding and integrating our economic capital model within our business. Chaplin: There are clearly some very technical debates around particular issues in Solvency II that will possibly have material effects on how we see our business. But provided we get a sensible outcome on Solvency II, it does not really affect us that much. We are not taking for granted the ability to remove some of the additional regulatory constraints that exist under Solvency I, and are managing the two measures until we see potential progress on some of the sticking points. It is more a case of hoping for the best, but planning for the worst, with a continuation of the two regimes at the moment. Fulcher: Are you finding that the bad way in which Solvency II is being implemented acting as a stress on your business? Gadd: Yes, it is a stress. You have your plans, and then you stress your plans for a variety of different outcomes, and the change of regulatory regime and the harsh calibration of Solvency II is just another stress that you test your plan against. Weymouth: Faced with regulatory change you always need a set of good planning assumptions. In our case we have a plan that says if Solvency II were to be implemented on 1 January 2016 we could meet the deadline. You work back from that assumption, have a series of checkpoints and you say at this point I ve really got to press the button and do more stuff, depending on the state of knowledge at the time. In a way you are running two parallel universes. If it did happen and it happened in a hurry you have to be able to deliver it. The important thing is to manage investment with real care that every dollar you spend is worth spending in the event that Solvency II does not happen. That is easy to say but harder to manage. Chaplin: Reflecting our view of the importance of our economic capital models, we have renamed our Solvency II programme the Economic Capital Infrastructure programme. Effect of Solvency II on managing capital Field: But are you all saying that Solvency II did not have any effect at all on the way you manage your capital, or that you are doing it anyway but maybe tweaked it at the edges? Chaplin: There are various elements. Certainly one of the things we think about is how we manage our diversification benefits across the group and how we optimise that. Clearly, that will be different if we get to a position where a regulatory regime recognises that in a way that the Insurance Groups Directive and Solvency I does not. We still optimise it within those constraints under our economic capital regime, but we will be able to do more when we get to a regime that recognises diversification benefits. Pryde: Like most people in this room who operate at Lloyd s, it is business as usual, in that the 2013 underwriting year was capitalised using a Solvency II model. I think that was a good experience both for managing agencies and for Lloyd s. It probably involved more teams than the ICA [individual capital assessment] model not just the capital modelling team but the actuarial team, who for us sit outside the risk management function, and the finance team and so required much more collaboration to get to the capital estimate. It has improved understanding across the organisation. Fulcher: Do you think the Lloyd s businesses have gained from the fact that Lloyd s has accelerated the timescale, or lost? Skinner: It has probably dragged the market up to where it needed to be, so it is a positive in that regard. If I look at our company operation, I think Solvency II is 80-90% relevant for Lloyd s. It was a necessary evil to kick-start the market in the right direction. Shaw: When Lloyd s of London saw the first QIS [quantitative impact study] results, it must have caused considerable alarm, as it could have meant a significant capital increase for Lloyd s. Lloyd s well-run Solvency II programme was a reaction to a key risk. Okay, it did not actually materialise in the end or in the expected timescales, but Lloyd s just had to approach Solvency II in that definite manner. Pryde: I am not sure things would have happened automatically without Solvency II. If I look at Pillar II, I think there is much more focus around evidencing, and it has really driven consistency for us. We probably would have got there anyway, but Solvency II triggered the thought process, and created a target to work towards. I think most people sitting round the table would agree that the governance around the Solvency II model is far superior to an ICA model. The biggest benefit of that for us is bringing the business into the calibration and understanding how the capital model works. We had gone quite far with our ICA approach, but it helps ensure that committees and boards remain interested. More time for troubleshooting internal models Field: How do the delays affect the way you have to run your internal models? Skinner: We are a long way through the IMAP [internal model approval process] with the FSA, so we are now dealing with a number of difficult-to-deal-with issues that were left at the bottom of the pile. We can now take slightly longer to resolve them. I don t think we will change what we are doing in the internal model other than we can extend our final development push slightly. I think the FSA has acknowledged that there are things in Solvency II that are just not practical. You unsuccessfully try to implement it as per the regulation, and do not get an answer when you ask how others are implementing it. Partly because there is no right answer. There are three or four things that I can put in that category, and the delay will give us time to develop as an industry. Field: Can you give an example of a nagging issue? Skinner: There are two that have always jumped out at me. One is the realisation of reserve risk. Solvency II has one of the oddest risk measures from a non-life perspective, in that it makes no sense to say how much risk will you see or realise during the first year. Solvency II triggered the thought process, and created a target to work towards Andrew Pryde, Beazley

