Action time as FSA sets out Solvency II schedule

September 25 was the date when Solvency II finally became a tangible concept for many insurers. The FSA’s discussion paper, published on that day, sets out a timetable of what it expects companies to do. After years of talking about Solvency II, let the action begin.

Although their comments have a direct effect on only those insurers and reinsurers regulated in the UK, the FSA are the first national supervisor to issue this type of guidance. Their comments are, therefore, of interest to insurers and reinsurers throughout the European Union and European Economic Area.

They confirm what we and other commentators have been saying for several years: that the quicker a company gets to grips with Solvency II the better.
The implementation date of 2012 is much closer than many people seem to realise.

There is a huge amount to get to grips with between now and then. Companies will have to comply with a range of corporate governance requirements, including the establishment of internal audit, risk management and actuarial functions. They will have to demonstrate that they fulfil several different reporting criteria. The FSA will also want to examine the way that data is stored and used, with implications for IT infrastructure.

For many companies these and other changes will amount to a completely new culture; it is not something that can be rushed.

The FSA paper is particularly relevant to those re/insurers planning to use an internal model to comply with Solvency II. The regulator anticipates that many will choose this route, which means that they will have to demonstrate that their models are truly embedded.

UK firms are already familiar with the use of internal models thanks to the ICAS regime, which adopts a risk-based approach to regulation. Apart from the regulatory aspects, this regime has brought wide-ranging business advantages, including improvements to capital management, transparency and accountability.

As a result, ICAS has acted as a catalyst for a marked rise in management standards. It would be a backward step indeed if UK-based insurers were now to abandon their investment in modelling in favour of the Standard Formula alternative offered under Solvency II. We do not, however, expect that to happen on any large scale.

TimetableThe next important landmark is June 2009, when firms intending to seek approval for an internal model are expected to notify the FSA in order to facilitate “early engagement”. They should then follow this up within a year by demonstrating that they have made significant progress towards meeting model requirements and by presenting their implementation plans.

During 2010 and 2011 there will be a series of ‘dry runs’ to give firms and the FSA the opportunity to test and refine the plans so that they stand a strong chance of acceptance. The formal applications for approval are due in the second half of 2011; this is intended to give the FSA breathing space to examine all applications thoroughly.

The FSA will then issue “minded to authorise” notices during the first half of 2012. Any firm that may be falling short will have the rest of the year to take the necessary steps.

The FSA is clear that insurers need to be developing effective implementation plans now to meet the required timetable, undertaking a gap analysis exercise to understand the transition required from the ICAS regime. This is a board and senior management responsibility. There are two immediate expectations in particular:

1. That the ‘Key Messages’ section of the FSA Discussion Paper is tabled at the next board meeting of all UK insurers;
2. That each insurer nominates formally a senior (probably board-level) individual to be responsible for successful implementation.

Next steps
We believe these to be sensible measures that will help UK companies to manage implementation of Solvency II and identify potential business advantages it may bring. It is for individual companies to decide in detail how they respond to this scenario in light of their own circumstances. However, we recommend the following initial steps as being suitable for nearly all re/insurers.

• Initiate board-level discussion on the implementation strategy for Solvency II;
• Nominate the individual to be responsible for implementation;
• Review the relative merits of an internal model as against the standard formula approach and make a decision on future direction; 
• Assemble a project team with representation from finance, actuarial, risk and IT;
• Initiate a gap analysis to define the key requirements and identify the scope of work required to meet your objectives as a first step of the implementation plan;
• Seek advice from industry experts.