The countdown to Solvency II is well underway. Insurance firms should aim to not just comply with the new rules, but maximise the business benefits.
We are eight months from Solvency II coming into force across the EU, and the UK Prudential Regulation Authority (PRA) appears to be on track with transposing the Solvency directive into UK national legislation. The PRA publication at the end of March (Policy Statement PS2/15) certainly marked welcome progress for the UK insurance industry, particularly as there were no unexpected developments.
PRA stance follows the directive
The PRA’s stance has always been that the Solvency II rules represent an EU initiative driven to a large extent by the European Insurance and Occupational Pensions Authority to maximise harmonisation across the EU. This is reflected in the PRA’s proposed transposition into UK regulations, as there is little or no change in its translation and application of the Solvency II directive. This is not a bad thing as the UK insurance industry on the whole is ahead of the game in implementing risk-based regulation, having been exposed to the PRA’s INSPRU Individual Capital Assessment regime over the last ten years. However, UK insurers should not be complacent as the application and supervision of the Solvency II rules and guidelines will no doubt follow the PRA’s own tough standards, principles and practices.
For non-life insurers the journey over the next eight months should be relatively straightforward. They are largely free of the burden of interpreting and applying transitional measures for the valuation of long-term guarantee products that will remain an ongoing regulatory issue for life firms for some time. However, for both life and non-life firms there remains the not-so-easy task of ensuring that the ongoing implementation program does not lose momentum, is fit for purpose and meets each individual firm’s objective, whether using an internal model (IM) or the standard formula.
Can anyone ignore Solvency II?
A commonly-held belief among some insurers is that non-IMAP firms can ignore most of the Solvency II rules and regulations around the use of capital models for business decision making. This view may be cost saving in the short term but is a strategic risk, given that significant numbers of firms of all sizes are implementing Solvency II with a view to deriving business benefits – and this requires at least an understanding of the internal model in terms of driving operational decisions. There is more to an IM framework than just building the stochastic engine for calculating the Solvency Capital Requirement for the regulators. Most insurers understand the value of an ORSA (Own Risk and Solvency Assessment) and this should be the starting point for those firms a little behind the curve or that can’t see beyond compliance. A good ORSA design and build lies at the heart of understanding core internal model concepts for business decision making, irrespective of regulatory IM status. The level of disparity between some smaller firms’ Solvency II implementation standards and those of firms that have already integrated and operationalised the Solvency II framework is still significant – and this is not due to the application of the Solvency II principle of proportionality.
Time to act
With less than eight months to go before the Solvency II deadline, and the PRA poised to publish the final Solvency II rulebook, PRA Category 4 and 5 firms that have been in ‘wait and see’ mode should now make a concerted effort to understand and apply the Solvency II framework to their business model. Delay or apathy in getting to grips with the key concepts and application will not only risk failure to meet PRA timelines, but also impact the long-term business model in a changing environment – because Solvency II has and will change the strategic and competitive landscape. Third country branches and smaller firms that have yet to earnestly progress their Solvency II implementation plans are running out of time. The imminent PRA Solvency II rulebook is a concrete reminder that the PRA is almost there in implementing its Solvency II supervisory framework and will expect all firms in the scope of Solvency II to prepare sooner rather than later.
UK insurers have much still to do over the next eight months, but the road is looking much clearer.
If you need further information, please contact Omar Ripon