Like most things in the UK, the insurance industry does not escape regulatory control. Insurance companies and reinsurers are required by solvency regulations to ensure they always have sufficient assets to meet ther liaibilities (something the banks seem to have struggled with lately!).
The Financial Services Authority (FSA) has published its important latest advisory paper in response to the impending introduction of the EU regulatory system known as “Solvency II”.
By publishing their detailed Discussion Paper ‘Insurance Risk Management: The Path to Solvency II’, the FSA is making a clear statement to the UK insurance industry that they must start to act and plan now if they are to meet the forthcoming Solvency II requirements.
Although, requirements under the European Solvency II regulations which are due to come into force during 2012 are not yet finalised, the industry cannot really afford to delay development of implementation plans. The discussion paper launched the FSA’s programme of preparation, highlighting key requirements and suggesting how insurers might start planning for implementation.
Under the new regulatory system, insurers’ will need to ensure they hold not only sufficient assets to meet their liabilities but will also need to take account of market risks (such as a fall in the value of any investments), operational risks (malpractice or system failure) and credit risks (such as a default on a large debt) when calculating assets v liabilities.
UK insurers already meet risk-based capital requirements under the Individual Capital Adequacy Standards (or ICAS) introduced in December 2004. But the FSA warns that Solvency II goes further.
Companies are invited to submit feedback up until the end of the year. The FSA will then start asking companies to identify an individual in their organisation who will be responsible for Solvency II and to confirm their overall governance and implementation plans.
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