At a glance

The FSA has updated its Solvency II website, setting out some of the impacts that the delay to Solvency II will have on its (and the PRA’s) interactions with firms.

The most significant update is an outline approach for allowing firms in the internal model approval process (IMAP) to use Solvency II work in meeting ICAS requirements. The approach, referred to as “ICAS+”, will be optional. The FSA letter setting out the ICAS+ approach also contains references to re-planning the timetable of ICAS reviews over the next 24 months and to the recent opinion statement made by EIOPA on early implementation of certain aspects of Solvency II, which are of interest to all firms.

Other updates primarily relate to revised anticipated timings of planned exercises and communications covering:

  • Reviews of technical provisions
  • Appropriateness of the standard formula
  • General insurance stress tests
  • The policy statement relating to CP 11/22 and CP 12/13 (Transposition of Solvency II parts 1 and 2).

ICAS+

Julian Adams (Director of Insurance at the FSA) sent a letter to internal model firms on 29 January 2013 which expands on the ICAS+ approach first mentioned in his speech at the PRA launch event for insurers last October. As suggested at that time, a two-phased approach is proposed to allow the early use of Solvency II models in meeting the current ICAS regulatory requirements.
Key points on ICAS+ included in the letter are:

  • The first phase of ICAS+ will involve the firm submitting reconciliations between its Solvency II model and its ICA model. The Appendix to the letter lists the expected inputs to the ICAS+ review process and recognises that the reconciliations required will vary from firm to firm.
  • The FSA considers ICAS+ to be most suitable for firms in the internal model approval process (IMAP) that will be subject to an ICAS review to the end of 2014. The opportunity to move to ICAS+ appears to be based on the FSA’s ICAS review timetable (see below).
  • Firms are not obliged to enter the ICAS+ process and it is not a condition for IMAP review or approval. That said, where a firm enters ICAS+, the supervisor will seek efficiencies by combining ICAS+ and IMAP processes and governance, using existing IMAP material where appropriate and providing feedback on the IMAP progress as part of the ICAS+ review.
  • Current ICAS rules continue to apply and ICAS+ does not require Solvency II standards to be met.
  • The supervisor (FSA or PRA depending upon timing) will consider not just the Solvency II model as part of ICAS+, but also the in-development ORSA.
  • The current supervisory approach will continue for groups, although the supervisor will consider firms’ requests for a group ICA in its rescheduling of reviews.

The 29 January letter says little on the second phase of ICAS+ other than refer to what was suggested in October 2012, i.e. that once the supervisor is comfortable with the Solvency II model, it can be used for ICAS purposes without further reconciliations. More details on the two-phase approach are expected in Q2 2013.

The letter mentions that the FSA is re-planning intended ICAS reviews over the next 24 months, and that firms should discuss the timing and content of reviews with their supervisors. We anticipate that this will impact on the timing of ICAS reviews for all insurers, not just IMAP firms.

We believe that the opportunity for insurers to adopt their Solvency II models for ICAS purposes is welcome but at this stage there may be insufficient detail for companies to make firm decisions on whether to follow the ICAS+ route. It is possible that some firms will view the required reconciliation between the Solvency II and ICA models as onerous compared to the alternative of maintaining both models. This might particularly be the case if there is a significant chance that the reconciliation is not accepted by the supervisor at the first time of asking or if the timing of the firm’s scheduled ICAS review is such that the benefit of moving to the Solvency II model is short-lived before actual Solvency II implementation. That said, the intended overlap between the ICAS+ and IMAP process should be beneficial to both the firm and the supervisor with regards to the granting of internal model approval.

The letter also refers to the 20 December 2012 EIOPA opinion statement which calls for the early implementation of certain elements of Solvency II. The FSA is working with EIOPA on the detail of interim measures and a consultation is planned this spring. While the letter states that it is not the supervisor’s intention to introduce Solvency II reporting any sooner than that required by EIOPA, it suggests that firms might be asked for additional stress testing or market-wide data to assist its supervisory activities.

It will be interesting to see whether the planned EIOPA consultation leads to significant changes in the UK or whether any requirements adopted by the UK supervisor can largely be met within the existing regulatory framework.

Timing updates

The delays to Solvency II have led to some revisions to planned activities and publications.

  • Review of technical provisions
    The FSA’s review of the approach and methodology used by firms to determine technical provisions, which began in 2012, is on-going. The follow-on phase, focusing on the calculation of the technical provisions, is deferred and will not be based on year-end 2012 as originally planned. More information is expected Q1 2013.
  • Appropriateness of the standard formula
    The supervisor is reconsidering its approach to the review of the appropriateness of the standard formula using responses received to its standard formula survey conducted last year. Firms can now expect an update in Q2 2013.
  • General insurance stress tests
    A General Insurance Stress Test (GIST) exercise, originally planned for late 2012 is now expected to take place in the second half of 2013, based on year-end 2012 positions.
  • Policy statement relating to CP 11/22 and CP 12/13
    The policy statement to CP 11/22 and CP 12/13 (Transposition of Solvency II – Parts 1 and 2 respectively) is now expected in the second half of 2013.