On 27 February 2012, the FSA held its second industry briefing for firms in the pre-application phase of the internal model approval process (IMAP). As well as providing further information on the next phase of the internal model approval work in the UK, this briefing covered the FSA’s approach to the increasing uncertainty around the content and timeframe for implementation of Solvency II and how this will impact on the approval process for internal models. The session also set out the latest materials that are available for firms currently in the approval process in advance of the assigned submission slots (or “landing slots”) which start from 30 March 2012, including an updated self-assessment template and submissions checklist.
The FSA offered its preliminary thoughts and observations based on firms’ progress to date with respect to internal model implementation. It has been encouraged by a good level of engagement and general progress, but indicated that it had some concerns around preparedness for those firms with early submission dates. In its assessment of a number of areas, including model documentation and the application of expert judgement, the FSA stressed the need for providing robust and considered justification for a firm’s approach and ensuring consistency across all areas of the internal model. In particular, the FSA views a firm’s documentation as an important indicator of preparedness and reminded firms that explanations as to why firms feel they are complying with certain elements of the Directive need to be followed up with adequate documentation. In respect of the progress seen in the validation of internal models, the FSA stressed the importance of ensuring the independence of the validation, particularly highlighting that where internal models have been developed by external advisors, this did not represent independent validation. It was also noted that it was necessary to ensure that, if validation was undertaken internally, those undertaking the task must have the appropriate skills and knowledge or support available to them to provide thorough and appropriate validation of the internal model.
Current implementation timeframes
In the opening speech, Julian Adams, Director of Insurance, highlighted the increasing pressure on the timeframe for implementation of Solvency II, commenting that with the preliminary vote by the ECON committee of the European Parliament currently schedule for 21 March 2012 “it would clearly not take much further slippage in this to put transposition in January 2013 at risk, but this would not necessarily affect the implementation date for firms in January 2014”. Rather, should further delays occur, the FSA expects the period between the transposition of the Solvency II requirements into national law and the full implementation of the regime to be reduced from the 1 year period currently assumed.
The FSA has commented that while it recognises the growing frustration in relation to the increased levels of uncertainty around both what the Solvency II regime will look like and the timeframe for implementation, it continues to work to the assumption that Solvency II will be fully implemented on 1 January 2014 and expects firms to do the same in their implementation plans. The FSA reinforced the need for companies to stick to their agreed submission slots, especially since the FSA plans to consider individual submissions alongside peer group firms to ensure consistency.
Internal model approval process
As previously commented at the ABI conference in December 2011, the FSA is basing its approach to internal model approvals on the latest draft Level 2 text, circulated by the Commission in November 2011. While this text is neither finalised nor a public document, the FSA continues to believe that this is the most sensible approach, as it “represents the best available view of what the final position will be”. Both the updated self-assessment templates and the internal documents used by the FSA in assessing firms’ applications are based on the November text and these will be updated should this be required in response to subsequent Level 2 texts.
The FSA used the event to launch a set of new materials to assist companies in their preparation towards internal model application. Chief among these was an updated self-assessment template which can be obtained from the FSA’s website (link). The template sets out the almost 300 requirements which must be met before internal model approval can be granted. The FSA acknowledged that while the creation of the updated template would necessitate additional work for firms, the new template is based on the original content of the application documentation and contains no UK-specific “overlay”.
The FSA also announced that it would be carrying out a review of firms’ approaches to, and calculation of, technical provisions. The FSA considers that such a review is critical to providing confidence in the underlying balance sheet calculation and that, without it, it would be unable to grant internal model approval. This review process is expected to take place in late 2012 / early 2013 and will be related to, but distinct from, the IMAP. The FSA also indicated that this process is likely to be extended to standard formula firms in due course.
Copies of Solvency II summary papers, together with copies of papers on other topics published by Milliman, can be found on our website: http://uk.milliman.com/perspective/
We look forward to hearing from you if you have any questions or comments on this briefing or any other aspect of Solvency II.
Please contact your usual Milliman consultant, or email SolvencyII@milliman.com for more information.
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