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Solvency II risk assessment rules under review


FRANKFURT, Germany—The European insurance regulator has launched consultations on two important aspects of Solvency II, while the U.K. regulator has hinted it will try to minimize the effects on U.K. insurers of having to comply with two sets of rules in 2013.

The Frankfurt, Germany-based European Insurance and Occupational Pensions Authority began a public consultation on the Own Risk and Solvency Assessment that insurers and reinsurers in the European Union will have to undergo under Solvency II, which is slated for gradual introduction starting Jan. 1, 2013.

The comment period runs until Jan. 20, 2012.

Under Solvency II, all insurers and reinsurers will have to conduct regular ORSAs—a view of the company's own risk profile and solvency assessment, or capital, needs.

Article 45 of the Solvency II directive requires that all companies perform a regular ORSA and that they provide the company's regulator with documentation on the process.

In its consultation, EIOPA requests responses from insurers and reinsurers about whether its guidelines on the ORSA are clear, whether practical or operational issues may arise from the ORSA process, and whether insurers and reinsurers have any suggestions on when and to whom reporting on compliance with the guidelines should be made, among other things.

“Effective implementation of the ORSA remains one of the top priorities facing European insurers,” said Paul Clarke, global head of Solvency II at Pricewaterhouse-Coopers L.L.P. in London.

Although there still is uncertainty about the final form of the ORSA requirements, EIOPA's publication of the consultation document should give insurers the impetus they need to develop and finalize their own ORSA processes, he said.

“There is unlikely to be any further detailed guidance on the ORSA after the finalization of this paper, so firms should treat this as the last opportunity to raise any questions still remaining,” said Paul Brenchley, insurance director at KPMG L.L.P. in London.

The consultation paper suggests that insurers will be encouraged to develop their own templates for reporting results of their ORSAs rather than regulators prescribing the form of such reports, he said.

Also this month, EIOPA published a consultation document on reporting requirements under Solvency II, with the comment period ending Jan. 20, 2012.

EIOPA has requested that interested parties provide feedback on issues that include whether more clarity about Solvency II's reporting requirements is needed, whether any additional areas should be included in the requirements, and whether they have any concerns about the reporting requirements.

Meanwhile, the Financial Services Authority signaled that it would explore ways to reduce the costs involved for U.K. insurers, which effectively would have to comply with current rules and models as well as the new rules during 2013 because the U.K. insurance regulator has decided to delay full implementation of Solvency II until 2014.

But large U.K. insurers likely will have to comply with many of Solvency II's requirements in 2013 anyway, experts say.

At the FSA's Solvency II conference for industry practitioners this month, Julian Adams, the FSA's director of insurance, confirmed that companies will have to demonstrate “some form of Solvency II reporting” starting Jan. 1, 2013, as well as comply with the FSA's current individual capital assessment rules.

But Mr. Adams also said the FSA intends to explore, along with companies, “possible ways of avoiding the costs associated with the dual running of an (individual capital assessment) and Solvency II model.”

He said the details of U.K. firms' pre-2013 reporting requirements would not be made public until the Omnibus II E.U. directive, which will phase Solvency II requirements in stages, is finalized. The directive is likely to be completed in the first quarter of 2012.

Jim Bichard, an insurance partner at PWC in London, said the FSA's announcement was a boost for insurers.

“Many insurers will feel relief at the FSA's announcement. Running the ICA model is a very resource-intensive process and it would be an enormous strain if insurers were required at the same time to submit preparatory reports based on separate Solvency II models,” said Steven McEwan, of counsel in the financial institutions group of law firm Hogan Lovells International L.L.P. in London.

Given the similar objectives of the ICA model and the Solvency II model, he said it might make sense for the FSA to treat fully operational Solvency II models as sufficient for ICA purposes during 2013.