May 2016
The Prudential Regulation Authority (PRA) has outlined plans to unburden itself from the administrative quagmire around approving internal models under Solvency II.
In a consultation paper released last week that detailed the UK regulator’s expectations on insurers transitioning to Solvency II, the PRA said it wished to eliminate unnecessary bureaucracy from the process for both itself and carriers.
It said: “Setting out the PRA’s expectations regarding the content of a model change application is intended to enhance the quality of applications and therefore reduce the administrative burden for firms and the PRA.”
By illustrating its requirements for successful applications to use internal models, the regulator said it hoped to propagate a “clear and consistent understanding” of its process for reviewing model change applications.
The PRA said it expected firms to engage as early as possible with supervision teams about planned changes and developments to internal models, including for expected future changes that could impact a firm’s risk profile.
The regulator added it would expect companies to submit no more than one model change application per year, while there would be scope for several major changes to risk profiles to be dealt with as part of the same supervisory approval process.
However, the PRA emphasised it understood that unforeseen circumstances such as major transactions could justify further applications.
The authority also said it would explore the viability of pre-application review processes before submitting change applications.
This would depend on the size of the changes proposed, but the pre-application reviews were not intended to be a substitute for a firm’s internal processes.
Last year this publication reported widespread dissatisfaction with the PRA’s handling of the internal model applications.
“That is one of the reasons the number of firms [seeking an internal model] has dropped – it is a resource issue. The PRA can only handle so many approvals,” one source said.
