Mark Carney is putting the right ideas into practice

Lloyd Richards contributed to the writing of this article

As the keynote speaker at the IFoA’s General Insurance Conference (GIRO), Mark Carney addressed the importance of insurance to the new focus of the Bank of England, with over 200 supervisors and 50 actuaries engaged in supervising insurance companies, supported by the support of the entire resources of the Bank.

Carney’s speech outlined how he intends to use these resources to promote resilience in the insurance sector without standing in the way of its effectiveness or imposing unnecessary impediments on the ability of insurers to evolve. The full speech can be found here. In this article we summarise the three “right ideas” the Bank is putting into practice to promote a resilient, innovative industry that supports the real economy, and also discuss the implications of comments made regarding the Internal Model Approval Process.

Right idea 1: tailored, consistent and robust capital standards

The Bank of England is highly supportive of the way Solvency II embeds across Europe the core principles of sound regulation:

  • Appropriate market-based valuation methodologies,
  • A comprehensive measure of risk and solvency covering all group activities,
  • Capital resources of an appropriate quality to absorb loss.

The Bank of England has worked with the European Central Bank to ensure the standard formula does not impede insurers’ provision of long-term finance to the real economy and make Solvency II more accommodative of securitisation.  There was a warning for insurers as Carney pointed to the banking sector as evidence of the dangers of using poorly designed models, stating that the Bank will not hesitate to withhold approval of inadequate internal models.

Right idea 2: a regime that holds the right people to account

Later this year the Bank will consult on a regime that includes senior actuaries in the senior managers regime (alongside CEOs, Chairmen, CFOs and CROs), making them directly accountable for how a firm is run, for their decisions, and for their actions. These senior persons will be expected to prove their fitness to regulators and ensure risks are understood, measured and properly considered.

Right idea 3: global standards for globally systemic insurers

Highlighting AIG as an extreme case of a systemic insurer, Carney outlined how the actions of some insurers can have broad spillovers into other markets and risk the financial system as a whole. Nine firms have been designated systemically-important insurers based on non-traditional non-insurance activities and interconnectedness to the wider financial system. These nine firms will be subject to higher global standards to reduce the probability and severity of failure.

Barnett Waddingham Commentary

Perhaps the most interesting comments Carney made came during the Q&A, where he promised strong approval discipline when it came to the Internal Model Approval Process. In our opinion his comments suggest that a lot of companies currently in the approval process will not get approval for 1 January 2016, and therefore companies should ensure they have a Plan B in place if their internal models are not improved.

"Internal Model approval is not guaranteed: companies should ensure they have a Plan B in place."

During his speech he highlighted how models must be based on appropriate data and account for all quantifiable risks, with Boards holding the responsibility to ensure models remain appropriate and show they are used in practice. As well as inadequate models the Bank will also withhold approval of models that are not sufficiently transparent. Firms need to make sure that they are communicating with the PRA before the IMAP and making sure that they are addressing all the PRA's feedback to avoid any surprises.

Barnett Waddingham’s Insurance Consulting Practice has formed the consortium TROIKA with IT and compliance experts to provide a one-stop-shop for insurers looking for assistance with all aspects of model validation. We can work with small to medium firms looking for a full range of expert advice and support, up to the largest firms who are typically looking for independent expert input and review.