Solvency II capital tests not part of augmented Icas regime, FSA confirms

Insurers welcome Icas+, although uncertainty remains over future requirements

UK insurers will not be required to adopt a Solvency II balance sheet in the first wave of changes to the Financial Services Authority's (FSA) insurer capital adequacy standards (Icas) regime, the regulator has confirmed.

Julian Adams, director of insurance at the FSA, confirmed in a letter to insurers this week that that the so-called ‘Icas+' regime would not require Solvency II "tests and standards to be met", relieving fears insurers would have to include a Solvency II risk margin in their capital calculations.

The new regime will allow firms engaged in the internal model application process (Imap) to use their Solvency II internal model to determine their regulatory capital requirements.

In the first phase of the Icas+ regime, Adams said, participating insurers will need to provide a reconciliation between the calculations made by their Icas model and new Solvency II model to account for the differences between the two models.

The FSA is expected to review each reconciliation on a case-by-case basis, although actuaries say it remains unclear what the regulator will focus on. As firms have developed their Solvency II models in various ways, the FSA expects insurers to use different methodologies to explain their reconciliation.

William Coatesworth, consulting actuary at Milliman in London, says: "The FSA has made it clear that there won't be a one-size-fits-all approach to the reconciliation. Rather, this will depend on the structure of the company and any changes to the business or modelling approach since the last Icas review."

How the FSA plans to implement the second phase of Icas+ also remains unclear. In this phase insurers will be allowed to use their Solvency II balance sheet as well as the Solvency II capital model for Icas purposes, without the need for further reconciliations.

A move to a Solvency II balance sheet would place significant demands on UK firms, say consultants. Jim Bichard, head of the UK insurance regulatory team at PwC in London, says: "The issue is that preparing the balance sheet in itself is a big process, as it involves outputs from the internal model and also other inputs. It's quite a lot of additional work versus just producing the model on its own."

Adams states in the letter that "industry interest is currently mainly for phase one", suggesting there is little enthusiasm for phase two so far.

The FSA may also be waiting for guidance from the European Insurance and Occupational Pension Authority (Eiopa) before publishing details on phase two.

Milliman's Coatesworth says: "Eiopa has been considering the issue of interim measures and has formally proposed that certain aspects of Solvency II Pillars II and III should be put in place by countries by January 1, 2014.

"As such, it would seem likely that the FSA will align the Icas+ reporting requirements with Eiopa guidelines in order to ensure that these are consistent with the wider implementation across Europe. We would expect more details on what this will entail following Eiopa's consultation on the guidelines in spring 2013."

The FSA is planning a consultation with firms and has promised to provide more information on what they will need to provide in their Icas+ review in the second quarter of 2013.

Stephen Haynes, chief risk officer at LV= in Bournemouth says: "We welcome the further guidance from the FSA on Icas+ and how through this approach we can maintain momentum from the Solvency II work, especially the Pillar II aspects such as the Own Risk and Solvency Assessment."