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The Actuary The magazine of the Institute & Faculty of Actuaries

Soapbox: The moving target of Solvency II

Over the last four years, the FSA has been updating UK insurers on Solvency II developments, and writing to firms that will be affected. So, while this article is not going to outline Solvency II, or give you any political background, it is going to tell you what the FSA considers are the things actuaries should be focusing on in 2010.

Firstly, preparing for the fifth Quantitative Impact Study (QIS5) exercise. This preparation should include:
>> Reading the draft technical specification.
>> Being part of your firm’s multifunctional project team, which should include not just actuaries, but also risk management people, finance people, IT and so on.
>> Planning to complete the qualitative and quantitative questionnaires; review them and discuss in appropriate forums to understand the results and the effect on capital requirements; processes; systems; Solvency II implementation plans.
>> Planning how to produce the Solvency II balance sheet, including the technical provisions on the required basis, other liabilities, assets and tiering of own funds, as well as the solvency capital requirement (SCR) and the minimum capital requirement (MCR).

While previous QIS exercises have allowed for a “best efforts” basis, we are strongly encouraging firms to use real-life data and processes. This will provide an opportunity to perform a real-life gap analysis and to provide good quality information to the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) and the European Commission that will inform the final framework, as well as providing your own firm with credible information to influence the final stages of the Solvency II debate.

Secondly, getting involved in your firm’s Solvency II implementation project, particularly in:
>> Preparing the Solvency II balance sheet including the valuation of assets, technical provisions and other liabilities.
>> Identification of the basic own funds from the balance sheet and how they fit within the tiering system. n Identification of whether ancillary own funds might form part of the capital used to meet the SCR and, if so, planning the application for approval.
>> Calculation of the SCR and MCR, whether from the standard formula, an internal model or a combination of the two and assessing whether these are met on an ongoing basis.
>> Developing the actuarial function — who is going to be responsible for what, and how it supports the risk management function, including input into the own risk and solvency assessment (ORSA).
>> Planning for the changes in supervisory and public reporting, and the effect of reduced timescales compared to current regulatory reporting and different reporting format.
>> Possibly getting involved in other areas of Solvency II implementation, for example, the risk management framework. Thirdly, many companies are part of groups, and firms need to work out:
>> Where a group SCR and balance sheet will need to be calculated, noting that this may include non-insurance entities.
>> How these figures will be produced, remembering that the group calculation default method is accounting consolidation. The use of the deduction and aggregation method or a combination of methods will require approval from the group supervisor.

Actuaries then need to establish their involvement in producing these figures, particularly if some come from a group internal model. While there is a lot of material to read from the Commission, from CEIOPS and from the FSA, there is no substitute for this. CEIOPS spends hours, days and weeks drafting its advice and this reflects the thinking of supervisors across Europe on how the framework should be implemented. As these are the people that will be supervising your firms, it is worth reading their thoughts.

And yes, we know that this is a moving target and that the Commission has not finalised level 2 implementing measures. However, the direction of travel is clear, so waiting until everything is absolutely concrete is a wasted opportunity.

The FSA has also noted that there are a lot of myths about different aspects of Solvency II appearing in conference presentations and questions we are asked by insurers and consultants. Many of these can be debunked by reading the Solvency II Directive — this is concrete. It is in force now, and is a comprehensive description of the regime.

If this is not enough information, the FSA has a series of industry groups on different aspects of Solvency II. These meet regularly and update industry on the key issues and future developments, such as when consultation papers will be published and the deadline for responding. If you are interested in joining one of these groups, please e-mail solvency2@fsa.gov.uk