TUESDAY 27 NOVEMBER 2007

Mr Michael Folger, Ms Sarah Varney, Mr Peter Green and Mr Duncan MacKinnon

  Q65  Chairman: Good morning and thank you very much for coming. You will have an opportunity to correct the transcript. As there are two sets of you, would you like us just to start by asking questions or would either or both groups like to start with an opening statement? Please do just exactly as you please.

  Mr Green: I would like to start with a very short opening statement. May I first introduce myself? My name is Peter Green and I head up the Financial Stability and Risk team in the Treasury, which covers operational responsibilities toward financial crises as well as policy towards the prudential regulation of insurance companies and banks and banking groups. Duncan MacKinnon within my team leads on Solvency II policy and negotiations. I did not want to repeat the memorandum which we have submitted, but just to summarise, I think we are in a very good place at the moment on this Directive, given our experience on other Directives, both in terms of substance and process. On the substance, the Directive that the Commission published in July meets our initial high level objectives almost exactly, I think. Those set a very high level. Those objectives are around ensuring that the existing UK FSA's current ICAS regime, which is super-equivalent to the existing EU Directives, is maintained and rolled across Europe, improving policy holder protection, improving the risk management of firms, while reducing the regulatory burden on firms and ultimately reducing costs for policy holders. Looking at it in more detail, the essential objectives were around following the three pillars of the Banking Directive approach coming from the Basel Framework for Banking Supervision: to ensure that we have market consistent valuations so that is as far as possible valuations of liabilities and assets are based on, or constructed from, market prices and market data; to ensure that we have capital requirements that are risk-sensitive and that internal models are allowed; and to minimise costs for firms, subject to maintaining the appropriate protection for policy holders. As far as the appropriate level of protection of policy holders is concerned, we were keen to ensure that, as in the UK, we have a non-zero failure regime in the Directive and that the protection should be calibrated at broadly the same level as it is in the banking sector, which equates to around a 1 in 200 probability of failure over a one-year time horizon. Finally, our other key objective was to ensure proportionate regulation, including around group supervision and the regulation of smaller firms. We thought initially that we were going to struggle with a number of those objectives, but a number of those dogs did not bark and in particular we were surprised, I think, that we so readily obtained broad agreement across Member States to market consistent valuations with the use of internal models and to an approach towards diversification benefits, which allowed us to put forward our proposal on group supervision. While we are in a good position as regard the Level 1 framework, at the high level, we are obviously very aware of the dangers of things potentially being unpicked and unravelled as we get into the detailed negotiations in due course on Level 2. This brings me on to where we are on the process. Again, I think we are in a good place on that and we have learnt I think substantively from our experience on other Directives of which there have been a large number coming from the Financial Services Action Plan. We have a good, strong, dedicated resource in the Treasury on this. Unlike with other Directives, Duncan's sole job is looking at Solvency II. We have very good working relations with the FSA, who have a large team on this. We work very closely with the industry at all levels. There are regular working groups at working level, but we also engage at a very senior level, the most senior level, with the insurance industry to make sure that we have the right strategic objectives. That includes engagement with the ABI, which of course represents firms of all sizes. We also work very closely with the Commission. The Commission have been very open on this Directive and we have good access and good discussions on the substance. We have also been very proactive about engaging with other Member States. Almost every other week we are going to visit somebody somewhere to talk about the Directive and discuss issues. Perhaps I could turn to Michael now who may want to say something about his views on substance and process.

