Sonal Shah talks to the FSA's James Orr on the impact of Solvency II on the general insurance market and the regulator's preparations going forward
James Orr heads up the FSA's general insurance risk specialists department, which works closely with FSA supervisors and prudential policy to provide expert input to development of effective regulation and assuring its implementation in firms, which includes Solvency II.
James has 22 years of experience, qualifying as a pensions actuary then moving to general insurance, with a specific focus on reserving and capital modelling. His roles have included: underwriting inwards reinsurance with a trade credit insurer; working on the British Antarctic Survey in Cambridge on the promotion of scientific research to the insurance industry; and managing the capital and loss modelling teams at Lloyd's of London. He lectures part-time on Cass Business School's actuarial Masters programme. James joined the FSA in 2008.
Why did you choose to become an actuary, and how did you enter the profession?
At school, my teacher said that I'd be a good actuary. I took this as career advice, studied Actuarial Mathematics and Statistics at Heriot-Watt University and qualified with the Faculty of Actuaries in 1994.
What are the key issues facing general insurers?
It is a long list: economic pressures driving claims costs; reduced yields on investments; changing distribution and competitive environments - the shift of economic activity and wealth to the East is clear and fundamental. All of these challenge firms' business models.
How do you expect Solvency II to affect the general insurance market?
Solvency II is clearly challenging and represents a huge investment in terms of finance, staff resources and management. In less developed markets, the greater formality around risk and capital management can be expected to drive consolidation and, in the UK, I would expect the minimum size of firms to increase.
If Solvency II achieves all its goals, in addition to the creation of a single insurance market within Europe, firms should be much clearer about what their risk appetite is and the pricing and control of the risks they accept. With the effective integration of risk and capital management, solvency and the security of firms should improve, as it is less likely that they'll take on risks that they have failed to price and capitalise correctly.
I would expect more structure around risk assessment and investment decisions within GI firms, with more risk specialists, including actuaries, involved in these processes. Although those of us who have grown up through the early days of Risk Based Capital at Lloyd's and the UK's Individual Capital Adequacy Standard (ICAS) regime might feel that greater formality could restrict the scope for individual creativity and problem-solving, there is still much to do in better quantifying risk and uncertainty for the real-world risks accepted by firms. I see this as a maturing stage in the development of the sector.
Is Solvency II being regarded as an opportunity or a disturbance by firms in the market?
Implementation of Solvency II clearly involves a huge amount of work. It should not be viewed, however, merely as a compliance exercise, but as offering significant benefits through enhancements to risk management, better alignment with capital and a more integrated approach. Opportunities are also presented by the changes in asset allocation rules, particularly the prudent person principle, which will allow firms to align their asset choices to their overall strategies.
What are the implications of the delays in the implementation of Solvency II?
We have attempted to approach the expected change in the implementation date to January 2014 in a way that allows breathing space without losing momentum. We are pressing ahead with internal model approval, and will continue to work with firms to ensure that we and they are ready. It is also important to bear in mind that the change in dates is not a complete one. We still expect to be required to have transposed the rules into our Handbook by January 2013. And it is possible that some requirements will fall on firms earlier than 2014, possibly in the area of reporting. We await further clarity from Europe in this area.
Is the FSA seen as an enabler in the general insurance market?
Our role as regulator of the insurance market is to ensure that firms are sufficiently capitalised and that consumers get the right level of protection. We work with and challenge 'live' firms through the ICAS regime, while ensuring that, with specialist run-off firms, policyholders are protected.
With regard to European policy-making, we have helped to develop guidance, interacting with organisations such as the Groupe Consultatif, and our pre-application process prepares firms for Solvency II.
Furthermore, Solvency II encourages firms to simplify complicated group structures that may have resulted from mergers and acquisitions. Again, our actuaries play a critical role in assessing the suitability of Part VII transfers that are put to the courts for approval.
The FSA is often cited as a leading regulator globally - what gives it this reputation?
That's a tricky question for somebody in the middle of the organisation! But one of the FSA's key strengths is the rigorous approach it brings to policy formulation and implementation. That can be seen in the way we are going about implementing Solvency II.
Does the FSA have sufficient powers?
The FSA's powers are really a matter for Parliament as they are set for us by the legislation under which we operate. We are being split into the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) next year, and Parliament is considering what legislative changes are needed.
The creation of the PRA coincides with Solvency II. How will the FSA manage the workload?
Clearly, there will be significant challenges. However, there are huge amounts of work being done in the FSA and Bank of England to prepare us for those changes. Solvency II is an important factor and we have been conscious of the way that such workstreams will fit into the wider programme of reform.
Is there anything we can learn from other industries?
Not everything that counts can be counted. In the same way that banks traded on the basis of risks assessed using flawed models, we should always consider what might lead to models failing and the consequences of this.
What has been your greatest professional challenge?
Making the transition from technical manager to being a leader of actuaries. Influencing decision-making is trickiest, but I am pleased at the progress that actuaries and other risk specialists have made in shaping Solvency II.
What do you do to relax?
I play the saxophone, teach a little music and lecture part-time at Cass Business School. I also enjoy training for triathlons. I love spending time with my family and think being a Dad is the world's best job!
James Orr is the chief actuary heading the general insurance department within the risk specialists division at the Financial Services Authority