24 February 2010
Published in: Capital - models, Risk governance, Regulation - supervision
Survey shows large gaps in Solvency II preparation
Few firms can currently define their validation policy for Solvency II or explain the governance surrounding the validation, according to the UK Financial Services Authority (FSA).
A questionnaire of 81 firms conducted by the FSA shows that over 20% believe there is a large gap between their current standard and that needed to meet the validation requirements, including valuation of assets and liabilities [see chart below]. The "use test" is another problem area, with almost 60% of insurers believing they have either a large or medium gap. The FSA also notes that firms "scored themselves weakly when it came to being able to explain the limitations of the internal model."
Areas with the strongest responses include firms having an internal model that covers all potentially material risks within their risk register. Of the four main areas covered by the survey, risk management showed the highest level of readiness for Solvency II model approval; however, only 17% of firms surveyed fell into this category.
The results of the questionnaire are part of an FSA update on its internal model pre-application approval process, published this month. The paper also reveals the conclusions of a series of pilot exercises started in September 2009 aimed at ensuring the pre-application process is "robust". Pre-application will be "an exacting activity", the paper reports. "[Firms] have noted that there are many areas where they are less well prepared than they had initially anticipated."
The pre-application process is designed to help firms and regulators with the internal model approval process for Solvency II and is expected to start in April 2010. Before then, the FSA will be writing to firms intending to use an internal model in order to assess which firms meet the pre-application qualifying criteria.