Paul Fisher, Executive Director, PRANow is a pivotal time for the insurance industry in its transition to Solvency II. The regime goes ‘live’ in nine months and the PRA will be open to applications from 1 April 2015, for 19 different types of permission. This is a new regulatory regime - for both insurer and regulator. A smooth transition will only be achieved via a continual two-way dialogue.
Turning point: Why Solvency II marks progress
The insurance market today is a highly sophisticated, global industry. It follows that the corresponding regulatory regime should be commensurately dynamic and risk-based. What we currently have in Europe, however, is not fit for that purpose. The European framework is a fragmented patchwork of regulation – dating back to as far as the 1970s in some cases.
Solvency II is a risk-sensitive regulatory framework which places greater emphasis on high quality governance and risk-management. The real benefit for everyone, however, can be gained with harmonisation. Solvency II will introduce a level playing field through greater EU-wide co-operation and transparency.
To be clear, the UK industry is in a relatively good starting point. We have operated a risk-based regime for around ten years. So although the detail of the regime changes substantially, many of the concepts are very similar.
As I have said before, the PRA will be looking to implement Solvency II exactly as intended by the Directive. Our focus now is squarely on implementing the new regime in a robust and timely manner, with proportionate judgements where required. I’m pleased to say that the UK is well on the road to achieving this.
Based on feedback we have received and further talks with the industry, amendments have been made to the national-specific reporting templates to reduce the burden on firms and improve clarity. We have also introduced a simplification of the transitional deduction from technical provisions.
On 20 March 2015, the PRA issued a policy statement containing the final rules and supervisory statements on the transposition of Solvency II rules into the PRA Rulebook. The rules take effect from 1 April 2015, allowing the PRA to start receiving applications for approvals. That means we are now at a watershed in the transition to the new regime.
The run-up to transposition: Policy certainty
HMT has decided to grant the PRA the power of prior supervisory approval for the volatility adjustment (VA). This brings the benefit of certainty to the process of obtaining the VA, where needed. Let me take this opportunity to assure you that the PRA will operate an efficient and proportionate approval process that looks to minimise any additional administrative burden on firms.
What does Solvency II mean for you: the role of the non-executive director?
To be an effective Board member, one does not need to be a modelling specialist. The financial crisis has brought to the fore the importance of governance and the role senior people play in the successes and failures of a company. In truth, it was a reminder of what we have always known.
Boards are responsible for ensuring continuous compliance with the capital requirements of Solvency II and ensuring that the way firms calculate the solvency capital requirement (SCR) is appropriate. For internal models, the use test and validation process are important tools for non-executive directors (NEDs) to understand and challenge the process. For standard formula firms the Board needs to understand and challenge the appropriateness of the standard formula and ensure it is happy with any remedial action to ensure the SCR remains appropriate to the risk profile.
The own risk and solvency assessment (ORSA) is a critical tool in a Board’s armoury. This should not be a ‘good news story’ but instead identify areas of concern within the firm and guide the remediation the firm is planning to take. In short, the ORSA needs to be a realistic assessment of the firm and NEDs need to challenge any concerns.
NEDs, by their very nature, possess wider market experience and should feel empowered by this to guide constructively, assess and robustly challenge all strategic decisions made within the business – and this involves the outputs of the Solvency II model.
Conclusion
The insurance business is fast becoming globalised and interlinked. Regulation must ensure that it keeps pace with these developments. I hope as both sides of the industry advance and learn, industry and regulator can continue to develop and work together.
Paul Fisher is Executive Director at the Prudential Regulation Authority.