25 February 2010
Published in: Capital - models, Risk governance, Regulation - supervision
“Train, don’t hire, for internal models”
Insurers should avoid planning paralysis and an over-reliance on recruitment if they are to convince the Financial Services Authority (FSA) that they are making progress towards Solvency II compliance, warns Towers Watson.
The warning comes as insurance companies prepare to embark on the FSA's internal model approval pre-application process, which begins in April 2010.
Naren Persad, senior consultant at Towers Watson, commented: "The various moving targets of Solvency II, such as the level 2 implementing measures, can mean that companies are continually planning, but don't act." Genuine progress towards implementation is best achieved incrementally, he explained: "Developing internal models is an iterative process, where several imperfect but improving efforts are needed on the way to the finished article."
As part of the pre-application process, insurers need to discuss their resourcing plans with the FSA to deliver the necessary improvements to the internal model, and Solvency II implementation more generally, according to Towers Watson. The company recommends that a plan to train and develop existing employees, rather than hire new staff, is more credible and more effective, especially as Mark Chaplin, another senior consultant at Towers Watson, noted that "there are a finite number of appropriately skilled people in the marketplace."
Towers Watson advises that insurers also need to focus on documentation and improving the quality of their base Solvency II balance sheet. The latter needs to be refined well beyond the calculations typically carried out for quantitative impact study 4 (QIS4), organized by the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) in 2008. Towers Watson recommends that key areas of focus are the robustness and completeness of data, the derivation of assumptions, the best estimate liability and risk margin calculation, the mapping of IFRS asset and liability information to the Solvency II balance sheet and product segmentation.