With Solvency II now live, what more needs to be done by insurers and how can they embed the processes and systems that have been developed?
There are five key focus areas that insurers need to address in order to deploy and embed the processes and systems required under Solvency II.
Many firms are working on developing and refining their internal models. As firms begin to scale back their implementation programmes they are shifting focus towards value-adding initiatives, such as capital optimisation. Specifically, the following items will be core to firms’ activities in the coming months:
In recent months the PRA and EIOPA have issued updated guidance around certain aspects of the Pillar 3 reporting. Firms should analyse this guidance, and any required changes to systems and processes must be adopted to ensure compliance with the latest requirements. Specifically, the following items will be core to firms’ activities in the coming months:
Firms need to familiarise themselves with the current proposals on what assurance will be required post-Solvency II going live. Understanding the group approach and Standard Formula appropriateness is essential. In light of these requirements, some firms are making targeted improvements ahead of assurance being completed.
The key IMV activities for firms in the coming months will include the following:
Recently a few firms have started to explore with us the inclusion of risks which historically haven’t featured in ORSA dry runs particularly tax risk and pension scheme risk. Maturity of Group Risk consideration is also improving with more emphasis on intra-group exposures.
Other items which many firms will be considering include:
Deferred tax assets (DTAs) have the potential to materially reduce the SCR and materially increase Own Funds. Accordingly, firms’ approaches to modelling and valuing such DTAs have attracted considerable regulatory scrutiny, particularly in the UK.
Solvency II mandates an IFRS approach to the identification and valuation of DTAs. However, points of debate have emerged on how IFRS principles should be applied in a Solvency II context. This is true both for the Solvency II balance sheet and the SCR.
Regulators are justified in applying regulatory scepticism to the forecasts used to support the valuation of deferred tax assets. Their demands for credibility and evidence is understandable. However, some firms have found that lack of common ground with their supervisor on points of principle has diverted attention from reaching agreement on matters of implementation and judgement, for example on the depth and quality of evidence required and the time horizons over which recoverability can be assessed. Accordingly, we expect tax will continue to arise as an issue throughout the IMAP process.
Some firms with large adjustments arising from the Solvency II technical provisions transition may find that they are less sensitive to such challenges, at least in the short term.