Two-month window from the end of March 2012 for internal model approval

Insurers were dealt a major blow this week as it became clear that the FSA was struggling with the early preparations for Solvency II.

In a speech at the FSA’s Solvency II conference, the regulator’s recently appointed head of insurance, Julian Adams, outlined changes to the process for approving companies’ internal models.

UK general insurance companies prefer using internal models, under which they can tailor their Solvency II capital requirements to their risk profiles, rather than the ‘one size fits all’ standard models, under which they would be required to hold more capital.

But the internal models have to be approved – and Adams revealed that the timetable for approval has slipped. Companies will only be allowed to apply for internal model approval in the two months from the end of March 2012, later than the FSA originally anticipated.

Adams blamed the delay on continuing uncertainties over the EU decision-making process on Solvency II, which European member states are still haggling over in the Council of Ministers.

“We still do not have full clarity on what has to be in place for day one,” said Adams. He even hinted that the European Commission’s implementation date of New Year’s Day 2013 may not be set in stone, adding that any slippage would have knock-on effects on the implementation process.

Adams warned that the FSA’s tight timescale for approving internal models meant firms may have to be prepared to switch to a standard model at short notice.

KPMG regulation partner Rob Curtis, who was head of international insurance policy at the FSA until last November, said: “Solvency II is starting to unravel. Over the last few years, everybody has been having policy discussions, but now they are having to work out how to implement it.”

Adams also announced that FSA resources for helping insurers prepare their internal models for its approval will focus on fewer companies – the 10 biggest life and non-life insurers, companies with Lloyd’s operations and those that are part of wider European groups.

He explained that the largest firms and those with the “highest potential impact on the regulator’s objectives” would be selected for the top tier of assistance.

But according to sources close to the FSA, the changes have been prompted by manpower shortages at the authority, which is competing with the private sector for scarce Solvency II actuarial skills.

We say ...

- Europe's politicians need to get their act together
to make sure that the Solvency II framework is ready for approval by the European parliament in the autumn. If the Council of Ministers cannot agree on a framework by then, they should delay the 1 January 2013 implementation date.
- The broader risk to Europe's insurance industry is that the continuing uncertainty over the shape of the solvency regime will deter investment by insurance companies from outside the EU - not much of a risk to the likes of Hungary, but a big problem for the London market.