On 21 February 2017, David Rule, Executive Director of Insurance Supervision at the Bank of England attended the Association of British Insurers to recap on how Solvency II was designed to work for the UK insurance industry, to look back at the Prudential Regulation Authority’s (PRA) approach to implementation and experience of operating within a Solvency II framework one year in and to identify a few areas where the PRA knows that Solvency II needs improvement. The focus of the speech was life insurance but general insurance was touched upon.

Regulatory regime before Solvency II

Attendees were reminded that the primary aim of the regulatory regime for insurance prior to Solvency II arose from the near failure of the life insurance company, Equitable Life in 2000. Problems for that company materialised when it had insufficient funds to meet guaranteed rates on annuities, amounting to £1.5 billion. As a result, the Financial Services Authority sought to supplement the regulatory reporting framework with data that would indicate the present value of expected contractual and “fair” discretionary bonus payments as well as a realistic capital margin.

Internal models

Under Solvency II, UK firms are allowed to use internal models to calculate their solvency requirements. In his speech, David Rule recognised that although the Solvency II standard formula works for the variety of insurers in the UK, there is no standard formula that can work for all of them. It was because of this that the PRA has approved 22 partial or full internal models with more said to be in the pipeline.

PRA’s implementation of Solvency II

The PRA considers its implementation of Solvency II to have been “robust but proportionate” and in line with its statutory objectives.

Whilst recognising that the PRA cannot set capital requirements beyond the rules of the European directive, it will be reviewing its approach to assessing a firm’s internal model and identifying if its process can be streamlined “without compromising standards”.

From the PRA’s view, it seems as if the challenges faced by insurers by the new regime has not been as bad as may have been feared. Solvency II is recognised by the PRA as taking far too long in the making and expensive to implement for regulators and market participants, sentiments which will be echoed by many in the industry, but generally thought to be working well.