By Tim Edwards, Director, Insurance and Investment Management, PwC
Solvency II seems to have slipped off the agenda whilst we wait for political agreement, followed by votes, and then messaging, all sometime in the future. But in reality, the ICAS+ regime is moving both the PRA and the major firms in the industry firmly in a Solvency II direction.
Beginning with the models themselves, the PRA feedback certainly appears to have an eye for future Solvency II requirements, with focus on complex issues such as calibrations, assumptions, expert judgement and dependencies (diversification / aggregation issues). All of this adds up to a “deeper prod” than we have seen historically. Firms are now expected to be able to reconcile – with a good story and at some degree of granularity – their ICAS v Solvency II capital requirements, as well as their current capital position v last ICA. A higher standard of validation is now expected, and model limitations are expected to be identified. This provides an essential hook to the use test, with boards and senior management expected to be able to explain how any model limitations might impact their ability to make decisions that are informed by model output.
The forward-looking agenda of the PRA has led to firms having to provide business plans and strategies over a 3-5 year period, including risk profiling, risk appetite and anticipated capital requirements. All of this needs to be backed up by stress and scenario testing, and with evidence of active involvement of both Board and Risk Committee. This begins to feel a bit like a Solvency II ORSA, and that is not coincidental.
There is a long way to go, of course. Many firms have commented that feedback from the PRA is very slow, and so required changes to practices and methodologies are being delayed. In some cases, model developments are held back, for fear of having to unwind elements at a later stage. I recently heard this elegantly referred to this as “a self-acknowledged development point” for the PRA, which seems a fair assessment.
With many commentators now expecting Solvency II to be implemented from January 2016, and EIOPA’s proposed Interim Measures from early 2014, ICAS+ firms should be some way along the road.
For the majority of the industry who are not subject to ICAS+, many of the above requirements are just as relevant. I’ll be putting a focus on that sector of the industry next time…
|
