UK regulator to differentiate insurance risks as Solvency II start questioned

The FSA also made it clear that insurers in the UK should not adjust or delay their Solvency II implementation plans. This is despite the fact that law firm Eversheds and professional services firm PwC have both intimated that there may be slippage to the capital adequacy regime’s 1 January, 2013 implementation date. Recognising that the risks posed by insurers are different from the other firms it will supervise, the PRA will have a specific insurance objective and a distinct approach to supervising the industry. “We recognise that the nature of insurers’ business models exposes them to a different set of risks than banks. The PRA’s regulation of insurers will seek to promote the safety and soundness of insurers to deliver two aims: to secure appropriate protection of policyholders and to contribute to the stability of the systems,” said Julian Adams, the FSA’s Director of Insurance.hideThe PRA will concentrate its resources and actions on those insurance firms and issues that pose the greatest risk to its objectives. The risk assessment framework for insurers will explicitly take into account the need to protect policyholders, the various risks to which insurers are exposed and the different way in which insurers can fail, said Mr Adams. In response Otto Thoresen, Director General, Association of British Insurers said: “It is good news that the government has recognised that insurance must be given proper consideration in the new regulatory structure. This is something we have been calling for, and we are pleased that there will be a distinct insurance industry objective built into prudential regulation.” The PRA will be responsible for the prudential supervision of over 2,000 firms, of which around half will be insurers, with the remainder deposit-takers and certain investment firms. It will supervise companies specialising in life insurance, general insurance and wholesale insurance, including reinsurance, and companies that undertake a composite of these activities. On current data, it will regulate 636 general insurers, around 300 of which operate in the UK under a passport from other EEA countries, 123 life insurers, of which 70 will be EEA authorised, 133 friendly societies and around 132 insurers that are involved in the London Market. Hector Sants, FSA Chief Executive and PRA Chief Executive designate, said: “The PRA will be a focused prudential regulator for insurers. In setting out the PRA’s approach to insurance supervision, we have looked closely at the lessons arising from previous episodes of insurance company distress.” “Reflecting the uncertain nature of insurers’ liabilities, prudential insurance regulation will be forward-looking and judgement-based. Much of the PRA’s proposed approach will be achieved in practice through the application of Solvency II, the new European framework for insurance supervision,” he added. The PRA expects its more forward-looking approach to setting capital to be mirrored by insurers, commented Jim Bichard, Insurance Regulatory Partner at PwC. “This is a big change and will see boards asking more ‘what if’ questions through the use of stress and scenario testing. Insurance companies will also need to have explicit resolution plans in place, which is a significant departure from previous regulatory approaches." Mr Brichard added that despite the current rumours of a slippage to the Solvency II deadline, the FSA has made it clear that insurers in the UK should ‘not take their foot off the pedal and adjust or delay their implementation plans’.Eversheds said in a statement that due to concerns over the preparedness of some countries and regulators, as well as parts of the insurance industry, Solvency II’s current implementation date is in question. “Solvency II has been the Financial Services Authority’s largest ever project. It has been a massive cost for the UK insurers, who have had to pay a special levy to the FSA on top of their own costs of implementation. Despite this investment, the FSA has struggled to resource the project. So it is small wonder that other European regulators have underestimated the challenge and are now pleading that they need more time,” said Michael Wainwright, partner at international law firm Eversheds. “A possible outcome is that the UK will implement in 2013 and other regulators will implement in 2014. This is not an ideal result for UK insurers, but it may be better than incurring an extra year of transitional project cost. On the other hand, it means that the UK will bear the cost and risk of piloting the new regime to the benefit of the rest of Europe,” he added.

UK regulator to differentiate insurance risks as Solvency II start questioned

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