  Mr Folger: My name is Michael Folger, Director of Wholesale and Prudential Policy at the FSA. On my left is Sarah Varney, who is head of our Solvency II office, which is the dedicated team that we have co-ordinating all our work on Solvency II. I think from the FSA perspective I would very much agree with what the Treasury have said, that the Level 1 text that we have before us is a pretty good outcome. A crucial perspective for us at the FSA of course is to try to get to a position where this step forward in Europe to a market-consistent approach for prudential regulation of insurance is one that allows us to preserve and develop the reform of our domestic requirements in that area, the so-called ICAS process which we introduced in 2004. From that point our firms and our industry are we believe positioned quite well for this further move forward in the Solvency II context. But Level 1 is one thing; the devil is so often in the detail and much of that will have to be determined at Level 2. At this point, we cannot be fully confident of the costs and benefits overall until Level 2 is done. The outline timetable from the Commission suggests that that could be in the second half of 2010. It is also the case that the European Parliament and some Member States no doubt are going to be looking at progress made at Level 2 before they quite sign up and deliver political agreement on Level 1 at the back end of next year. There are several areas where, I am sure, you will find us this morning pointing to Level 2 as the place where the answer will need to come from. We are, like the Treasury, looking to apply all the lessons we have learned, but not least in my own case in respect of the Markets in Financial Instruments Directive (MIFID). We are putting lots of resource in at the front end of the Level 2 process. Working closely and openly with the industry and other stakeholders was very important. Just a few words on some of the data that we have shared with you in the attachment to our paper; this is from the so-called QIS 3, Quantitative Impact Study No. 3, which attempted to scope the quantitative impact on balance sheets of the first run at what Level 1 might be interpreted as requiring. It is a complex picture. I think I would highlight the fact that the particular version of the MCR (Minimum Capital Requirement), a modular requirement, yielded some pretty disappointing results. It gave figures which seemed to us to be much too high for the non-life companies and is very noisy indeed for the life companies. A key concern as we look forward to QIS4, which is the next round of quantitative testing, is obviously to get the specification for that exercise drawn up so that we get data relevant to options other than a modular MCR. The other leg of the whole system obviously is the Solvency Capital Requirement, the SCR. As we have indicated in the note, that seemed to be giving excessive results, to be setting excessively high capital requirements for non-life underwriting risk, and also for aspects of life business as well. But, overall, crudely expressed though that was, we drew some comfort from the fact that something like 80 per cent of the UK firms surveyed as part of QIS3 would find their existing capital levels adequate to meet the SCR. That is as true for small firms within the sample as it is for the bigger firms. That probably is as much as I should say, except to re-emphasise that QIS4 is crucial to the way forward, both on the MCR and the SCR and also to exploring simplifications for small firms and that, although it is a statistical exercise, it is, it seems to us, crucial to the successful prosecution of the whole project from here onwards.

  Chairman: May I thank both of you very much. Mr Green, I am conscious that you have other things to do other than come and talk to us about Solvency II. We are particularly pleased to have you. You are also responsible for the solvency of the banking industry just at this moment. I have cause to know that this is one of the more difficult subjects that will be before you. I think between you that you have really shot my fox; you have answered the first question I was going to ask. You have really told me what part you are playing, that it all lies down to Level 2 and the detail in there, as ever. What I am going to do is ask Lord Kerr to ask his question.

  Q66  Lord Kerr of Kinlochard: Can I ask a two-part question, Chairman? I was interested in what Mr Folger said about how it was not possible yet to work out the overall cost benefit: and that would come in due course. The Treasury explanatory memorandum of August mentioned that the third QIS would ask a number of questions about administrative costs on both definitions, the costs of registering the thing and the extra, the costs of the structure, and that a regulatory impact assessment would come out later this year. What is the timing now of the impact assessment, and can you do it properly without an overall cost benefit judgment? The second part of the question is about Pillar III, where the ABI gave us evidence that more disclosure was not necessarily good news and implied that the Regulator might be in discussion about the satisfaction of MCR by a company behind the scenes, and that maybe the discussion should take place behind the scenes. We, this committee, were a bit sceptical about whether the action of having a Pillar III regulator in the office, was not of its nature a rather public act. I would like to hear from the FSA about whether they shared the ABI view that more disclosure at Pillar III might be bad news.

  Mr Green: Thank you. I think it is right, as you say, that QIS3, has not provided us with all the answers we might desire and has left a number of things open that now need to be further tested in QIS4 and then in other tests to come in future. I do not think that should stop us at each stage trying to produce answers to the assessment of the likely costs and benefits of the Directive, given what we know and given our policy preferences. It does help us to inform our policy negotiations going forward and to engage with the Commission. Even though it would be imperfect, we will still try to do it. I think it would be a living document that we continue to refine over time. As for publication, we think now that we will try and do it before the end of the year.

