09 February 2010

Published in: Risk governance, Regulation - supervision

Aviva covers all the angles on Solvency II

The company's director of group solvency, Teddy Nyahasha, explains Aviva's goal of a collective group view of risk, the value of dialogue with continental European regulators and the lessons learned from the ICAS regime. Interview by Jessica Baylis

Before joining Aviva, Teddy Nyahasha worked for the UK's Financial Services Authority (FSA) developing its policy on the Basel II accords and more recently the Individual Capital Adequacy Standards (ICAS). It is no wonder, then, that the UK's largest insurer picked him to lead the group into the new world of Solvency II.

"That was very useful for what I do today," he reflects. "I've been able to look at the world through one lens and now at Aviva I'm looking at the same world through a different lens. It's very interesting seeing the different dynamics."

Aviva's risk structure is designed to cut across the whole business, including the vertical reporting structures in order to get a "collective group view", he explains. Nyahasha reports to the chief accounting officer, David Rogers, but also works closely with the chief risk officer, Robin Spencer, who took up this role in January, and the chief financial officer, Philip Scott (Pat Regan from 22 February), who is "chief sponsor" for Aviva's Solvency II project.

Solvency II preparations have reinforced this horizontal risk structure. For example, Aviva has created a cross-group Solvency II steering group which reports to the board. "The group pulls together a collection of skills from across Aviva, including three members of the executive board and the CFO. It covers all areas affected by Solvency II and its main objective and duty is to make sure that there is a coordinated effort across the company."

Lessons from ICAS 

Like many UK insurers, Nyahasha says Aviva hopes it will not need to make major changes to its internal model to gain Solvency II approval, partly because Aviva has had a model for over seven years. "One of the key milestones in that journey was the introduction of the ICAS regime," he observes.

The ICAS regime requires all UK insurers to create a database or model to assess the amount and quality of capital that is appropriate for the size and nature of its business. Because Aviva has a unique structure with one of its UK entities owning most of the overseas subsidiaries, the company had to report virtually all its overseas positions to the FSA. to comply with the ICAS regime. "We therefore believe we have a fairly developed process for measuring and capturing our economic risk," observes Nyahasha.

And what lessons has Aviva learned from the ICAS experience? "The common message that came from both us and the FSA was that it took much longer than people initially thought it would: it's a massive investment. It's as much about sharing knowledge about how the business is actually run. That takes time."

Cultural differences 

A key part of Nyahasha's role is liaising with regulators, and not just in the UK. "We have a policy that we like to engage with other regulators as much as possible and participate in their discussions." He believes this illuminates the various approaches to Solvency I across the 16 different EU countries in which Aviva operates.

"Some of the changes required are probably as much cultural as they are a thing of number- crunching. All EU countries currently have their unique version of Solvency I: there are very different and interesting dynamics and they all come from slightly different angles." Somewhat diplomatically, he adds: "It makes the discussions and the disagreements in the development of Solvency II that much more interesting."

As with any major legislative change Solvency II has an inevitable political dimension. It is therefore important to talk to the various parties across Europe, he says, because "the disagreements that the industry has with policy makers are partly misunderstandings or misperceptions that are the result of people looking at things from a different perspective."

Group support 

One of the more contentious sticking points so far has been the issue of group support. A small number of countries and the large European groups lobbied for a mechanism that would allow capital to be calculated at a group level. In the end the directive omitted group support, but Nyahasha - one of its more vocal proponents at the time - remains optimistic it will be reintroduced at a future date.

That optimism is fuelled by the fact that the directive includes a trigger point that requires the European Commission to review the group support mechanism in five years. By then he expects views to have softened. "Solvency II is a massive change and we'd hope that, with some of the lessons learned through increased cooperation from the initial years of Solvency II and once member states get more comfortable with a new measure, they might be less resistant."

"Even if you remove the political aspect of it, some of the resistance was out of genuine concern because we are shifting from a very blunt instrument to something that is relatively complicated. There is always concern when you move things very quickly. But over time people will have had a few years to collectively look through the numbers and actually live it rather than just discussing it."

The most recent disagreements surrounding Solvency II have involved the industry versus the regulators rather than inter-country differences. The industry feels that, in the light of the financial crisis, the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) has hiked up capital requirements in a manner that undermines the economic-based philosophy of the new regime.

Nyahasha believes the level two implementing measures are overly conservative. In his view, CEIOPS was given a tight timeline to draft the advice while also having to take into account the lessons learned from the financial crisis. As a result, the consultation papers and summary statements in their final form "were piecemeal and hadn't looked at the overarching impact of the recommendations. The result is we've ended up with a very prudent set of rules which go against the principles underpinning the directive."

Opening the door to regulators 

Although Nyahasha hopes the European Commission revises CEIOPS' proposals, he nevertheless believes the issue is often taken out of context. "Very few insurers, especially large players, use Solvency I as a representation of the capital they need to hold. If you look at what Solvency II -- as intended in the text agreed by the European Parliament and Council of Minsters -- brings to our own internal view of our economic capital, then the shift in capital is still not that significant."

Again Nyahasha is optimistic that the requirements will be softened. The industry is currently having detailed discussions with the regulators and the lobbying process continues. "We believe that half the disagreements are due to the fact that these are new concepts for regulators - more so than for the industry. Our preferred approach is therefore an ongoing dialogue and process of education." By way of example, he explains that Aviva has started opening up its internal model to regional regulators. "This week we are hosting a party of CEIOPS members for a two-day event where we will introduce them to our internal model."

Capital hikes aside, Nyahasha stands behind the overall principle of Solvency II. "The biggest benefit Solvency II will bring is an alignment between the way we think internally about managing our risk and the way the regulators assess us," he explains.

"Under Solvency I, there are certain scenarios where a right decision from an economic point of view can have a negative impact on your Solvency I measure. This conflict will be removed."

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