Despite continuing uncertainty over the Solvency II timetable insurers are now focussing on documenting and evidencing their models and considering how they will report the results to stakeholders, both internally and externally.
For Internal Model firms IMAP has become the top issue. This is hardly surprising given the imminent submission dates for most firms, and the pressure the FSA is bringing to bear. We know that a number of firms are looking very carefully at whether or not an Internal Model offers real advantages over using Standard Formula. This is being driven by the bar being set ever higher by the FSA; less capital advantage being delivered by the Internal Model route than expected; and greater investment required to build the model than anticipated.
Last year Pillar 3 didn’t feature in the top 10 issues for Internal Model firms but is now ranked 4th, and remains a high priority for Standard Formula firms as well. It now appears to be gaining the attention it warrants. Dry runs are going to be important so firms must make them count. Issues need to be actioned quickly as there may not be much time to work through problems.
One surprising finding is that Pillar 2 appears to be low down on the list of Solvency II challenges. Lack of progress on Pillar 2 can easily undermine all the effort that has gone into Internal Model development and validation. Firms must ensure that people have the right quantitative information around solvency and risk information to ensure they are deriving real value from the Pillar 1 investment.
Having invested large amounts on Solvency II programmes to date now is the time for insurers to try and extract real value from their investment. The possibility of further delays to the timetable gives companies an opportunity to ensure new processes are properly embedded and deliver benefits to the business.
