Jim Bichard, UK Solvency II leader at PwC, comments:
“For many, tomorrow’s results will be a defining moment in what has been an exciting journey towards Solvency II implementation.
For those who find out their internal model applications have been approved, congratulations will be in order and many of the household names in the industry are looking to breathe a huge sigh of relief. Achieving approval is a huge positive for firms and a recognition of all the hard work put in by the UK insurance community - including both regulators and insurers over many years. Assuming that most of, if not all, models are approved then this is a major endorsement for the UK insurance market and a major achievement for the PRA which, despite the reduction from 120, will have reviewed significantly more models than any other European regulator.
Those which gain full approval will begin next year with the benefit of having the certainty of optimal capital requirements and the reputational benefits of operating with a capital model that has passed the ultimate test. If the applications are partially or fully rejected, then firms are likely to face difficult questions from investors, analysts and rating agencies about the effectiveness of the models they use to run their businesses. Firms in this position will need to act quickly to manage the risks associated with failure which would be a negative message to their stakeholders. The likely impact will depend on the business model of the insurer but a rejected application could leave firms needing to activate contingency plans, facing significantly reduced capital surpluses and reputational impact.
Those which fail or achieve partial approval will need to reapply. Whilst the majority of the work will have been done, and firms will benefit from feedback on their process from the PRA, much work may still be required to reach an acceptable standard. Firms which have previously exited the IMAP process or deferred their application are likely to be watching the process closely, making plans and considering making an application in the New Year.
After Saturday’s announcement, firms will quickly need to turn their thoughts to life after 1st January. This is the beginning of a new journey, where internal models will need to be updated on an ongoing basis. Management should now be asking themselves if they have the capabilities to flourish as Solvency II becomes business as usual.”
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