On October 22, Julian Adams, director of Insurance at the UK FSA, gave a speech at the Prudential Regulation Authority’s (PRA) Insurance Conference in London. As well as setting out in more detail what the PRA’s supervisory approach will be for insurance business (and with-profits business in particular) when it becomes the UK’s prudential regulator for insurers in 2013, the speech covered the continuing uncertainty around the Solvency II timeline and the implication of this for firms.
Significantly, the speech highlighted the FSA’s view that an implementation date for Solvency II of 2014 is unrealistic and that 2015 looks challenging given “the lack of agreement on the shape of the long-term guarantee package” including the matching adjustment and counter-cyclical premium. While he stopped short of saying it was working towards an implementation date of 2016, Mr Adams stated that revised “landing slots” for firms in the internal model approval process (IMAP) will be agreed and that these “can be at any point of the firm’s choosing up to a maximum of 31 December 2015”, commenting that this “simply reflects the furthest end of what we regard as a sensible planning period”. These comments also coincide with comments made last week by Gabriel Bernardino, chairman of the European Insurance and Occupational Pensions Authority (EIOPA), to the Wall Street Journal that “Under the best scenario, Solvency II could start to be implemented either 2015 or 2016… At the end of the day, we’ll probably go to 2016, but it is still to be seen”.
This revision of landing slots reflects a change in the FSA’s (PRA’s) approach to Solvency II implementation, moving away from the previous approach of working backwards from the official implementation date, and instead basing workloads and timescales on a realistic assessment of firms’ preparedness and internal implementation plans. Mr Adams acknowledged that this approach may need to be reconsidered when a credible official timetable eventually emerges.
In relation to the use of Solvency II models for the current ICAS regime, Mr Adams set out a new two-phase approach. Phase 1 will require firms intending to use their Solvency II internal model under the ICAS regime to publish a “reconciliation between the calculations to take account of the differences in the two regimes”. This will allow the PRA to understand the differences between the ICA and Solvency II models. Once this reconciliation has been performed to a sufficient level to give assurance to the PRA, phase 2 will allow firms to use the Solvency II internal model and balance sheet for ICAS purposes with no further reconciliation. However, this may require reconciliation being performed more than once for firms less advanced in their model development.
Even where the Solvency II model is used for ICAS purposes, the PRA will retain the right to apply Individual Capital Guidance (ICG) and to ensure the Solvency I capital requirements are being met.
For firms intending to use the standard formula under Solvency II, Mr Adams indicated that the FSA will use its recent data request to firms to prioritise its assessment of the pre-day one appropriateness of the standard formula – although no further details were provided on how this assessment would be performed.
Other areas where firms may be able to use their Solvency II development work as part of the current ICAS regime include:
- The Own Risk and Solvency Assessment (ORSA) – the PRA may allow firms to use parts of the ORSA to use to satisfy current requirements;
- The Prudent Person Principle; and
- Reporting – the PRA will look to see if there is a need to supplement existing data received from firms in areas such as stress testing or market-wide data.
The FSA has stated that it will be looking to work with firms over the coming weeks to derive the next level of detail in relation to its approach to Solvency II implementation, allowing firms to both build on their existing implementation work and to use this Solvency II work to “meet the current requirements to the maximum extent possible”.
The speech went on to discuss the approach to the supervision of with-profits business and the respective roles of the PRA and FCA in relation to this.
A copy of the speech is available on the FSA’s website.
Copies of Solvency II summary papers, together with copies of papers on other topics published by Milliman, can be found on our website.
Please contact your usual Milliman consultant, or email SolvencyII@milliman.com for more information.
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