UK's FSA Confirms Delay of Solvency II for Insurers

(October 5, 2011) — The Financial Services Authority has announced that insurers have been given another year to become compliant with Solvency II.

According to the regulator, the date that UK firms will be forced to comply with is January 2014 as opposed to 2013. “We have developed an approach that balances what we need to do to discharge our regulatory obligations and bring in the new regime with the needs of the industry,” the FSA said in a statement.

Some UK insurers had lobbied for the FSA to stand by its original timeframe for the implementation of the rules. They had argued that delaying the introduction would result in additional costs for insurers by forcing them to operate their old models alongside new systems, and thus, they called for a 2013 implementation date.

“This delay poses some specific challenges to the UK market since the current…regime would require firms to run a (Solvency I) internal model in 2013,” Association of British Insurers (ABI) chief executive Otto Thoresen told CityWire.  

“Today’s FSA announcement is helpful as it removes some of the distracting debate and formally assumes a year’s delay in implementation to 2014,” Jim Bichard, insurance partner at PricewaterhouseCoopers in London, told Risk.net. “Despite this, insurers will be keen for more detail from the FSA on the practical implications of complying with two parallel regimes in 2013.” He added: “The FSA’s plan to extend the internal model approval process…by over a year is likely to be met by disappointment from many of the largest insurers, especially those pushed to the back of the queue, when they have committed time and resources, including their best people, to progressing for a mid-2012 delivery.”

Meanwhile, some industry observers have suggested that Solvency II will ultimately be extended to cover defined benefit pension schemes. The response to this suggestion has largely been negative. Last month, the Confederation of British Industry (CBI) warned that Solvency II is a terrible idea for the business and economy of the United Kingdom. “We need the UK government to step up to the plate in Brussels and stop the imposition of insurance-style solvency standards on DB pension liabilities. The government can do a lot more than it has to date,” CBI chief policy director Katja Hall said in a statement.

Hall continued: “This issue affects all businesses with DB liabilities, whether or not they have closed the scheme. The proposal is a terrible idea, based on a wrong-headed insistence that defined benefit schemes are the same as insurance contracts. The potential effects are very significant, and would massively undermine the government’s economic goals.”

CBI estimated that schemes that comply with Solvency II would need to sell equity worth over £800 billion. “With the volatility that we have seen in international money markets, pension funds piling into more secure government bonds would push down yields and create even more pressure on sponsors as investments fail to deliver,” the release stated.

In contrast, Hector Sants, CEO of the Financial Services Authority in the UK, has previously described Solvency II as “facilitating a step change in the solvency and risk management of insurance firms in a consistent and transparent way across Europe.” The main effect that the new policy will have on the insurance industry is increased capital requirements, he noted.