On 19 April 2012, Julian Adams, Director of Insurance Supervision in the Prudential Business Unit of the Financial Services Authority (FSA), gave a speech at the City & Financial Conference entitled "The new approach to insurance regulation and the implementation of Solvency II".

Mr Adams explained that the FSA is nearing the end of the pre-application process and getting ready to move into the submission stage.  It therefore expects each firm to be able to produce a reasonably complete set of application materials for submission to the FSA during its particular landing slot.  If the FSA does not believe a firm has made sufficient progress, it will stop working with that firm, and the firm will not be allowed to continue in the internal model process in the run-up to implementation.  Because this could have severe consequences, all firms seeking internal model approval are expected to have contingency plans in place to deal with the situation if their model is not approved.

Mr Adams also provided some generic feedback about firms' progress to date.  He noted that, in general, levels of engagement have been good.  However, he also made these criticisms:

  • Some firms have fallen behind their own implementation plans, and that is casting doubt on their ability to meet their agreed FSA submission deadline.  In particular, validation workstreams seem to be significantly behind other workstreams, and in some cases, their scope is too narrow or the work is incomplete.  This means that some firms have not been able to identify critical issues and that has impeded FSA review.
  • Some firms seem to regard expert judgement as a 'magic bullet' that can be used to explain away aspects of an internal model which are not fully documented or justified.  The mere fact that a judgement has been made on a specific issue does not make it immune to challenge; nor does it mean that normal standards do not apply.
  • Many firms' supporting documentation is weak or undeveloped.  Whilst poor documentation is bad in and of itself, Mr Adams was concerned that, in some cases, it was also an indicator of poor underlying thinking or a lack of senior management engagement.
  • Much of the work produced so far on 'model change policies' has also been weak.  Firms seem to have given little thought to the purpose of model change policies.  Many policies have needed more detailed consideration about the division of changes into 'major' or 'minor', and they have needed to include qualitative as well as quantitative aspects.

Firms will begin to receive detailed feedback in the coming weeks, including the FSA's views on their individual progress and the issues which give the FSA most concern on a firm by firm, and model by model, basis.  But the stakes are already high.

The speech is available in full here.