Analysis & Opinion

FSA seeks to maintain momentum for Solvency II

In the wake of the votes by the European Parliament and ECOFIN to approve the Solvency II Directive, the Financial Services Authority (FSA) in the UK has set some new targets for UK-based insurers in ‘Dear CEO’ type letters.

By 30th June 2009, companies are required to submit two responses to the FSA, one on progress on Solvency II implementation planning and one on their intentions around the internal model and the dry run processes. The FSA has also laid out the pre-application qualifying criteria for companies to participate in the dry run processes in 2010 and 2011.

A summary of the details that companies will need to provide by the deadline follows:

• Governance arrangements for their Solvency II implementation plans, including the project team, the individual leading the project and structures to ensure Board engagement and accountability 
• Plans for the development of a formal risk management structure, including plans for the ORSA
• Details of their gap analysis and any shortfalls - or if they haven't done one, when they plan to do it
• Outline of the discussions on Solvency II at Board level
• Intentions for the internal model: 
  • do they intend to apply for approval and is this with effect from the implementation date of 31 October 2012? 
    • if they intend to apply, who will be responsible for the development and implementation of the model and what is their reporting line to the "key executive" leading the overall Solvency II activity?
  • will they have a full or partial model? 
    • if partial, which elements will this include and what is the rationale for this? 
  • will they engage with the FSA in the first dry run, the second, or not at all? 
    • by what date do they expect to have met the pre-application criteria?

We have highlighted in bold the two things that we believe need particular attention and detailed consideration.  

The dry run pre-application qualifying criteria are aimed at focusing plans for the next year and include, at the top level:

• Full QIS4 completion, including qualitative questions, for each entity and for the Group as a whole 
• QIS5 completion 
• Demonstration of substantial progress towards documentation of the model 
• An indication of progress towards satisfying each of the model requirements 
• A Solvency II implementation plan for embedding modelling, risk management and systems, and complying with all Solvency II requirements (not just the model) 
• Iterative development plans for the model, including periodic recalculation of the SCR (Solvency Capital Requirement).

Contact Mike Wilkinson at EMB – mike.wilkinson@emb.com – if you would like some assistance in interpreting these latest FSA requirements in more detail.