It is two years since the first Solvency II internal models were approved in the UK – what has happened since?
It is nearly two years since the PRA announced the approval of 19 full or partial Solvency II internal models in the UK. Since then, two more internal models have been approved, and a number of variations to approval for various mergers or acquisitions within the life insurance industry.
Although there have been a handful of internal model amendments related to changes in methodology (as opposed to scope), there have been fewer than expected in the first 18 months of Solvency II. Other events have overshadowed major model changes (both for companies and the regulator) – particularly the behaviour of the financial markets following Brexit and the knock-on impacts that this had on, for example, the recalculation of the Solvency II transitional measures.
Likewise, the Matching Adjustment (MA) has also taken priority for a number of firms – and seems to be currently at the top of the PRA’s list, with the latest consultation paper just released. That said, we are now beginning to see companies in the UK and elsewhere in Europe reconsider the calibration of their internal models. There is a strong view within the industry that it’s now time to assess how far insurers have conceded on certain aspects of the models and the overall strength of the calibrations to the respective regulators. Companies are taking the time to look more closely at the internal model to assess whether they have in fact conceded too much in certain areas, particularly compared to their peers.
Yet making major changes is no small task, with a full set of documentation required, followed by validation and then a six month approval period from the PRA. This lengthy waiting time opens up the possibility of parallel models being run, as well as uncertainty on, for example, capital charges on new asset types.
So which areas are companies most likely to be looking at? The obvious contenders for annuity providers are longevity risk and credit risk – particularly the MA under stress – but there have also been areas of development around interest rate modelling and of modelling “alternative” asset classes.
KPMG has assisted a number of companies in the calibration, documentation and validation of risks potentially subject to major model changes, as well as providing support for internal rating methodologies used in the internal model and matching adjustment calculations. If your business is impacted in this respect, please feel free to get in touch for guidance on how best to respond.
If you would like more details, please contact Nick Ford, Senior Manager – Actuarial & Insurance Risk.
With Solvency II now live, what more needs to be done by insurers to embed the processes and systems that have been developed?