Should firms wait for the finalisation of the new regime to get on with their implementation plans? No
The direction of travel for the new regime is sufficiently clear to enable firms to execute their planning and preparations for implementation. There is no need to wait for all the final details.
Firms are reminded to allow for flexibility in their plans (incl. contingency plans) where we are still awaiting certainty.
Solvency II is not just about the numbers and firms should be actively considering the implications of Pillars 2 and 3 for their business as they represent significant challenges which will take time to implement.
Is QIS5 worth the effort? Yes
Completing QIS5 can help firms to make the transition towards implementation as it will:
· give a practical insight into the way the balance sheet is constructed under Solvency II;
· provide senior management with an opportunity to understand what Solvency II might mean for their business;
· help firms assess their level of preparedness;
· inform firms’ contingency planning; and
· assess the likely impacts on financial resources.
· QIS5 is an impact assessment study and not a stress test.
Will the FSA benchmark internal models against the standard formula? No
Solvency II will require firms to hold capital which is appropriate for the firms’ risk profile to the level of the agreed prudential safety objective. So internally modelled capital requirements might be higher or lower than the standard formula.
The FSA considers benchmarking as a useful tool as part of a larger toolkit of techniques when reviewing the appropriateness of internal models. We recognise that benchmarks on their own are not an effective way to take into account the different risk profiles of firms.
Is the standard formula too complex? It depends.
Depending on the business you write, you might find the formula too complex, or too simple. This is to be expected as the design of the standard formula should ensure that all firms hold sufficient capital to meet the prudential safety objective.
The proportionality principle will allow firms to use a large number of alternative options when calculating their capital requirement as long as these can be justified.
Is Omnibus 2 intended to introduce significant changes to the agreed Solvency II Directive? No
Omnibus 2 is designed to make Solvency II consistent with the new European supervisory architecture for financial supervisors, not to fundamentally review Solvency II.
The detailed level 2 implementing measures are of more significant interest for your implementation plans.
Firms should continue to plan for implementation on 1 November 2012.
Any proposals in the second Omnibus Directive will be subject to agreement by the European Parliament and Council.
What should firms be doing now?
Complete QIS5 on a “for real basis” (not best efforts) to get the most from this exercise. Help us to help you by using the proposed methodologies and providing feedback (e.g. expected profits in future premiums).
Ensure all aspects of the new regime are given equal priority and consider their implications on the way you will need to run your business.
Whatever your plans, start engaging with us as early as possible.
Think about reporting and documentation as Solvency II will require firms to report and disclose more information and more frequently.
Plan and prepare for adjustments and adaptations to be made to your implementation plans, in particular resource allocation and technical upgrades.
What is the FSA is doing?
We are supporting HMT in the negotiations to finalise the level 2 measures; we are actively involved in CEIOPS to deliver a successful practical implementation.
The new rules will bite from day 1; we are preparing ourselves to be ready to supervise firms’ compliance as soon as the new regime comes into force.
We are engaging with European counterparts for the review of European cross border group internal models.
While the regulatory framework will change, our regulatory philosophy will not. As highlighted by Adair Turner in his Mansion House Speech (21 Sept 2010), we are committed to delivering our Business Plan priorities during this transitional time for the organisation.
© FSA - Financial Services Authority
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