  Mr Folger: As regards Pillar III, this is a very broad subject because Pillar III within the Solvency II context covers both regulatory reporting, which is the flow of information, much of it routine information, from the firm to the regulator, and it also covers public disclosure, the duty on the firm to announce publicly its condition and keep the consumers and the marketplace current in terms of its prudential balance sheet position. On the first part of that, we are perhaps once bitten twice shy because in the Capital Requirements Directive, which is a forerunner of this and which addressed the prudential requirements on the banks, there was a pan-European requirement in the Lamfalussy context to get a unified reporting set, which actually and frankly gave us some difficulty because most regulators across Europe put all their requirements into the pot and we ended up with tens of thousands of data points to be reported by firms on a routine basis, which seemed to us to be very difficult to justify on cost-benefit grounds. So in that area, yes, it is important that we have common core reporting, but to oblige everyone to level up to that of the most cautious and prescriptive regulator does not seem to us to be the way forward. As regards public disclosure, of course publicly listed companies are bound to declare to the Stock Exchange their position. The regulatory overlay on that is relatively limited in their case. I would say, and I am not sure what may have lain behind the ABI's remarks, that there can be situations where the regulator having a breathing space, even if it is only of a few days, can be helpful. Indeed, there has been some comment around that very point in the current strains on banks' balance sheets, has there not? It certainly would not be the regulator's desire to sit on bad news, so to speak—that would be a rather dangerous proceeding for all of us—but simply to have enough elbow room to react intelligently in what can be very complex and fast-moving situations.

  Q67  Chairman: Can I just pick up on that? I think the ABI were worrying about the situation where it was clear that the MCR had not been breached. If the MCR has been breached, there may not be a lot that can be done. But on the question where the SCR has not been breached but the regulator would like the company to top up its capital, do we envisage a way of doing that without publicity, from the point of view of the regulator?

  Mr Folger: I will comment and invite my colleague, Ms Varney, to comment and to add to this perhaps. In fact, it is a current requirement in the UK that, after the event, breaches of what we might loosely call the SCR, do have to be reported publicly, so that does not take us into new territory. In dialogue between the Treasury and ourselves and the industry, the need for a proper degree of openness about actual breaches of the SCR is something we have discussed with them quite intensively.

  Ms Varney: I can certainly add to that. The Level 1 text at the moment talks about a firm disclosing a solvency and financial condition report once a year. That will cover a number of things, but included within that a firm would be required to disclose whether it had had a material breach of the SCR or indeed had breached the MCR during the year, even if that breach had since been rectified. Indeed, the Level 1 text also, where firms have breached the MCR for example, allows a certain period of time for a firm to recapitalise, but if within that time the firm has not managed to recapitalise, then that is a disclosable event.

  Q68  Lord Woolmer of Leeds: Could I ask a couple of questions about the latest Quantitative Impact Study, particularly of the FSA, if I may? One of your jobs is to promote public understanding of the financial system. In general, the public will not know much about MCRs and SCRs, and so on. The first, the SCR, is giving people 99.5 per cent confidence that the insurer has enough assets to meet his liabilities. That is very important to customers. The other one is the minimum income requirement and if you go below that policyholders are considered to be at unacceptable risk, so they are very important. Can you explain in ways that the public will understand what are your concerns at present in those two areas that you mentioned in your paper this week? What are your concerns? Is it that the measurement of those risks is difficult and what is in here is not really quite right, in which case that could be of concern to the policyholder, or is it that this way of doing it will impose unnecessarily high requirements and hence impose costs on the businesses, the insurers, that they should not have imposed on them? Is it the policyholder's concern or the insurer's concern?

  Mr Folger: I would say that in respect of the SCR, the general tenor of the concern which the industry has and we have and a number of commentators have is that the QIS3 numbers suggest that the particular set of propositions that was tested was actually excessively conservative and in various areas set too high a level of SCR. In relation to the MCR, it seems to be set, in the life area, according to a formulation that gives very odd results. Sometimes the MCR is as high as the SCR, which is counterintuitive, and sometimes it is a very low number indeed; it can even be negative curiously through the way that the equations work. The broad tenor of the concern with the SCR is that in a number of areas it is over-conservative and, in relation to the MCR, we have something that does not work. We are looking for a certain ladder of intervention in which our intervention would be triggered in particular ways according to how firms stood in relation firstly to the SCR, and then the MCR. It is a problem with the system that will be generated if the MCR stays in this rather noisy form. Perhaps Sarah would like to add to that.

