LONDON – The UK Financial Services Authority (FSA) has found that UK insurance firms are better prepared to face the challenge of Solvency II – the EU rules overhauling capital requirements for the insurance industry – due to big improvements in risk management after the implementation of its individual capital assessments regime, ICAS.
As part of the FSA’s risk-based approach to regulation, insurers are required to make their own assessment of the level of capital they need to hold, known as individual capital assessments or ICA.
In an insurance section briefing published in October, the FSA found during its first round of ICA reviews that the industry had taken a "significant step forward" in preparing for Solvency II, which is due to come into force in 2012.
The FSA reviews a firm’s assessment and forms its own view of the capital it thinks is adequate for the firm’s risk profile. It then calculates the firm’s individual capital guidance (ICG). In its review, the FSA found that the average ICG was 114% of a firm’s ICA, with most firms’ ICGs coming within 100% to 110%.
Despite concerns that the new regime would result in the release of capital that might otherwise be retained, the level of capital held by the market has remained broadly unchanged since the ICAS regime was implemented in December 2004. This is because, when a firm’s appetite greater than the regulatory minimum, UK rules require it to hold capital commensurate with that risk appetite.
"The industry is now in a better position to face the challenges of Solvency II, which is likely to require insurers to use their own risk modelling as an integral part of their management," the FSA says.