Solvency II - focus areas

Solvency II - focus areas

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?

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30 St Mary Axe and Lloyds of London

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.

Pillar 1

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:

  • Many Internal Model (IM) & Partial Internal Model (PIM) firms added caveats and promises to their IM application processes. Following the acceptance of these applications, these process changes must be implemented. 
  • The PRA are re-examining the appropriateness of Standard Formula for some firms. 
  • As the large implementation programmes draw to a close, firms’ focus will shift towards optimising capital position and hedging programmes.
  • A number of firms will still be seeking to make major changes to the internal model and/or matching adjustment applications within the first year of approval. Firms will need to ensure there is a robust process for dealing with model change, including regulatory pre-approval of major changes. They will need to ensure that the model remains appropriate for the business risks and have a regular review process to determine whether any enhancements are required, for example introducing more components to the internal model or refining calibrations and methodologies, particularly for alternative assets.

Pillar 3

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 will continue to prepare for the end-state QRTs (i.e. those first due for Q1 2016 and year end 2016 reporting), including finalising their dry-run plans.
  • Firms will decide whether to include any Solvency II Pillar 3 results in their FY 15 market disclosures. Disclosures will need to be prepared, and the decision on the level of disclosure communicated to investors and the market.
  • Many firms will also be scheduling analyst briefings and education sessions to help manage the release of their results into the market. 
  • Management should consider the additional audit and assurance requirement consultation, and ensure they are prepared to meet these requirements.
  • A look through solution for investment fund data will need to be in place for as early as Q1 2016. 
  • Management should also consider other accounting changes (i.e. IFRS 4 Phase II or IFRS 9) during the implementation of their Solvency II program.

Audit and Assurance

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.

IMV / IMAP

The key IMV activities for firms in the coming months will include the following:

  • Joining up Internal Model validation activities performed via by the first, second and third lines of defence within the business. 
  • Extracting value from Internal Model validation activities and looking at Internal Model validation from the Board’s perspective.
  • Managing and validating Internal Model changes post IMAP approval. 
  • Looking at the IMV linkage of the external audit of financial statements and implementing an internal model calibration which is acceptable to the PRA. 
  • Some firms will be preparing to submit their Internal Models for approval for the first time.

ORSA

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:

  • Addressing PRA feedback regarding ORSA / Stress and Scenario Testing (SST) maturity
  • Leveraging the ORSA into a quarterly process
  • Assurance over current practice

Tax

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.

Solvency II

With Solvency II now live, what more needs to be done by insurers to embed the processes and systems that have been developed?

 
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