  Ms Varney: Absolutely, that is quite right. One of the key concerns of the industry and for us is that there is a sufficient gap between the Solvency Capital Requirement and the Minimum Capital Requirement for a graduated process of regulatory intervention within the firm, so that as a firm's capital position deteriorates, the degree of scrutiny of that firm would obviously increase, and during that period of time there would be progressive action of the firm. To the extent possible, the firm would de-risk its books. Prior to run-off of existing business, or transfer of its liabilities and the assets backing them to another firm.

  Q69  Lord Woolmer of Leeds: Would these problems be resolved and sorted out in the stage one process or will they only be resolved at the second stage of Lamfalussy?

  Mr Folger: The MCR in particular is something which, as I think the Treasury pointed out in their August note, it seems to us is going to have to be addressed in the Level 1 process through clear specification in the text, a draft of which was published in July, of which route to take. There is considerable uncertainty over what in technical terms is the best route to undertake, which is why we are concerned that the QIS4 exercise should gather sufficient information to allow other approaches to be tested.

  Q70  Lord Giddens: Any shift in regulation or generalisation of regulation has to change the competitive feel. Can I ask if you think there will be winners or losers from the draft Directive and who they are likely be? Will it adversely affect small firms? Will small firms have to bear some of the cost without getting the benefits while the larger firms tend to prosper?

  Mr Green: In the detail of how the current UK regime compares to Solvency II, I will leave Michael to talk about how that will impact. It is certainly true that small firms start off at a disadvantage because the cost of regulation for them as a proportion of their total costs is much higher. Even if this Directive did not really change very much, there are, as we have seen in other Directives, significant one-off costs in adjusting to any new regime. That said, given what we are trying to achieve in Europe is essentially, as I have said at the start, a rolling-out of the existing UK regime, we do not think that this is going to have a very major impact on the structure of the UK market. While there has been a tendency towards consolidation over the years, it is simply because in the business of insurance economies of scale and scope are quite large. It will make a difference, I think, across the EU where there is a much larger number of small firms. I suspect that we will see continuing consolidation. That is not to say that it will necessarily be driven by this Directive. I think it is a natural process that is going on. This Directive, since it will bring in new risk management techniques and allow firms to align their economic models more closely with their regulatory capital requirements, I think does tend to produce lower costs for those who have the capacity to model their risks and work out the risks, and that will generally be the larger firms. The big beneficiaries of this Directive, though, I think in the end are policyholders. This will reduce costs overall directly for insurance companies by aligning what they do for the economic management of their business with the regulation and therefore taking out, as it were, a layer of costs they have now. And by improving the Single Market, it improves competition throughout the EU. It is therefore likely to improve innovation and in the end I think the major beneficiaries are likely to be policyholders, facing lower costs but with the same level of protection that they currently enjoy.

  Mr Folger: If it is helpful to add to that, I think the distinction that the Treasury have drawn between firms that are good at managing and monitoring and assessing their risk as potential winners rather than big firms as such is an important point. As Peter has said, obviously there will be a tendency for big firms to find that easier than small firms because they have a greater capacity to bear the overhead of setting up a modelling system. We have seen new firms, and firms that started small, grow and prosper under our regime; you can think, for example, of Direct Line Insurance, which was nowhere in the marketplace 10 or 15 years ago but is one of the major players now in motor and property insurance. Niche players like that can actually develop a very good understanding of their chosen marketplace and the risks and pricing in that place. We do not see this, from where we sit, as necessarily bad news for small firms in a broader sense. For what it is worth, the QIS3 results for the UK, which we have published as I mentioned, suggested that at the level of the SCR small firms are not going to be any worse placed than bigger firms in the light of the QIS3 results. It is my understanding that the European picture for QIS3—I am not sure that is quite published yet—shows a similar picture.

  Ms Varney: Yes, the CEIOPS report (Commission of European Insurance and Occupational Pensions Supervisors) which is the relevant Level 3 committee, on the Third Quantitative Impact Study shows a very similar picture at the European level in that respect to the point that Michael has just made on the UK market. One important thing to remember is that our current UK requirements, our ICAS regime, are calibrated to the same level as the Solvency Capital Requirement under Solvency II. If Solvency II actually in terms of the standard SCR model delivers that calibration, then any capital effects that we see in the UK should be second order effects.

  Q71  Lord Kerr of Kinlochard: I want to pick up on what Ms Varney has just said about the CEIOPS report and the fact that across Europe rather similar results were obtained to those in the UK in respect of small firms. I had assumed that the greatest benefit for policyholders would accrue not in the UK but in less competitive markets; and the greater benefit for shareholders might accrue in the UK where companies might be rather efficient and competitive. If small companies across Europe are as unworried as small companies in the UK, does that show I am wrong?

