Solvency II: countdown to implementation

The PRA held the anticipated ‘Solvency II: countdown to implementation’ conference last week. This was a very well attended event with delegates keen to hear the PRA’s plans and to gain some clarity on its expectations over the coming 18 months.

The PRA was open and delivered some important messages but as expected there are still lots of technical questions unanswered and firms will need to precede without the clarity they desire and plan for alternative outcomes. Sessions covered included: an update from the PRA on implementation and policy review, standard formula, internal models, other approvals, and reporting.

The key things to take away are:

Internal Models

• Not all internal models will get approved….
• Contingency planning is crucial for firms. Firms should be prepared for not getting internal model or matching adjustment approval, or changing which transitional they elect to apply.
• Documentation is about quality rather than quantity. It should set out assumptions, rational and key areas of judgement rather than reams of paper setting out a lot of background information.
• Make sure the Board understand the model. The PRA has not been impressed by current level of understanding. The message delivered was that the Board needs to understand the broad concepts and judgements made in order to challenge the model.

ORSA

The review of ORSAs to date has identified good practices but make sure that:

• risk and risk appetite is well defined,
• there is evidence that the Board is engaged in the process,
• stress testing is not superficial and retrofitted to a predetermined solvency

Standard Formula Appropriateness

If using the standard formula the Board will need to be satisfied that it picks up all quantifiable risks and that it is appropriate. The PRA will be reviewing the appropriateness of the SCR in 2015 and firms should expect a communication in Q4 2014. The starting point will be a comparison to the ICA. If you deviate significantly from this expect some questions……

One key area identified where the standard formula may be inappropriate for both life and non-life firms is pension risk; there should also be a communication on this shortly.

If a capital add on is required this is only a temporary measure so expect to move a partial internal model, undertaking-specific parameters or change of your business model! The PRA did say to remember that complexity is not necessarily a good thing, so a simple PIM may be the way forward!

Balance Sheet Review

The PRA set out how it will get assurance on a firm’s SII balance sheet. This will apply to all internal model firms and some large standard formula firms. This will be a 2 step approach:

• Step 1 – a ‘review and recommend’ report is required by the end of Q1 2015
• Step 2 – a ‘reasonable assurance opinion’ ideally by 30 June

If firms are in scope then they will be contacted by mid-November. The review can be carried out by an external firm or internal audit if appropriate.

Matching Adjustment

Matching adjustment information provided was mainly a summary of the Fisher letter and contained no new technical information or clarification. What was new was that firms will only receive individual feedback from the pre-application simultaneously towards the end of March. Partial pre-applications are allowed with supplementary information to follow if agreed with the firm’s supervisor.

Other comments worth noting are:

• PRA resources are tight so we need to work together to get this done!
• PRA is not gold plating!
• Lots to do on reporting ……
• PRA solvency II pages on website have changed! 

There was a lot of information covered and if you didn’t attend it is worth checking out the PRA website.