Countdown to Solvency II - A new interpretation of “proportionality”?

CSFI’s “Insurance Banana Skins” survey has once again highlighted that increased regulation is felt to be the biggest single issue facing insurance companies. Of course, it is not just a matter of Solvency II – there are regulatory changes taking place across the globe (including in the US, South American, Africa and Asia), whilst in the UK, the activities of the FCA will be just as influential for many insurers. But it is the progress of the FSB’s measures for global systemically important insurers (G-SIIs) that point the way towards a different regulatory future for at least some firms.

 By Tim Edwards, Director, Insurance and Investment Management, PwC

 G-SII policy measures will impose new supervisory requirements on the most complex (“global, systemically important”) insurers, following existing provisions in the banking sector (for “global, systemically important banks”). So far, it is expected that only a handful of global insurers will be captured, though there are expectations of some trickle-down into regional and domestic insurers in the future (see the European Commission’s consultation on Recovery & Resolution plans for non-banks as one example). The list will be reviewed annually, and will extend to reinsurers in July 2014. Requirements currently include capital and risk management measures that address all a Group’s activities (not just its insurance operations – policy measures are still being developed and so concepts listed here may change), and the need for a robust and detailed “Recovery and Resolution” plan, responding to the risk of failure and providing a ladder of supervisory intervention.

 From our perspective, banks have invested significantly, reflecting the level of effort and work required to address some of the new systemic policy measures, such as recovery plans. Many insurers on this list have already developed their own responses to these measures and it is this kind of early preparation which will help them in the long run.

 Solvency II already goes partway towards these requirements, through the ORSA (a need to align risk profile to capital, covering both insurance and non-insurance activities, re-run in the event of materially change, and report the results to supervisors), which includes stress and scenario testing activity. But for the very largest, it will not be enough simply to identify the greatest risks – contingency plans will also need to be prepared, perhaps a natural extension of the ORSA. This is a great example of proportionality, applied in a way that has had little focus to date – the most systemically important insurers will be subject to requirements that go beyond those imposed on the vast majority of firms under the scope of Solvency II.

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