Applying EIOPA’s Preparatory guidelines: FLAOR

2013 saw confirmation that Solvency II will become reality from 1 January 2016. EIOPA has published preparatory guidelines and, in response to this, the Prudential Regulation Authority (PRA) released a Supervisory Statement. It is no longer sufficient for Solvency II to sit on firms’ agendas action must now be taken and progress demonstrated.

Here we focus on the guidelines surrounding the forward-looking assessment of risks (FLAOR), outlining what these mean for insurers and how we can help

Who is impacted by these guidelines?

The short answer is all insurers are impacted, although additional requirements apply to firms captured by the thresholds set by EIOPA, who were notified prior to 31 January.

What are the PRA’s expectations for UK firms?

Firms are expected to devote time to designing, compiling and trialling their FLAOR during the preparatory period and submit annual assessments to the PRA in 2014 and 2015.

The development phase is expect to be a staggered approach that allows firms to demonstrate:

• Progress made in time for the first annual assessment in 2014;
• Further progress made in time for the second annual assessment in 2015 taking account of;

PRA feedback in respect of the first assessment;
experience gained during 2014;
prevailing market conditions;
changes to the risk profile; and

• Threshold firms will also have to demonstrate continuous compliance with the Solvency II technical provisions and regulatory capital requirements for the second annual assessment.

Consistent with previous communications from the PRA, it has said that it will not prescribe the format of the FLAOR but it expects firms to focus on:

• Developing a qualitative process that is documented. This will be covered in the FLAOR policy, which can be part of the risk management policy.
• Performing the quantitative assessment, following the established process. The quantitative assessment will be documented in:

Record of the FLAOR, providing a detailed audit trail and explanation of how the FLAOR results were produced to enable a third party to evaluate the assessment undertaken.
Internal report, describing the FLAOR outcome, summarising the process and methodology, recording the main findings and outlining subsequent implications for the business. This report should become a valuable form of information that firms use in their strategic decision-making.
The main form of submission to the PRA will be via a Supervisory report, describing the FLAOR outcome. The internal report, approved by the Board, can be used if it contains sufficient detail. The supervisory report must be submitted to the PRA within two weeks of the FLAOR being approved by the Board.

The PRA notes that it is also considering providing firms with a summary sheet, with the aim of capturing information in a consistent way and to facilitate its review, but provides no further information in respect of this at this stage.

It is down to firms to decide when they wish to carry out their FLAOR and they should inform the PRA in plenty of time when they plan to submit their results.

Active involvement by the Board is expected during the design, implementation, documentation and sign-off of the FLAOR. It is important that sufficient involvement can de demonstrated, including allowing adequate time for discussion at Board meetings.

What is not expected?

Whilst the PRA expects a number of things from firms there are also some key points that are not expected, at least not from the outset:

• Assessment of overall solvency needs does not have to be on a Solvency II basis, at least for 2014, the currently applicable regulatory requirements can be used until the Solvency II requirements are finalised.
• Monitoring continuous compliance with regulatory capital requirements and technical provisions and assessing the significance of the deviation of the risk profile from the assumptions underlying SCR are not necessary during the preparatory period for non-threshold firms.

The PRA’s duty is to ensure that firms meet the specified outcomes of EIOPA’s Guidelines. Full compliance with Solvency II during the transitional phase is not a requirement, and so the PRA is not expected to take supervisory action in respect of non-compliance, specifically with Pillar 1 requirements.

What should firms be doing?

Firms should be establishing and trialling their FLAOR processes and procedures and producing the accompanying documentation. Preparations should be set to meet the requirement of carrying out and submitting the results of their first FLAOR to the PRA in 2014 then to make any necessary revisions before submitting the results of their second FLAOR in 2015.

How can Barnett Waddingham help?

• Providing training to Boards to complement their existing knowledge on Solvency II. Training could cover a background to Solvency II, highlighting specific areas of interest, and describing the Board’s role and responsibilities under Solvency II
• Identifying the gaps in firms’ current policies and procedures relative to the requirements under Solvency II.
• Assisting firms with drawing up realistic implementation plans to tackle the gaps identified and to achieve the requirements during the preparatory period and full compliance with Solvency II in time for 2016.
• Much of the development concerning the FLAOR involves embedding policies and procedures, which is best carried out internally. . We have the necessary expertise to assist firms with reviewing the documentation that is required, appraising it with reference to the requirements and commenting on its appropriateness.
• Our Insurance Actuarial team offers a wide range of services and can assist with other aspects of work that may be taking a back seat as a result of Solvency II taking centre stage.