Solvency II briefing for NEDs (and everyone else)

On 19 March the Prudential Regulation Authority (PRA) held a briefing session on the role of non-executive directors (NEDs) for firms using an internal model under Solvency II. Slides and a recording from the session were made available on the PRA’s website on 20 April.

The main topics covered were:

  1. internal models
  2. ORSA/systems of governance
  3. regulatory reporting
  4. board understanding of Solvency II

As well as providing useful considerations for NEDs of internal model firms, the session included a brief update on each of the topics which are of interest to all insurers. This blog summarises the main updates on each topic and draws out some of the important considerations for NEDs.

Internal Models 
Key points from PRA update

Lessons from pre-application:

  • insufficient documentation of approaches
  • some key risks are ignored
  • optimistic assumptions and diversification benefits
  • Boards understanding should focus on assumptions, strengths, weaknesses, limitations and sensitivities of the model
  • validation is a key process and Boards need to own validation design

Formal application

  • this opened April 2015 and it takes up to six months for a decision
  • contingency plans are required in case model is rejected
NED considerations
  • scope of model – which risks are/are not covered
  • features – what are the assumptions, strengths, weaknesses, limitations and sensitivities
  • for what purpose does the firm use the model
  • validation – design, conclusions and how issues are addressed
  • Board involvement in ongoing review and future changes
  • has there been PRA feedback
  • what are the contingency plans
Key points from PRA update

Feedback on 2014 FLAOR submission

  • industry feedback is due to category 1 – 4 firms in Q2 2015
  • lack of evidence of Board involvement
  • ORSA should be holistic and the key is bringing together strategy, stress testing, risk management and solvency
  • positive findings: link with risk management system, good engagement with supervisor and proactive response to feedback received
  • negative findings: buy-in from Board, business strategy missing and lack of forward looking assessment
NED considerations
  • is the ORSA embedded within all aspects of the firm
  • has there been Board challenge
  • does the ORSA help with decision making
  • does it link all the difference aspects of the firm

System of governance

Key points from PRA update
  • EIOPA Guidelines are similar to PRA rules and expectations except for the prudent person principle, actuarial function holder and outsourcing
  • PRA will question Boards and executives during 2015 to check compliance is on track
NED considerations
  • is there evidence to show compliance with the EIOPA Guidelines
  • does the firm understand the new requirements

Regulatory reporting

Key points from PRA update
  • category 1-3 firms need to provide their interim reporting for 2014 by the end of June 2015
  • a recent PRA survey indicated that firms are progressing well with reporting and have stable templates
  • the PRA expects to undertake more detailed analysis than it does today due to the more detailed Solvency II reporting requirement
NED considerations
  • has there been a dry run of the process
  • is the reporting of a high quality
  • are there any major issues for reporting

Board understanding 

Key points from PRA update
  • PRA are looking for evidence of active engagement from the Board
  • Boards are nervous of Solvency II as the process has been long and confusing
NED considerations
  • Board is responsible for internal model and therefore need to understand the drivers and limitations