Regulator to help insurers avoid the costs of Solvency II delay

However Julian Adams, Director of Insurance with the FSA, told an industry briefing that changes the regulator had made to its assumptions about when the new standards will come into force were "emphatically not a wholesale delay in the implementation date".

"It is very likely that some form of Solvency II reporting will be required during 2013 as Member States will need to demonstrate readiness for the new regime. But the detail of what this might amount to is unclear," he said.

Last month the FSA announced that it had updated its implementation assumptions for the Solvency II Directive (155-page / 3.7MB PDF), which sets out stronger risk management requirements for European insurers and dictates how much capital firms must hold in relation to their liabilities.

Rather than coming into force next year as originally planned the Directive is to be transposed into UK law by 1 January 2013 when the responsibilities of the European Insurance and Occupational Pensions Authority (EOIPA) take effect. The new standards will then come into force for UK firms on 1 January 2014.

Insurance firms had expressed concerns that this split implementation, known as bifurcation, would increase the costs associated with regulatory compliance by forcing them to run two models simultaneously.

Adams said that the regulator intended to "explore with firms possible ways of avoiding the costs associated with the dual running of [the existing Individual Capital Adequacy Standards (ICAS) regime] and Solvency II model, while continuing to secure a degree of policyholder protection".

"This could include investigating whether, where we are minded to approve a firm's [Solvency II] model, such a model could be used to demonstrate satisfaction of some or all of a firm's ICAS requirements," he said.

However, the FSA would not "remove from firms the current obligation in our handbook to keep their capital position under review and to make use of their model in reaching business decisions".

"Removing such requirements in the run-up to the introduction of the new regime would in our view send the wrong message... we need to strike the right balance between operational efficiency and policyholder protection," he said.

He added that the FSA had "no latitude to waive or alter the requirements" to keep previous European requirements in force until the January 2014 implementation date of the Solvency II regime.

He stressed that there should be "no loss of momentum" in firms' implementation programmes, although he admitted that many issues would not be completely certain until the new rules were finalised.

"We are aware of a number of areas that affect key aspects of a firm's business that are still under negotiation. We are playing a major role in negotiations and [European] Commission working groups as we want to ensure that we can achieve an outcome that makes sense in the context of the UK marketplace, and provides a degree of protection for policyholders that is appropriate and economic," he said.

The FSA intends to publish its first consultation paper on the implementation of Solvency II later this week, with a separate Treasury consultation due later in the year, Adams said. He added that two public consultations, on reporting and risk assessment, were also expected from the European authorities.

The FSA said previously that it remained ready to receive applications from firms who wish to use their own system for calculating capital requirements from 30 March 2012, but that firms would now have until mid-2013 to apply depending on complicating factors.

Firms using the standard process will be able to apply from 1 January 2013, but the regulator will exercise its discretion to deal with more complex issues earlier, it said.