On behalf of the General Insurance Board and Solvency II Working Party, Amerjit Grewal shares members’ views on how Solvency II regulation could be tweaked to better serve a post-Brexit UK
In June 2020, the UK government announced that there would be a review of Solvency II (SII) to ensure it remains effective, relevant and competitive to UK insurers and policyholders post-Brexit. To support this, and as part of the first stage of the review, the Treasury sent out a call for evidence, asking UK firms and other stakeholders to share views on key areas in which regulation could potentially be enhanced.
The IFoA responded to this call for evidence in February 2021, capturing both non-life and life perspectives on the regulatory regime. Here we will look specifically at the non-life views shared by members, collated by the General Insurance Board, Solvency II Practical Review Working Party and responses from our market survey, sent out earlier in the year.
The London Inter-Bank Offered Rate (LIBOR) is currently used to determine the discount curves by currency. However, LIBOR will be replaced by overnight indexed swap (OIS) rates before 2022. The government asked insurance firms whether this transition would result in any issues, and if they had a preference when it came to the timing of the switch.
Our market survey showed that general insurance considerations included:
- Observations that the switch would affect life insurers writing longer tailed business far more significantly than non-life insurers, where the focus will be on assessing any solvency capital requirement (SCR) and balance sheet impacts and communicating those to internal stakeholders
- The desire to test LIBOR and OIS rates in parallel to help with communication to management, meaning a transition as late as possible (ie year-end 2021) would be favoured
- A request from Lloyd’s actuaries for the Prudential Regulation Authority (PRA) and Lloyd’s to assess whether the transition would impact assumptions or methodology within the internal model (such as the interest rate risk), and to provide market-wide communications to accommodate any change
- The desire for alignment between the PRA’s yield curve publication and that of the European Insurance and Occupational Pensions Authority, as the former is published approximately five working days after the latter – further straining already tight reporting deadlines.
Another key aspect of the call for evidence was to understand whether changes should be made to the existing reporting framework to make it more cost effective and to add value to insurance firms. Our market survey showed significant interest in this aspect from members, who suggested that:
- Many felt SII reporting requirements were disproportionate in terms of cost and effort expended to benefit gained
- There was a desire for refinement of certain disclosures to remove duplication, for example at year-end where quarterly and annual solvency returns are required. It was also suggested that various templates should be combined to avoid duplication of effort, and that some should be removed – such as Technical Provisions Data, which requires very granular data that is arguably of spurious accuracy
- A risk-based approach should be applied so certain templates only need to be collated if a certain risk threshold is breached
- Reporting deadlines should be extended to ensure quality is not compromised to meet working day timetables
- There should be clarity from regulators on how each template or data request is being used, as it is not always clear
- Reporting of the standard formula should be removed for insurance firms using internal models that are heavily validated, meaning any standard formula reporting is of limited use to the company itself. Comparisons are only prepared for own risk and solvency assessment (ORSA) or reporting, and so it would be beneficial for the PRA to consider whether there is a business need for insurers to run the two in parallel
- Members saw the benefit in the Actuarial Function Report requirements.
The call for evidence asked whether there would be benefit in changing the standard formula or internal model processes in determining SCR charges. Responses to our survey suggested that:
- As the standard formula was calibrated on European data, it would be beneficial for a refresh using UK data only
- The current approval process for new internal models often results in many major changes being triggered by the aggregation of minor changes; members welcomed a review of the process
- There was a desire for more explicit guidance and scenarios from the regulator on how insurers should capture climate change risks in capital modelling. Some questioned whether climate change was better captured elsewhere, for example in emerging risk frameworks or ORSA reporting, rather than the SCR calculation itself.
When it came to the responses concerning the risk margin:
- Overall, the theme was that non-life insurers would welcome a simplification of the calculation
- Some members have suggested that, rather than using a cost of capital approach, percentiles could be used – as is the case in Australia
- Members generally welcomed an overhaul of the cost of capital approach. For example, it remains unclear how the 6% was set (or how/why it remains relevant). They felt it would be beneficial to be given more information about how the assumption will be set going forward, if it is to remain as a set percentage
- It was felt that it would be beneficial for the Treasury to consider how any change made to the risk margin methodology would impact those insurers reporting under IFRS 17, as it is likely that insurers reporting under both regimes would want to align the two in order to minimise operational costs.
Other areas for review
Our market survey also raised other general insurance viewpoints, including:
- Depending on their risk profile, firms should be allowed to select one year or ultimate risk
- There should be better sharing of data collated by UK regulators (through regular benchmarking or reviews) to provide more feedback to industry and avoid a one-way stream of information
- Certain definitions should be better clarified – for example, the definition of receivables ‘due’ and receivables ‘overdue’, which some feel are open to interpretation
- The UK should be made more competitive by reducing reporting requirements or focusing more on forward-looking reporting such as ORSA, rather than historic ‘accounting’ type reporting
- There is an opportunity to further align to IFRS 17 or, at a minimum, ensure any divergence from current SII regulations that could potentially also disrupt IFRS 17 implementation is communicated to the market in a timely manner.
This is only the first stage, and we expect further correspondence from the Treasury once industry responses have been reviewed. The IFoA’s General Insurance Board, in collaboration with the SII Practical Review Working Party, will provide further updates from a non-life perspective as and when more information comes to light.
The full response submitted by the IFoA to the Treasury can be found at bit.ly/2RLxJ4F and the full call for evidence can be found atbit.ly/33AmMpi
Amerjit Grewal is a GI actuary at AEGIS London