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Implications of the introduction of ICAS+ before SII Stuart Robinson 1 May 2013 PowerPoint Presentation
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Implications of the introduction of ICAS+ before SII Stuart Robinson 1 May 2013 . How does ICAS+ fit with other interim approaches?. There is still considerable uncertainty around the actual implementation date for Solvency II …

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How does ICAS+ fit with other interim approaches?

  • There is still considerable uncertainty around the actual implementation date for Solvency II …
  • … but, EIOPA and other local supervisors are keen that companies continue to prepare.
  • UK is unique in having a Pillar 2 approach (ICAS) with similarities to Solvency II Pillar 1
  • ICAS+ presents a framework for closing the gap between ICAS and Solvency II Pillars 1 and 2.
  • EIOPA are looking to drive regulatory consistency on Solvency II preparations for Pillars 2 and 3 through the interim measures
  • Therefore, we are expecting:
    • More focused ICAS reviews under ICAS+, to inform preparation for Solvency II
    • An opportunity to get more feedback on key elements, including ORSA and embedded use
    • More structured and intensive engagement with Colleges on Pillar 2 and Solvency II preparations
    • Alignment of expectations between supervisors
    • Clarity that there should be limited focus on Pillar 3 until it is clear when Solvency II will be implemented and go live

Implications for Pillar 1

Solvency II Internal Model

ICA Model

Counter-cyclical premium

Risk calibration methodology

Contract boundaries

Projection to ultimate for GI business

Liquidity/Matching premium

Model enhancements

1-year new business treatment

Closure of new business risks

Loss-absorbing capacity

Ring-fenced funds



Management actions modelling

Group Risk


Pension Schemes Treatment

Treatment of non-EEA undertakings

Liquidity Risk

Intra-group arrangements

Fungibility requirements

Basic risk free rate

  • There does not appear to be a technical difference between an ICAS and an ICAS+ model
  • For an ICAS+ model, there should be a proportionate amount of effort on validation and calibration relative to Solvency II, although specific and observable benchmarks will be needed
  • The delay to Solvency II may also allow an increased proportion of validation and calibration process to be internal.

Implications for Pillars 2 and 3

  • Pillar 2
  • For Pillar 2, EIOPA and PRA guidance will require early implementation of many Solvency II based requirements, including:
    • ORSA type requirements (‘Forward looking assessment of risk’)
    • Forward looking stress and scenario testing
    • Embedding of risk appetite in decisions on business strategy
  • Given the delay to Solvency II, it is reasonable to focus on incrementally refining of BAU processes to address key requirements
  • Pillar 3
  • Given the uncertainty on the timing of Solvency II and ultimate Pillar 1 requirements, we expect companies to focus on ensuring that any development effort is cost efficient
  • The Pillar 3 reporting requirements of Solvency II are clearly still onerous for the industry and early implementation must be avoided until there is greater certainty on timing and Pillar 1 requirements. The EIOPA interim measures take a pragmatic approach to this issue.
  • A key area of uncertainty is how requirements can be met from a process perspective – key questions include:
    • How acceptable will a roll-forward approach be?
    • How accurate do results have to be?
    • How often will calibrations need to be refreshed?

Implications for the Board

  • ICAS+ / Pillar 1
  • Under ICAS+, we expect the PRA to look for additional evidence that the Board:
    • Is aware of the key limitations of the models, data and assumptions
    • Understands the importance of judgement in the models
    • Is comfortable that any management actions in the models are appropriate
    • Is comfortable that the capital requirements for key risks are ‘reasonable’
    • Has ensured that Management has established an adequate model control framework
  • Pillar 2
  • The introduction of obligations around the ORSA (forward looking assessment of risk under the EIOPA interim measures) will be a key change
  • We expect to take a pragmatic approach, avoiding duplication of processes and reporting, by leveraging existing management information from:
    • Plan submissions
    • Capital and liquidity reports (including forward looking stress & scenario testing)
    • CRO Reports
  • However, Boards will still need to be clear that they have met the ORSA requirements

Key areas of concern

  • We see ICAS+ as pragmatic and helpful
  • We would be concerned if the UK gets too far ahead of the rest of the EU:
    • No other EU supervisor has an interim approach, so ‘benchmarks’ may be set too high
    • In addition, the level of effort expected on calibration and validation may ultimately be higher than necessary
  • On Pillar 2, we are keen to ensure that lessons from the exiting ICA regime are factored into the development of supervisory thinking:
    • ICA numbers already reflect an economic view of risk and are used to steer the business
    • An ICA-based ORSA would be a sensible interim option in the UK
  • Close engagement with EIOPA and other EU supervisors will be essential to ensure that ICAS+ evolves alongside the EIOPA interim measures, to maintain alignment and try to minimise rework as the timetable for Solvency II becomes clearer