KPMG head of Solvency II in the UK Phil Smart says the 23 consultation papers, published last night, define some of the fundamentals of the directive and how the regime will work in practice.
He says: “The sheer weight of documentation represents a significant challenge for insurers who will need to act quickly to familiarise themselves with the proposals, assess the business implications and refine their implementation plans accordingly.”
Smart says the papers relating to the groups regime and criteria for internal model pre-approval are particularly important for insurers.
He says: “The loss of group support from 2012 was a blow to many insurers who were keen to see a reduction in the level of capital locked into each insurance entity within a group. As a result, all insurers will now need to consider their optimal structure in a Solvency II world.
“At this stage, there is no paper explaining how equivalence of overseas regimes will be assessed and this could have a significant bearing on the restructuring plans of some groups.”
In addition, the Committee of European Insurance and Occupational Pensions Supervisors has also issued a paper in relation to the mandatory tests for internal model approval.
KPMG says consistency of model approval by individual country supervisors is critical to ensuring the efficient working of the insurance market across Europe.
Smart says: “It is worth reiterating here that the term internal model goes much wider than the actuarial black box used to generate the numbers, and it is equally, if not more important to ensure that there is a strong governance framework in place.
“The board must be able to clearly demonstrate its understanding of the limitations of the model and its ability to make informed decisions using it as a tool, rather than blindly following its output.”
Deloitte capital markets partner Andrew Smith says: “The insurance market and in particular the UK annuity market is going to be particularly interested in consultation paper 40, Advice on Risk Free Interest Rate, which links discount rates for liabilities to government bonds.
“The industry has advanced many arguments in favour of using swaps as the basis for liability discounting. The UK annuity industry has been lobbying for the use of a liquidity premium in valuing reserves and its absence from the consultation paper is likely to re-energise the debate.”