FSA unveils two-tier Solvency II preparation system

The FSA has told the industry that it is introducing a two-tier system for approving insurers’ Solvency II internal models.

In a speech at the regulator’s Solvency II conference today, the FSA’s recently appointed director of insurance Julian Adams announced a series of changes to the internal model approval process (IMAP).

He said the FSA will be concentrating its resources on the top ten life and non-life insurers, companies with Lloyd’s operation and those which are subsidiaries of wider European groups.

He said: “We have considered the level of resources we are able to devote to firms going through the pre-application phase of IMAP, and have decided to concentrate these on a smaller population of firms – those firms representing a significant market share, and being those which we have always regarded as having the highest potential impact on our objectives.

“Such firms will receive the greatest intensity of review throughout the pre-application phase, with detailed reviews of various aspects of their model in accordance with a work plan which we will agree over the course of the coming weeks.”

Adams also told the conference that the FSA was cutting the time during which it could take applications for approving internal models to the two months between March 30th and May 31st next year.

He explained that the change to the timetable had been prompted by uncertainty over the EU decision making process on Solvency II, which is still being haggled over by member states in the Council of Ministers.

“The EU policy-making process remains fluid, and the lack of clarity around the final policy position – and associated transitionals – means that we still do not have full clarity on what has to be in place for day one

Adams also told delegates that while the FSA’s “current view of the world” was that Solvency II will be fully implemented on January 1st, 2013, any slippage would lead to a change to the implementation process. He said: “If this should change – although I should stress that we have no information at present that it will – we will naturally review our plans and may look again at our implementation approach.

And he made clear that the pre-application process was now closed, meaning that firms that had yet to enter the process should not expect to receive an immediate decision on their internal model.

Adams also warned firms that the compressed timescale for approving internal models meant that they could discover at a later date than they had originally bargained for that they would have to abide by a potentially more capital hungry standard model.

He said: “Firms should also give consideration to the extent to which use of the standard formula would imply a much higher regulatory capital requirement than their own model, and explain to us what their approach would be to meeting those additional capital requirements, given that our decision on whether or not to approve their model would potentially come much later in the day.

KPMG insurance director Janine Hawes said: "The FSA has today introduced a two-tier approach to internal model approval process; more clarity is required on the impact for firms in the second-tier. These firms may need greater help to pass the approval standards expected. It is not clear how many of them will ultimately gain day-one approval. Some may need to consider other alternatives to mitigate the high standard formula charge, for example by the use of undertaking specific parameters."