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FSA tells insurers to plan now for Solvency II


Insurers must start planning for 2012, when the new European solvency regime known as Solvency II comes into force, the Financial Services Authority (FSA) has warned.

Advert: The Sourcing Summit, 18 & 19 November 2008, Queen Elizabeth II Conference Centre, LondonSolvency rules require that insurers and reinsurers hold sufficient assets to meet their liabilities.  Solvency II is the European Commission's project for implementing a new, harmonised solvency regime across the EU to replace the current patchwork of prudential rules.

A discussion paper published last week launched the FSA's programme of preparation for the new regime by highlighting key requirements and suggesting how insurers might start planning for implementation, even though the new rules are still being developed.

"Although the detail of the European requirements is not finalised, the aim is now clear and the risks of waiting before starting to plan for implementation are considerable in terms of non-compliance in 2012 and/or being forced into costly high-risk programmes of work at short notice," the paper states. "So starting work now on a measured and a flexible basis is a sensible course for regulator and firms alike".

Whereas current EU solvency rules require insurers to hold capital against their insurance risks, under the new system, insurers' capital requirements will also have to take into account market risks (such as a fall in the value of their investments), operational risks (malpractice or system failure) and credit risks (such as a default on a large debt).

UK insurers already meet risk-based capital requirements under the Individual Capital Adequacy Standards (or ICAS) introduced in December 2004. But the FSA warns that Solvency II goes further.

For instance, under the new regime, insurers will have to obtain prior approval if they want to use their own model (as opposed to the standard model) for calculating how much regulatory capital they need, and they will be required to publish reports on their solvency and financial condition.

"While the UK industry is well-placed to move to the Solvency II regime there will be significant challenges for all UK firms" the FSA paper warns. "Prior planning and preparations by firms, starting now, will be crucial". 

Feedback on the discussion paper can be submitted until the end of the year. By March 2009, however, the FSA will ask all firms to identify an individual in their organisation who will be responsible for Solvency II and to confirm their overall governance and implementation plans.

In Europe, the results of 'QIS4', the latest quantitative impact study into the practical implications of the Solvency II proposals, will be published in November by the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS).

CEIOPS has already indicated that the number of insurers taking part in the exercise exceeded the European Commission's targets, with an almost 40% increase in industry participation since the previous study in 2007.

The European Commission hopes that its Solvency II Framework Directive can be adopted by the Council and the European Parliament by the end of 2008 or early 2009.

Implementing measures ('Level 2') are due to be published in the first half of 2010, with a view to these being adopted by the second half of 2010 or early 2011. Supervisory guidance ('Level 3') should be completed at the same time.

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