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Life insurers urged to speed up Solvency II compliance

Life insurers should accelerate current processes used in managing compliance as the upcoming European Solvency II deadline draws nearer, Towers Watson has urged.


25 SEPTEMBER 2014 | BY JUDITH UGWUMADU

The UK actuarial firm today published a survey highlighting the time pressures that life insurers will be under to meet the Solvency II reporting timelines, which is due to come into force in January 2016.

The survey said the leading risk and capital modelling issues preoccupying UK life insurers are: model validation requirement, the application of the matching adjustment (MA) or volatility adjustment (VA), and accounting for credit and longevity risks.

Towers Watson found in its poll of 20 UK-based life companies, representing the vast majority of life firms using internal models for the new capital rules that over two-thirds expect to completely re-engineer their end-to-end reporting processes.

A majority said they expect to increase investment automation and supporting technology, while nearly half expect to make greater use of advanced capital modelling techniques such as Least-squares Monte Carlo methods – a standard numerical method for option pricing.

The survey also acknowledged that progress had been made in validating models but most firms still had ‘further to go’. It noted that attention had switched over the last year to broader model validation requirements.

These include the degree of usability of the internal model for the business, the need to demonstrate independent and robust challenge, and determining the right level of reporting detail for the board.

Of those polled, three quarters said they intend to use a MA (60%) or VA (15%) when valuing their annuity businesses.

Towers Watson senior consultant Tim Wilkins said: ‘Trial MA submissions to the PRA [Prudential Regulation Authority] have provided an early indication of the level of detail involved.

‘We expect there to be pre-application processes for both VA and MA, and both are likely to be restricted in scope and require careful justification.  This creates considerable uncertainty and firms should keep abreast of developments.’

Paul Bowker, a mortality expert at Towers Watson, noted that whilst many firms have made good progress with the run-off approach for longevity risk, other firms are seeking a one year Value at Risk (VaR) approach and, in some cases, are having difficulty achieving credible outcome.

He said: ‘A key challenge under the one year VaR approach is to develop a method that appropriately captures all of the risks that may occur over a one year time horizon.’