3 If you take something like asbestos, it took 30 years to manifest itself, so you would not have capitalised against it. From a non-life risk and capital perspective, Solvency II just does not work. As an industry, I do not think we are very far down the line trying to do this assessment meaningfully. The main issue with the models is spurious accuracy and detail masking big assumptions, which is possibly a systemic risk Penny Shaw, Hiscox The other one is my pet hate, which is diversification, something we have no data for, and yet drives a huge component of capital requirements. Fulcher: I remember many years ago in some forum where correlations were being debated suggesting to Lloyd s that they should just tell people what correlations they wanted managing agents to assume as otherwise people would largely be forced to make up the numbers. At the time Lloyd s did not want to go down that route but I think, with the benefit of hindsight, Lloyd s should have adopted that strategy. Ross: In effect, that is what Lloyd s does anyway through its benchmarking. Fulcher: Yes, but they do not do it explicitly. They do not just give their assumed correlations to the market. I think for diversification nobody, not even the largest managing agents, has enough data to parameterise correlations, particularly in the tail. Pryde: We take a slightly different approach, which is a drivers of risk approach of modelling the market cycle rather than using correlation matrices. This is a key design concept of our internal model due to our medium-tailed casualty business risk profile. The market cycle is indeed the first thing that Lloyd s itself talks about when they set the ICA guidance. Our approach of modelling the market cycle correlates classes and years of account naturally, based on how the business sees the risk. So when we come to parameterise our dependencies we have quite a lot of data because we have got 50 to 60 years of the US combined ratios, and we overlay our understanding how our portfolio has changed. This exposure-based approach provides a prospective view of our risk. Of course, the result has implied correlations, which we use to validate our approach. We find our drivers of risk approach easier to explain because that is how the business thinks about risk. Shaw: The problem with Solvency II is there is so much focus on the 1-in-200 or tail for all risk types and then the diversification between them, when we lack credible data to actually measure it. A benchmarking-type approach that is simpler to understand and compare across risks and companies would have won a lot of support in the industry board rooms. The main issue with the models is spurious accuracy and detail masking big assumptions, which is possibly a systemic risk. The real value for business in all these models is that they measure volatility around the mean. That is something that we did not as an industry routinely have before. Everybody had their business plan and a prospective assessment of capital to support the plan, but now we have a tool to look at volatility around the business plan, i.e. the probability of making a loss. That is actually much more interesting information. Pryde: We have set risk appetite at a 1-in-10 likelihood which focuses the board on the risks they have under their watch and what earnings volatility they are prepared to accept. Traditional risk management techniques have a two-by-two matrix of frequency and impact. But I have always struggled with trying to compare risks on a frequency dimension. How do you financially compare a 1-in-50 likelihood with a 1-in-100 likelihood? So when we set risk appetite we focus on the earnings volatility at one point of the distribution, the 1-in-10 earnings, for each of our 57 risk buckets, and we manage against that. That in itself takes us straight back into your point; what risks are we facing now rather than what might happen in a 1-in-200 event. Our view of the 1-in-10 and 1-in-200 gives us a good range on the distribution, which we probably did not have under the ICA regime. Getting used to the use test Field: Do any of you feel you need to fundamentally change your approach? Ross: This delay gives us an opportunity to enhance how we comply with the use test. This delay is very much the way that Pillar I should have been implemented from the start, in a phased way. One of the disservices done in Solvency II to my mind is that by being increasingly theoretical and prescriptive, it ignores how things are done in practice. For example, part