28 April 2014
The UK’s Prudential Regulation Authority (PRA) has unveiled strict criteria governing the way that general insurers will be required to calculate their technical provisions and internal models under the incoming Solvency II capital regime.
In a supervisory statement published on 25 April, the PRA set out requirements to complement those outlined in the European Union’s Solvency II directive, which is due to take effect on 1 January 2016.
The statement said that firms should calculate technical provisions using realistic assumptions and adequate methods.
It added that they should take events not included in data into account when calculating technical provisions, and that increasing the percentage of technical provision without justification was not appropriate.
The statement also said internal mathematical models used to calculate capital requirements should cover all material risks to which an insurer is exposed.
Because a third party model might have an impact on a firm’s internal model, third party models and data should meet the same standards.
For instance, in situations where a firm acquires catastrophe risk event loss tables from a third party, the model that produced the tables should be compliant as well as the tables.
On 17 March, the PRA released a consultation paper on a draft version of the statement, giving firms until 14 April to respond to its contents.
The regulator said it received a total of seven responses to the paper, largely requesting clearer wording or further information on specific points, and only made changes where it felt clarity would be improved.
Although some respondents found expectations in certain areas to be “overly burdensome”, the PRA said that these expectations were derived directly from Solvency II requirements.
According to accountants PwC, the consultation paper “raised the bar for justification of a number of simplifications currently used by general insurers”, although it said well-prepared firms would be able to cope.
PwC added that although the statement was helpful, it was not comprehensive, as topics such as contract boundaries were not covered.
