26 October 2012

Risk.net: FSA proposals to ease ICAS modelling burden raise questions over inclusion of Solvency II risk margin

Financial Services Authority (FSA) proposals to allow firms to use their Solvency II internal models to meet current regulatory requirements are unclear and may lead to insurers having to hold more capital, actuaries warn.

To relieve the burden on insurers from running multiple models in the run-up to Solvency II implementation, Julian Adams, director of insurance at the FSA, said in a speech this week that insurers could choose to use their Solvency II models instead of the capital models used for the existing regime. The regulator also acknowledged that delays in the legislative process for Solvency II meant the current implementation timetable was "unrealistic". As a result, it adjusted its timetable for firms to achieve approval of their Solvency II internal models.

Insurers intending to use their Solvency II model to meet requirements for the FSA's individual capital adequacy standards (ICAS) regime will initially need to explain the difference between the calculations to take account of the differences in the two methods, the FSA said. At a later stage, the FSA will allow firms to use their Solvency II balance sheet and model for Icas purposes without any further reconciliation.

The announcement prompted speculation that insurers' capital requirements may increase if they use their Solvency II models. Actuaries say it is unclear whether or not insurers will be required to hold a risk margin - as is required under Solvency II - if using a Solvency II model for calculating ICAS capital requirements. Insurers will also have to pay close attention to the reconciliation process between the capital levels calculated using ICAS and Solvency II models.

Firms will need to isolate and explain difference between the two capital bases or risk a capital add-on. This is something many insurers will not have had experience of doing before, says Jim Bichard, head of the UK insurance regulatory team at PricewaterhouseCoopers in London.

While Adams insisted that the ability for firms to use Solvency II models was not a way of introducing Solvency II by the "back door", some suggest the FSA is already beginning to apply aspects of the Solvency II regime. A number of sources have said some insurers have increased their capital levels recently, although the reasons for this are not clear.

The FSA will also be relaxing its timetable for firms undergoing the internal model approval process (Imap) to account for the likely delay to Solvency II. Insurers will be able to agree a revised landing slot for their internal model applications up to December 31, 2015, Adams said. The move was welcomed by the Association of British Insurers.

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