of the validation process is for many people in the business fully to understand the internal model, what goes in and what comes out, and to offer feedback. That positive feedback causes you to change some of the inputs, and to decide you can use it here and you cannot use it there. Trying to rush to a day-one big bang implementation to my mind just does not work. You are not really going to get much use and value out of a model that way. Weymouth: I would agree. You are more likely to get business more engaged in working on risk-adjusted capital measures with a greater time period than banging it through and saying, This is Solvency II, here are the use-test criteria, because they will get to understand it and see the value in it. Skinner: Australia s regulator, APRA, has phased-in their Solvency II equivalent more naturally. They said, Here is the regulation, here is what you have got to do to have an approved internal model, and companies took three or four years to digest what those requirements were, and it probably has achieved a better outcome. ICAS+ raises questions over capitalisation Field: What has been your reaction to ICAS+, the invitation from the UK Financial Services Authority to use Solvency II work to meet the individual capital adequacy standards (ICAS)? Fulcher: My first thought is that the ICAS+ regime is an option in this case the option, but not obligation, to use a Solvency II model to set capital ahead of the formal introduction of Solvency II. And if something is an option with a real chance of some firms wanting to exercise it, then it has to have some intrinsic This delay is very much the way that Pillar I should have been implemented from the start Julian Ross, Talbot

4 value. In terms of how firms have reacted, some have realised that although they would like to exercise this option it does have some implications and means that in some cases they are going to have to use their Solvency II models in anger to produce real numbers, earlier than they had been envisaging in light of the delays. I do not think that that applies to Lloyd s; at Lloyd s, the Solvency II models are already being used in anger, both by Lloyd s for capital setting and by individual firms for management decisions. Ross: From a Lloyd s perspective, the thing that surprised me about ICAS+ was that we turned our ICA model off several years ago. Our Solvency II model can calculate capital on an ICA basis and a Solvency II basis. I was surprised that it appears to be a big deal and that firms might still have two models, where one only does one thing and one only does the other. Shaw: It may become popular to go back to the ultimate capital measurement approach of a UK GAAP/IFRS balance sheet. If everybody is turning on their ICA models and comparing to a Solvency II one-year focus and Solvency II balance sheet, this may openly question the appropriateness of one-year value-at-risk and the Solvency II balance sheet. Skinner: I hope it does. I think that Solvency II is the only regime that has the one-year reserve risk. ICAS+ is the only thing that pushes it back towards a more sensible view of measuring capital, which will be good. Ross: At the risk of saying Lloyd s again, if you are at Lloyd s, then club rules apply: you are capitalising on an ultimate basis anyway. Fulcher: But if you actually try to implement it practically, you realise it is too dangerous to do. For instance on a one-year basis you could write extremely long-tailed liability risk with almost no capital at all. The chance of anything emerging in the next 12 months to change your view of reserves is almost nil. But would any firm be happy to write this business with no capital? No, I do not think that anyone would. Chaplin: You can get into quite complicated debates as to the logical consistency of adding capital numbers calculated on a run-off basis to capital numbers calculated on a one-year risk-adjusted basis. But clearly it is no worse than where we have been through the ICA regime since 2004 and I do not see that necessarily as a particular problem. The only hesitancy from a multinational group perspective is that obviously ICAS+ is a UK regime, and I am not quite sure how that will ultimately interact with the activities of the other supervisors within the college. The FSA has acknowledged there are things in Solvency II that are just not practical. Justin Skinner, QBE Field: What has the FSA said about the deadlines for IMAP [the internal model approval process]? Skinner: The FSA said that they want to see you draw a line under the IMAP process round about mid-year and, at that point, an internal panel will give us pointers on what is good and what is not quite so good. Then we will move to an ICAS+ regime. Gadd: For us, they intended to give us feedback on the IMAP through the ICAS+ process, as we are using pretty much the same model. How the PRA will consider internal models Field: Will there be much change when the Prudential Regulation Authority (PRA) comes in, especially in relation to things like internal models? Skinner: One of the first things that the PRA or the Bank of England started looking at for Solvency II, was introducing the pre-corridor minimum capital requirement (pmcr), which in essence was saying when the internal model capital goes