Articles - SIMR and Solvency II – identical twins or forgotten cousins?

For a long time the industry has been most preoccupied with the Pillar 1 quantitative aspects of Solvency II (SII). But as we approach the final dash to SII go live the UK’s Prudential Regulation Authority (PRA) is clearly widening its focus to the full spectrum of SII requirements designed to change how insurance businesses are governed and managed post SII implementation on 1st January 2016.

 By Barney Wanstall, Director, Insurance, PwC
 The clearest example of this is the UK’s new Senior Insurance Manager’s Regime (SIMR) bringing into sharp relief the Pillar 2 aspects of SII. Pillar 2 of SII requires insurers to develop and demonstrate an adequate system of governance, including appropriate internal organisation and key functions, an effective risk management system, and prospective risk identification through their own risk and solvency assessment (ORSA). A key driver of SIMR is the Pillar 2 objective of ensuring insurers have adequate systems of governance and appropriate internal organisation of key functions. The objective of SIMR is to ensure that individuals who are effectively running insurance companies, or who have responsibility for key functions at those firms, behave with integrity, honesty and the appropriate levels of skill. These individuals are expected to be responsible and accountable for the sound and prudent management of the firms they run. The new rules will apply to insurance and reinsurance firms within the scope of SII, including the Society of Lloyd’s. Key aspects of SIMR include:
 1. A more granular and specific regime implementing the enhanced governance measures, ongoing fitness and propriety assessments in SII;
 2. A new narrower set of controlled functions that capture a wider range of people. SII introduces the concept of ‘key functions’ and ‘key function holders’ (with responsibility for the following functions; Internal Audit, Compliance, Risk, Actuarial and for GI firms Underwriting);
 3. A new set of conduct standards that will apply to a broad range of people across firms; and
 4. The requirement to provide the FCA and PRA with formalized governance maps and forms detailing the scope of individual responsibility.
 Whilst SIMR is not a significant change in regulatory expectations about good governance, implementation is proving to be more complex than expected for many firms and, for some, a little difficult. As with any regulation the two key compliance questions are what does good proportionate implementation look like and what are the potential regulatory consequences of not getting the implementation right? Part of the answer to the second key compliance question lies in one of the key principles of Solvency II which is that some risks may only be adequately addressed through governance requirements rather than through the quantitative requirements reflected in the Solvency Capital Requirement (SCR). Regulators consider an effective system of governance as essential for the adequate management of insurers. Ultimately significant failures in governance can result in the imposition of capital add-ons by the PRA as well as the use of s.166 powers by both the PRA and FCA. It is notable for instance that more than 50% of all s166 reviews for the past 2 years have been in the category of “Governance controls and risk frameworks”. For individuals it can lead to personal fines, sanctions and ultimately disbarment from working in the financial services sector.
 So there are some potentially significant consequences for not getting it right. In summary therefore this is not a topic that can be looked at in isolation – and it may very well need to be higher on your firm’s priority list.
 Key dates
 1/1/16 Governance Maps and key functions
 08/02/16 Last date for submission of Grand-fathering notification to the regulator.
 7/03/16 Remaining SIMR requirement come into effect

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