  Ms Varney: Let me clarify the comment that I made. The comment was that across Europe if you look at the percentage of small firms who pass or fail the standard SCR, who either have enough capital to meet the standard SCR or do not, there is no greater percentage of small firms that fail that test than large or medium firms. That said, looking at different countries across the EU, it is not right to say that it is the same percentage in each country.

  Mr Folger: That said, of course the need for putting extra capital on the table is only one part of the picture. There are also the ongoing costs of sustaining the risk management systems which should enable the small firms, or firms of any size, to get the most out this new system, and that could bear more heavily on some smaller firms. We would see it I think as a bit of a counsel of despair to say that you would expect small firms not to be able to start up and actually do well in their chosen slot in the market. I have mentioned one example, one that has done so in the UK.

  Q72  Lord Giddens: It is very rare that something benefits everybody. I do not feel it is the case in this situation either. Will it not mean in so far as they are not already, virtually all small firms will have to be just niche firms?

  Mr Folger: I guess there will be a tendency towards that. It is possible that this may be that rare thing, a non-zero sum game, because what Europe is trying to do here, as explained in the Treasury memorandum and the impact statement from the Commission, is to try to get us to a more rational and efficient use of capital. Insofar as that can be achieved, then either you can keep your prudential standards constant and cut your prices, or you can keep your pricing and capital where it is in total and provide a more robust product. That would tend to be more of a phenomenon in continental Europe than here, because we are, speaking loosely, three-quarters of the way towards the Solvency II type system here. In continental Europe, I think you could make a fair argument that this is a non-zero sum game.

  Q73  Chairman: Can I just pick away at that question? I have a son living in Germany who is paying a great deal more for his insurance policies on almost anything than he would be in the United Kingdom. Do we think that consumers in other parts of Europe will benefit more than United Kingdom consumers or am I taking an altogether too rosy a view of United Kingdom insurance companies? The question of who will get what out of this from the consumer point of view is important.

  Mr MacKinnon: If I may, I will address that question. In a sense, all of the impacts of Solvency II will be more significant in almost all other Member States than in the UK precisely because of the FSA's regime already being in place and the fact that the UK is a very large market within Europe; it is about 20 to 25 per cent of the total European market and is, as has been stated already, relatively consolidated. I think that the point that Michael made about the efficient use of capital is really the key one. The fact that companies are not going to face a situation where they will suddenly find themselves with insufficient capital when Solvency II is implemented shows that the total volume of capital in the EU insurance sector overall is perhaps adequate, but it is the Commission's view that throughout it is not used efficiently; that is to say, it does not reflect the fact that different companies have different risk profiles and need to hold different quantities of capital for that reason. I think that Solvency II should stimulate more competition, particularly in other Member States and more efficient use of capital, and that ought to be the benefit both of policyholders and those companies' owners in those Member States.

  Q74  Lord Giddens: In the light of another witness we have coming later, do you think that therefore the result directly over Europe will be for net job creation?

  Mr Green: Yes, I think it would be likely to over time.

  Q75  Lord Giddens: In line with the Services Directive, as it were?

  Mr Green: That is right, but I would not say necessarily net job creation within this sector. As you make any sector more efficient, you reduce inefficiencies and that capital goes somewhere else to be used more efficiently in that or other sectors. Overall, anything that can improve the efficiency and functioning of the EU Single Market is likely to increase over time the size of the market.

  Q76  Lord Giddens: Therefore obviously some people might lose their jobs in some countries in the interests of greater market efficiency?

  Mr Green: It is possible that jobs may be lost in some areas as markets become more efficient. That is a condition across all parts of the economy.

  Q77  Lord Moser: Reading the various papers about the Directive, I get the impression that on the one hand some of the stuff is extremely sophisticated and rigorous, the basis of the SCR and the MCR—which is as it should be. You talk in your own paper about various models, et cetera. It is quite difficult stuff and very rigorous, which appeals to me as a statistician. One of the major inputs is the risk assessment and there the rigour sort of disappears a bit in the papers I have read. What I am interested in is from the management point of view of the insurance company. I used to be on the board of an insurance company years ago and I was very stuck how much of the risk assessment side, risk mitigation and risk assessment et cetera, was very qualitative, very judgmental. I sense this contrast between the rigor of the models and the judgment of the risk assessment. Perhaps I have got the balance wrong. I would love to hear you talk about that, in particular from the point of view of whether the Directive, in your view, takes enough interest in this aspect, the quality of the risk assessment really.