beyond a certain point, the PRA will start investigating you. There was a certain amount of scepticism that as soon as you have an internal model regime, people will game the system and drag down capital levels in the insurance industry. My perception is that capital levels did not drop following the ICAS regime in 2004, so this measure seems inappropriate. Chaplin: That is not what is quoted by the FSA. The FSA claims to have done the analysis and found that ICA requirements have gone down significantly. Fulcher: I think that it is inevitable, given where the Bank of England is coming from, it is going to take a far more sceptical view of internal models, particularly where those models produce lower capital requirements than the regulatory benchmark of the standard formula. Pryde: I think that on the Lloyd s side, the capitalisation levels have not reduced. If anything, they have probably been more appropriate for the stage of the cycle that we are in. Chaplin: But the capital reduction is a bit of a red herring in some ways, as I think that there has been substantial de-risking activity. So reduction of capital is a natural consequence and even evidence that the regime has appropriately incentivised more active risk management. It is clear that the PRA is thinking more broadly and learning from the bank regulation experience. I do not think that there is a rejection of internal models as providing useful information; it is just recognition that you need a broader spectrum of supervisory and risk management tools. Farr: Perhaps the UK industry and the FSA underestimated the amount of work required to establish an internal model. Lots of companies were encouraged to go down that route and then found that actually it is extremely onerous for the regulator to get comfortable with the internal model and for the company to provide backup for it. With the use test, it s not genuinely going to be satisfied within a year; it will be potentially three or four years before the model is truly bedded in. Perhaps it is worth stepping back and saying, We have developed internal models, but now we need to think more carefully about their role, both in a business and a regulatory context. Weymouth: Regulators in some European countries that I talk to will question why we are using an internal model when the local norm will be to use the standard formula. They are concerned that it seems unnecessarily complicated and are slightly sceptical. Shaw: I think the PRA should consider doing It is inevitable that the Bank of England is going to take a far more sceptical view of internal models. Graham Fulcher, Towers Watson

5 It is clear that the PRA is thinking more broadly and learning from the bank regulation experience. Mark Chaplin, Aviva a revised standard formula as quite high on their agenda. They have ECR [enhanced capital requirement], they have QIS figures, but where is the mid-point? It would be a bit more sensible to be more risk-based where you know the correlation structures that you have imposed based on industry analysis and based on the data, and tell companies to stay between risk categories. The importance of rating agency capital Field: Will rating agency capital become more important? Skinner: For non-life commercial business, the rating agency capital has always been the important piece. Solvency II is a lost opportunity; I was hoping that rating agencies would look at Solvency II and say, You delivered the Solvency II model; we are now going to use the Solvency II internal models as part of our methodology. The option is there for them to do it, but I do not think they are pushing it particularly hard. It is a bit of a shame, and Solvency II means that rating agencies may take internal models less seriously in the short term. Fulcher: Yes. I think that one of the downsides of Solvency II could potentially be the slowing of the convergence of rating agency capital to economic capital. The rating agencies were starting to engage with economic capital and had plans to start reviewing and using internal models more seriously in their capital assessment. Shaw: Boards are expected to know minute detail on internal models but what about boards understanding of other capital models i.e. rating agency, etc? I have done an exercise recently and compared the SCR [solvency capital requirement] with various standard formulas out there Standard & Poor s and AM Best s, and others. They are really very different, and I think communicating the key differences and discussing why they are different and who the winners and losers are would be useful, as these are used across the industry to measure credit risk exposure to other companies. Pryde: One of the things that I have put into the ORSA [own risk and solvency assessment] is the different capital metrics that we are measured on, and each one is slightly different. The risk is the same, but you have the standard formula, the internal model and the ratings agencies... Shaw: They can certainly be north of 20% to 30% different. Pryde: They can be very different. If you are a board member trying to work that out, you can end up managing your business to the worst common denominator, as it were, which is generally now the rating agencies. Ross: I think that many people, especially in Bermuda, would