2013 saw confirmation that Solvency II will become reality from 1 January 2016. EIOPA has published preparatory guidelines and, in response to this, the Prudential Regulation Authority (PRA) released a Supervisory Statement. It is no longer sufficient for Solvency II to sit on firms’ agendas; action must now be taken and progress demonstrated.
Here we focus on the guidelines surrounding governance, outlining what these mean for insurers and how we can help
Who is impacted by these guidelines?
Unlike for the other three key areas of Solvency II – Forward Looking Assessment of Risks (FLAOR), internal models and reporting, firms are not required to physically submit anything to the PRA to demonstrate progress in respect of governance. However, all firms are required to set up appropriate governance structures and related internal policies in time for the Solvency II implementation date.
The PRA has said that it may approach key function holders ahead of this date to establish how a firm’s preparations in their areas of responsibility are progressing.
What are the PRA’s expectations for UK firms?
Essentially, the PRA expects firms to be taking steps during the preparatory period to fill any gaps in their existing governance arrangements and policies to meet the requirements set by Solvency II. At a high-level this means:
- Ensuring that a system of governance which ensures sound and prudent management is established;
- Developing a robust risk-management system that allows continuous identification, management and reporting of all relevant risks, and their interdependencies, at an individual and aggregated level; and
- Providing qualitative information to the PRA that will demonstrate the effectiveness of the system of governance.
The PRA has not explicitly specified that firms provide evidence of their progress during the next two years but it is possible that verbal and written reports are requested from time to time, as part of the PRA’s ongoing supervisory assessment.
What should firms be doing?
Firms should be carrying out or revisiting gap analyses on their existing governance arrangements, with reference to the guidelines. They should draw up clear, realistic implementation plans to resolve any gaps. Aspects of the system of governance that may need work could include:
- Preparing and training Boards for the expectations that will be placed on them under Solvency II. In particular, in reviewing the system of governance, setting risk-appetite and tolerance limits and in respect of the FLAOR.
- Posting people with appropriate skills and experience in roles of the key function holders – risk management, compliance, internal audit and actuarial and clearly setting out their roles, the position of the roles within the firm and their rights and powers.
- Establishing an organisational structure that supports the firm’s strategic objectives and allocates responsibilities and reporting lines.
- Getting well documented policies in place, covering:
Fit and proper requirements;
Overall risk management policy and specific risk management of underwriting and reserving risk, operational risk, risk mitigation techniques, asset-liability management, investments and liquidity risk;
Capital management policy;
Internal audit policy; and
- Undertaking fit and proper assessments of those running the organisation, the Board and persons holding key functions, both internally and externally.
- Considering how the Prudent Person Principle and its impact on investment decisions and asset allocation may affect existing asset portfolios.
- Developing a medium-term capital management plan, taking account of output from the risk management system and the FLAOR.
How can Barnett Waddingham help?
- Providing training to Boards to complement their existing knowledge on Solvency II. Training could cover a background to Solvency II, highlighting specific areas of interest, and describing the Board’s role and responsibilities under Solvency II.
- Identifying the gaps in firms’ current governance arrangements relative to the requirements under Solvency II.
- Assisting firms with drawing up realistic implementation plans to tackle the gaps identified and to achieve full compliance with Solvency II in time for 2016.
- Much of the development concerning systems of governance involves embedding policies and procedures and amending firm structures, which is best carried out internally. We have the necessary expertise to assist firms with reviewing the documentation that is required, appraising it with reference to the requirements and commenting on its appropriateness.
- Our Insurance Actuarial team offers a wide range of services and can assist with other aspects of work that may be taking a back seat as a result of Solvency II taking centre stage.