  Mr Folger: That is obviously a crucial issue and I think implicit in your remarks is the fact that sometimes there will be a tension between a fully quantitative approach and a judgmental approach and sometimes they need to fit together. It is a commonplace that trying to rely on the results of a model in situations which are beyond the observed historical facts can be very dangerous. We have, we believe, nudged the industry in a reasonably helpful direction here in the UK in this area through not just the model specifications but a reasonably systematic approach to specifying the stress scenarios that firms should look at. I think Ms Varney can comment in more detail.

  Ms Varney: I think one thing to note about the Solvency II Directive compared to Solvency I is that there is an increased focus (a) on the quality of the firm's managers and (b) on its systems and controls. Clearly the amount of text that there is within the Level 1 Directive is relatively limited. It sets out high level principles, as you would expect. The reason for that is that it is intended to produce a relatively flexible regime, because clearly insurers come in different shapes and sizes and one needs flexibility within the regime to ensure that a one-size-fits-all is not imposed upon different types of insurers. As Michael has said, an increased focus on the quality of risk management within firms has been a key plank of the Tiner reforms within the UK, and we do devote a lot more time and resource to looking at those things within UK insurers now, and that is carried into the Solvency II Directive. I do not think that will be a big cultural change for UK insurers but clearly that step-up in focus on the qualitative aspects will be a cultural change in some of the other Member States.

  Q78  Lord Moser: Do you think this is particularly a problem for the smaller companies? If the regulator comes in and is dissatisfied with the MCR or the SCR and actually finds that the people who are making the risk assessments are inadequate, is that going to be a major issue?

  Mr Folger: It could be but there are smaller players who do understand the risk in their sector extremely well. Indeed, we are concerned that all players of any size should understand their risks, but there are niche players in the London insurance markets; there were the Lloyd's Syndicates, for example, who over many years have specialised in thinking about rather abstruse risks. From the UK perspective, we do not think there is a special reason to be concerned about the smaller firms being unable to step up to the plate and meet the required standards of modelling and judgment in the context of that modelling. In continental Europe, historically there has been a more prescriptive approach, an attachment to extremely conservative accounting provisions as the way to encourage and to build in what we used to call hidden reserves in the balance sheet. From where we sit and from our experience within CEIOPS talking to other regulators, we think that the cultural change there is much greater than it would be here.

  Q79  Lord Renton of Mount Harry: Might I comment on this before moving to other questions? I come at this very like Lord Moser but not as a statistician like him, but as an ex-member of Lloyd's where it is quite clear of course that some syndicates got it right in the early Nineties and onwards and others got it very wrong. Therefore, I have a degree of scepticism about this Solvency II because it seems to me that definition of risk is never going to be precisely quantifiable. If it were, it would not be risk any longer. A tremendous amount will depend, as you have just said, on the quality of management, and that of course changes very quickly because a successful manager in one company may quickly run away to another company in order to produce better results. I do find it difficult to see how Solvency II as we see it at the moment deals with that question of the movement of quality of management. Even more precisely, could I ask you: in paragraph 14 of your annex to us you said there were several comments on the calculations of missed margins under the cost of capital approach and the resulting margin is often considered to be too high to meet the principle of market consistency. What do you mean by that exactly?

  Ms Varney: Perhaps I should answer that question. The general principle for the valuation of assets and liabilities on an insurer's balance sheet within Solvency II is a market-consistent valuation standard. To the extent that you can directly observe market prices or extrapolate from market prices some risks within insurers, that is relatively straightforward, but for so-called non-hedgeable risks, then Solvency II takes a different approach. It requires firms to calculate their liabilities as some of a best estimate plus a risk margin. That risk margin is calculated under the so-called cost of capital approach, which is effectively the cost of holding the SCR capital that would be required to run off that portfolio of liabilities. QIS3 shows that, in terms of how that calculation was specified technically within the Third Quantitative Impact Study, there are some technical issues with that as to whether it actually currently for all lines of business achieves a market consistent valuation standard or is over-prudent in some areas.