see the rating agencies as de facto regulators. I know they are not regulators, but I think in many instances rating agency capital is effectively the driver of capital. For example, although we hold more than that, we would not hold less than the amount that is required to maintain our target rating. We need to make sure that we get the right judgements into the calibration process. Ian Farr, Towers Watson Field: Why do rating agencies still have that power when they have come under so much criticism? Ross: People who buy insurance generally have no other credible means of assessing the credit worthiness of the people that write it. Weymouth: If you want to write commercial business with mid- and large-sized companies, it is very straightforward and they just will not let the business be written with you if you do not have the right rating. Farr: The regulators in the US appear to set their rules slightly differently; rather than trying to set a relatively high target capital requirement, they set an absolute minimum requirement, with staged intervention at various points above that. Companies are aiming to hold the order of three to five times that regulatory minimum, with the rating agencies effectively setting the capital standard to maintain the ability to write business. Fulcher: We can all complain about the rating agency models when they rate our own businesses, but I suspect that pretty well every company around this table on the non-life side uses the rating agencies when they decide which reinsurers to place business with. Ross: Think about reinsurance credit committees and the repercussions of their decisions; if they approve buying reinsurance from an AA-rated reinsurer and it goes bust, compare that with approving buying it from an unrated reinsurer that then goes bust. Pryde: It was interesting when we were putting together a eurozone dashboard. You realise that all our models use credit ratings, so therefore you need to think through how your capital model will respond when ratings change. If you have a raft of reinsurers who are downgraded, all of a sudden your capital model could swing quite significantly. I think as we build these internal models with further data points and interdependencies, we have to think those through, because they can sometimes drive business decisions unexpectedly. Publication of economic capital Field: Will more firms publish their economic capital? Fulcher: Yes absolutely. As Mark [Chaplin] has outlined, Aviva has been very explicit with its assessment of economic capital, its target level of capital, the actions it has taken and the actions it intends to take as a result of those assessments. From my perspective, that is being well received by the market, because I think they can clearly see what the drivers of capital are and how this matches the decisions being taken. Chaplin: I think it will be hard to maintain that you run your business on economic capital and that it is driving decision-making and not communicate that to the market. Certainly, we have benefited from having that conversation with our investors, and we would imagine that other firms will see that benefit and will start publishing. Farr: The insurance industry particularly the life insurance industry is struggling with its communication to investors; the more that can be communicated around risk exposures and capital requirements, the better the industry is likely to be perceived. Pryde: We have certainly always published; I just do not see the advantage of not. I think managing capital is one of the key parts of running the business, so it seems very odd to me that there is a silence on whether you

6 are putting capital to use within the business, or whether it is worth returning the capital to shareholders at this point in the cycle. If you are silent on that, I cannot see how investors would be able to invest in the company. Gadd: I think it will present a problem for analysts though, because if everybody is publishing their economic capital, how do they compare them? Embedded value was often undermined because it was assumptionsbased, and it was a lot simpler than insurers economic capital models. I think in the context of explaining how you run your business, it is a very valuable piece of disclosure. Certainly the risk exposure is probably even more valuable from the analysts perspective, so they can effectively run their own model to take your risk exposure and understand the risk from their perspective. A chance to revisit strategic decisions? Field: With Solvency II being deferred, will that encourage companies to make strategic changes that they might have been putting off? Chaplin: It s had no impact on us from a strategic perspective. We have a degree of urgency that we have injected into our transformation programme - all of this was happening with or without Solvency II. Ross: I imagine if we were a larger, more complicated group we might have been thinking about restructuring to optimise Solvency II, but we re quite straightforward and so it has had no real impact on our strategic decisions over the last few years. Fulcher: Yes, some firms have had certain regulatory-type plans, some of which they were doing purely from a Solvency II point of view, some of which they wanted to do from a business sense