Review of insurers' have taken significant steps to delivering risk-based capital management
The FSA has today published a paper outlining the progress made by the industry in developing systems and modelling techniques to identify and measure risk.
Under the FSA's risk-based approach to setting capital for insurers introduced at the end of 2004, insurance firms are required to make their own assessment of the level of capital that they think is appropriate for their business (an Individual Capital Assessment or ICA). This calculation is in turn reviewed by the FSA.
The FSA has now completed its first round of ICA reviews for all insurers; an important milestone for both the FSA and the industry.
The FSA said: "The reviews have shown that insurers have taken a significant step forwards to delivering more risk-based capital management. The ICA is now being increasingly used by the management of firms to inform their business decisions and management are now far better acquainted with the details of their firm's ICA.
"The industry is now in a better position to face the challenges of Solvency 2 which is likely to require insurers to use their own risk modelling as an integral part of their management."
The paper also contains details of the difference between firms' own calculations of the capital that they require (the ICA) and the FSA's view (expressed as Individual Capital Guidance, ICG, to the firm).
On average the ICG (weighted by size of firm) was 114% higher than the ICA. Whilst over 50% of FSA assessments resulted in ICG being set at the same level as the firms' ICAs, in some instances the ICG was over 50% greater than the ICA, the FSA said.
