UK’s FSA criticised for ‘two-tier’ approach to Solvency II

International law firm Eversheds has criticised the decision, which is one of a number of significant changes to the regulators internal model approval process. It believes the FSA has created a ‘two-tier’ system that will leave smaller insurance groups to ‘fend for themselves’. PwC says it is a ‘pragmatic move’ that may in fact result in the larger firms coming under more scrutiny from the regulator. For smaller firms, who will now have to rely more heavily on independent assurances for their models, it will add an unforeseen cost, it adds. The FSA’s director of insurance, Julian Adams, announced the change at the regulator's Solvency II conference in London this week. The higher risk firms, on which the FSA will focus, are the top 10 general insurance and life companies, firms which have operations in the Lloyd’s market and those which are subsidiaries of major European groups where the regulator is obliged to participate in a college of supervisors. hide“We have considered the level of resources we are able to devote to firms going through the pre-application phase of IMAP [internal model approvals process], and have decided to concentrate these on a smaller population of firms–those firms representing a significant market share, and being those which we have always regarded as having the highest potential impact on our objectives,” said Mr Adams in his speech at the conference. “These firms will continue to receive the greatest intensity of review throughout the pre-application phase, with detailed reviews of various aspects of their model in accordance with a work plan which we will agree over the course of the coming weeks. Other firms who are in pre-application will receive a reduced level of engagement. This will comprise a small degree of interaction with our actuaries and other risk specialists, supplemented as always by interactions with supervisors to ensure that firms remain on-track with their plans,” he added. Jim Bichard, insurance partner at PwC, commented that the large number of UK insurers seeking internal model approval has ‘clearly amplified the significant pressure regulators are under’. “We see this as a pragmatic move which makes better use of all the expertise in the market in dealing with the uncertainty caused by this unprecedented regulatory change,” he said. “Not only must larger and higher impact firms now expect a greater degree of scrutiny and challenge from the regulator, they may also need to dedicate significantly more time and resources to justifying the approach taken and demonstrating solid model evidence and documentation to the FSA,” he continued. However, small and medium-sized insurers may see a reduction in the amount of practical interaction and support they receive from the regulator, he warned. The FSA’s Mr Adams also announced that it is pushing back the timing of formal submissions for pre-approval to use an internal model to the end of March 2012. And he recommended insurers demonstrate a greater degree of independent assurance over the development of their internal model and model approval process. The FSA will be making changes to its external review approach to facilitate this. The FSA will introduce elements of external review into its approach, whereby it will allow firms to submit independent reports on some aspects of their model and how it works. Mr Adams said that this approach will allow firms to see up front the areas in which the regulator is particularly interested, and the FSA will receive independent reviews in a consistent format that will help it to take decisions quickly and efficiently. The announced changes are needed based on the FSA’s current assumptions on Solvency II. In particular, that there will be full implementation of the regime on 1 January, 2013. Mr Adams also made clear that the FSA does not necessarily regard developing a full model as being the only acceptable choice under Solvency II. It does not necessarily regard use of the standard formula as second best, he said “Whatever its deficiencies in some areas, the standard formula produces for some firms perfectly acceptable results, and we would expect firms to consider use of the standard formula for some risk modules, or some parts of their business,” he continued.

UK’s FSA criticised for ‘two-tier’ approach to Solvency II

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