Aviva, Prudential and Society of Lloyds are among a group of UK large insurers to have secured approval from the Prudential Regulation Authority (PRA) to use internal or partial internal models under the Solvency II directive.
The regulator's decision means these firms can start using their models to calculate solvency capital requirements from 1 January 2016. The PRA said it marked a "significant step forward for the UK insurance industry" in preparing for the implementation of the directive.
Andrew Bailey, deputy governor for prudential regulation and CEO of the PRA, said: "Today marks a major milestone in the implementation of Solvency II in the UK. Going forward we will monitor insurers' models carefully in order to ensure they continue to deliver an appropriate level of capital."
The PRA did not reveal where an insurer's application to use an internal model had been either rejected or withdrawn, but said a number of firms were planning to apply for model approval after 1 January.
Insurers without approval to use internal models are required to adopt the standard formula, which is set out by regulators to determine capital requirements. The PRA considers the standard formula “appropriate” for the majority of insurers.
But Bruno Geiringer, an insurance partner at Pinsent Masons, said those adopting the standard formula could reduce their capital strength. As a result, they could either become vulnerable for takeover or would need to restructure their businesses on a "more capital-lite" basis with less emphasis on capital-intensive products such as annuities.
He added: "We are likely therefore to see substantial restructuring in 2016 as insurers look to offload non-core portfolios that are too capital-intensive. 2016 should be a very active year for boards of insurers and their professional advisers."
The firms listed by the PRA are those headquartered in the UK. Where an insurer provides products in the UK but has a parent based elsewhere in the EU, the regulator where the parent company is based will communicate the decision. The PRA said it would have taken part in discussions on approval.
Firms that gained approval to use internal models are:
- Amlin Plc
- Aspen Insurance UK Ltd
- Aviva Plc
- British Gas Insurance Ltd
- Just Retirement Ltd
- Legal & General Group Plc
- Markel International Insurance Company Ltd
- MBIA UK Insurance Ltd
- The National Farmers' Union Mutual Insurance Society Ltd
- Pacific Life Re Ltd
- Pension Insurance Corporation Plc
- Phoenix Group
- Prudential Plc
- QBE European Operations Plc
- RSA Insurance Group Plc
- Scottish Widows Group
- Society of Lloyd's
- Standard Life Plc
- Unum European Holding Company Ltd