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FSA’s shift of focus on Solvency II signals extra strain for insurers

PwC has highlighted the potential strain on insurers due to changes to the Financial Services Authority’s (FSA) Solvency II guidance and internal model approval process, as announced at a conference held by the regulator yesterday.

The announcements seen as most significant by the firm include:

>> The FSA refocusing its internal resources for model approval towards higher-risk and impact firms. This includes the top 10 life and general insurance companies, any firms that have involvement at Lloyd’s (including the non-Lloyd’s activity of those groups) and firms that have companies where there is college interaction.

>> Recommending insurers to demonstrate a greater degree of independent assurance over the development of their internal model and model approval process.

>> Pushing back timing of formal submission for pre-approval to use an internal model to the end of March 2012, which PwC says will create a greater gap between those in the Lloyd’s market and the rest of the insurance market and gives less time for any subsequent amendments to the model.

Jim Bichard, insurance partner at PwC, said:

"The large number of UK insurers seeking internal model approval has clearly amplified the significant pressure regulators are under. News that the FSA is refocusing its resources for model approval to prioritise higher risk or larger and more complex firms underlines the resourcing strain Solvency II has created on all parties. We see this as a pragmatic move which makes better use of all the expertise in the market in dealing with the uncertainty caused by this unprecedented regulatory change.

"Larger and higher impact firms may now expect a greater degree of scrutiny and challenge from the regulator. They may also need to dedicate significantly more time and resource to justifying the approach taken and demonstrating solid model evidence and documentation to the FSA.

"Small and medium-sized insurers may see a reduction in the amount of practical interaction and support they receive from the regulator. These firms will have to rely increasingly on independent assurance that their model plans are fit for purpose, which could be an unforeseen cost."