but thought, There is no way we are going to get this done before Solvency II comes in, and therefore had deliberately shelved them. Some of those firms are now taking their business-focused plans off those shelves and dusting them down; while at the same time considering whether to shelf the Solvency II-driven plans. Weymouth: I think Solvency II has probably driven a slightly more rapid review of corporate structure. If you have a relatively complex corporate structure with many legal entities, it is not only Solvency II, but a number of things would drive you to simplify that as much as you can. Again, Solvency II was more of a catalyst than a fundamental driver of it. Pryde: Also, it s less risky like that. If you look at insurers and banks where there have been issues, one of the most common denominators is complexity in corporate structure. We have benefited most from the pillar 2 work Heloise Rossouw, Old Mutual Raising capital in an uncertain environment Field: Does the delay affect the ability to raise capital on a more regular basis? Gadd: There might be some changes to appetite of external investors that come into the insurance market, because clearly at one stage there was such a wide range of potential outcomes in terms of the regulatory capital requirements. That was presumably putting some investors off. Even though there is now a delay, the potential range of outcomes is now much narrower, which would give confidence to third parties to come into the market and put their capital at risk. Chaplin: There is appetite in the market for insurance company debt. These are long-term capital instruments, so within any time horizon that you are likely to issue for, you are going to have Solvency II or some replacement regime that still leaves open the question as to what will count as qualifying capital. More generally, there is a push for better-quality capital. Aviva has talked about medium-term commitments to reduce our leverage and improve the quality of our capital. I think that is a common thread; rating agencies like to see it; regulators would like to see it. Money well spent? Fulcher: Looking back on Solvency II, what do people think are the things that they gained the most from the money they have spent? Gadd: We have invested in data governance, the quality of the modelling and the governance that goes around the models. All of that is going to be of value for the long term. We have probably spent more money on it than we would have otherwise done, because we had to do it under time pressure and pay expensive contractors, but the end product has definitely moved us forward. The fact that we now focus on using the model to help us actually run the business rather than, as you say, producing lots and lots of reports for regulators is a very positive thing, I believe. Weymouth: I think it has probably helped in raising awareness of managing a balance sheet as opposed to purely the P&L [profit and loss], out into the business as a whole. Over time, I think that is positive, because I think people will be more rounded business managers across the piece. Pryde: I think we have benefited more from the pillar 2 side. There has obviously been some benefit on pillar 1, but given that we have been using an ICA model for a number of years, there is less marginal benefit there. The ORSA is a CRO s valuable tool to keep the board educated on risks and capital management. Would we have had that without Solvency II? Possibly. Whether that will help stop companies going bust or not is to be decided, but I think the quality of information for the board has never been better. Shaw: I certainly saw a number of companies using Solvency II as an opportunity to financially re-engineer how actuarial, finance, modelling and other finance focused teams interacted and overall drove production of financial management information used by the business. Solvency II helped make it more simple, transparent and better controlled. There were also improvements in the broader understanding of all the risks the business faces. Farr: Solvency II poses a lot of very valid challenges to companies use of modelling in risk management. There is a danger that models are calibrated against a small data set and that calibration is just treated as a given, whereas the reality is that judgement plays a huge part in calibration of models. That reality needs to be recognised and we need to make sure that we get the right judgements into the calibration process. Pryde: From a strategic point of view, we have looked at two transactions, and in both cases, giving the board the usual corporate finance PowerPoint presentation as to why the transaction should go ahead, but also supported with a transactional ORSA. I do not think the board would have had both those dimensions quite so explicitly in the past, so actually I think that it is driving better strategic decisions at the point of them being made, rather than going ahead with the transaction and finding out some of the issues after. Rossouw: In my view, having only recently joined the organisation, we have benefited most from the pillar 2 work. Our risk and capital management supports sound business decisions and allows us to attribute capital according to an accurate assessment of the economic impact of our risks.