PRA approves 19 UK insurers' Solvency II 'internal models'

A total of 19 insurers will use either full or partial internal models, covering their whole business or parts of their business, according to a list published by the PRA (1-page / 167KB PDF). The regulator has not confirmed which firms have received only partial approval, or indicated whether any other applications were rejected or withdrawn.

"For those who received the necessary approvals, they will breathe a huge sigh of relief as they will feel they have obtained a capital advantage which they would have been seeking by implementing an internal model," said insurance law expert Rabbani Choudhury of Pinsent Masons, the law firm behind Out-Law.com. "For unsuccessful applicants, they will have specified contingency plans in their model applications to the PRA, which will in turn expect that contingency to take effect."

"Most unsuccessful applications will use a Solvency II Directive standard formula to calculate their capital, and will also potentially have a capital add-on imposed, which would typically result in them holding a higher amount of capital. However, these firms will have the opportunity to prepare fresh applications in future, although there will be a waiting period before a further application will be allowed," he said.

The Solvency II regime will apply to more than 400 retail and wholesale UK insurance firms, as well as the Lloyd's insurance market, when it comes into force across the EU on 1 January 2016. The new rules set out broader risk management requirements for European insurers and require firms to hold enough capital to cover all their expected future insurance or reinsurance liabilities.

The rules permit firms to develop internal models in order to calculate their liabilities. These models must receive approval from the firm's own regulator, and cover "all material risks" to which firms are exposed. Firms that choose not to develop an internal model will be able to use a standard model, which the PRA said was "appropriate for the majority of insurers".

However, insurance law expert Bruno Geiringer of Pinsent Masons said that the internal model approval process was "absolutely vitally important" for UK insurance groups with diversified business lines, as it would enable them to "align their risks to their capital in the best way for them".

"Where the PRA has not approved an insurer's application for approval of their internal model, the insurer will have to use the standard model which may reduce their capital strength," he said. "In that event, these insurers may either become vulnerable for takeover or need to restructure their businesses so that they manage the business on a more 'capital-lite' basis with less emphasis on sales of capital intensive products such as annuities."

"We are likely, therefore, to see substantial restructuring in 2016 as insurers look to offload non-core portfolios that are too capital intensive. 2016 should be a very active year for boards of insurers and their professional advisers," he said.

The insurers that received full or partial PRA approval are: Amlin; Aspen Insurance UK; Aviva; British Gas Insurance; Just Retirement; Legal and General; Markel International Insurance Company; MBIA UK Insurance; the National Farmers' Union Mutual Insurance Society; Pacific Life Re; Pension Insurance Corporation; Phoenix Group; Prudential; QBE European Operations; RSA Insurance Group; Scottish Widows Group; Standard Life; Unum European Holding Company; and the Society of Lloyd's, which applied on behalf of all Lloyd's of London member syndicates.

The PRA said that "a number of insurers" were continuing to develop internal models, and planned to apply for approval later than 1 January 2016. These firms will be required to use the standard model until their own models are approved.