01 February 2013

Risk.net: Solvency II capital tests not part of augmented ICAS regime, FSA confirms

UK insurers will not be required to adopt a Solvency II balance sheet in the first wave of changes to the FSA's insurer capital adequacy standards (ICAS) regime, the regulator has confirmed.

Julian Adams, director of insurance at the FSA, confirmed in a letter to insurers this week that that the so-called ‘ICAS+' regime would not require Solvency II "tests and standards to be met", relieving fears insurers would have to include a Solvency II risk margin in their capital calculations.

The new regime will allow firms engaged in the internal model application process (IMAP) to use their Solvency II internal model to determine their regulatory capital requirements.

In the first phase of the ICAS+ regime, Adams said, participating insurers will need to provide reconciliation between the calculations made by their Icas model and new Solvency II model to account for the differences between the two models.

The FSA is expected to review each reconciliation on a case-by-case basis, although actuaries say it remains unclear what the regulator will focus on. As firms have developed their Solvency II models in various ways, the FSA expects insurers to use different methodologies to explain their reconciliation.

How the FSA plans to implement the second phase of ICAS+ also remains unclear. In this phase insurers will be allowed to use their Solvency II balance sheet as well as the Solvency II capital model for ICAS purposes, without the need for further reconciliations.

A move to a Solvency II balance sheet would place significant demands on UK firms, say consultants. Jim Bichard, head of the UK insurance regulatory team at PwC in London, says: "The issue is that preparing the balance sheet in itself is a big process, as it involves outputs from the internal model and also other inputs. It's quite a lot of additional work versus just producing the model on its own."

Adams states in the letter that "industry interest is currently mainly for phase one", suggesting there is little enthusiasm for phase two so far. The FSA may also be waiting for guidance from the European Insurance and Occupational Pension Authority (EIOPA) before publishing details on phase two.

The FSA is planning a consultation with firms and has promised to provide more information on what they will need to provide in their Icas+ review in the second quarter of 2013.

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Julian Adams letter

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