Tuesday, 19 April 2011

FSA - "Delivering Solvency II" (if you're big enough...)

I hope everyone has had an opportunity to get bogged in to the materials from yesterday's FSA presentation to the UK Insurance Industry on Solvency II delivery (full menu here). I sadly didn't attend, but webcast and morning materials are available.

Obviously some pretty eyeraising items emerged (alongside the normal bluster) bulleted below;

Hector Sants Presentation
  • Dry speech in the main
  • Further emphasis that the UK is not looking to "gold plate" Sol II (an expression I find weirder with every mention)
  • Highlights that the FSA (and its successor) will be a supervisory arm of an EU policy making body once Omnibus II clears - Tories are sure to like this come the next financial crisis!
Julian Adams Speech
  • Stresses that there is "no information" to suggest transitionals will actually move any goalposts
  • Prudential Regulatory Authority will be influenced significantly by Sol II - important to note divergence between that and the Irish approach of being best in breed
  • Attempts to "draw attention" to the ORSA in his speech, with little success (the struggle continues...)
  • BIG ISSUE - Tiering of the Internal Model refinement services into tier 1 (top 10 by APE/PVNBP, plus Lloyds and Large multinationals requiring college supervision) and Tier 2 (every other mug!)
  • BIG ISSUE - Tiering means intensity of review and agreed workplans between FSA and top boys, followed by a "reduced level of engagement" (skeleton staff) for the other levy payers.
  • BIG ISSUE - To replace this, "various tools" will be made available to assist , after consulting with the ABI (so much for risk based and proportional!)
  • BIG ISSUE - "Elements of external review" will be permitted by FSA as the second part of not providing a full model acceptance service - I can only read this as having to write out another cheque to Big 4/Consultancies to see if models pass an as yet undefined propriety test.
  • Big shift in planning for processing final applications for Internal Models (previously planned for late 2011, now moved to March 2012 at earliest
  • Reduced level of attention "does not necessarily imply" a decreased likelihood in getting day one model approval (not necessarily doesn't mean implausible in my book!)
  • As a by-product of all of the above, there appears to be an increased emphasis on contingency planning should one's model not pass (including where one might raise additional capital to beat the Standard Formula SCR, with a 7-9 month deadline to do so)
 FSA Solvency II Delivery Doc
  • Confirms that the request for illiquidity premium from the UK industry is for 12 years on the back book (This matter is only down for 7 years in the transitionals currently)
  • Amusingly refers to the tacit withdrawal of model support for smaller organisations a "graduated approach"
Interested to know what anyone else thinks of these developments. Apart from illustrating that the FSA, despite the levies, cannot recruit mathematicians when the going rate is a grand a day, it will in my view create a competitive advantage for participants in the first tier. Additionally, resources which will be used to "practice" being supervisory colleges for mainland Europe dominated forms seems a little spurious in a country with more model validation to do than most other countries put together.

Mind you, I don't do maths...

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