Implications of the introduction of ICAS+ before SII Stuart Robinson 1 May 2013

1. Implications of the introduction of ICAS+ before SII Stuart Robinson 1 May 2013

2. How does ICAS+ fit with other interim approaches? • There is still considerable uncertainty around the actual implementation date for Solvency II … • … but, EIOPA and other local supervisors are keen that companies continue to prepare. • UK is unique in having a Pillar 2 approach (ICAS) with similarities to Solvency II Pillar 1 • ICAS+ presents a framework for closing the gap between ICAS and Solvency II Pillars 1 and 2. • EIOPA are looking to drive regulatory consistency on Solvency II preparations for Pillars 2 and 3 through the interim measures • Therefore, we are expecting: • More focused ICAS reviews under ICAS+, to inform preparation for Solvency II • An opportunity to get more feedback on key elements, including ORSA and embedded use • More structured and intensive engagement with Colleges on Pillar 2 and Solvency II preparations • Alignment of expectations between supervisors • Clarity that there should be limited focus on Pillar 3 until it is clear when Solvency II will be implemented and go live

3. Implications for Pillar 1 Solvency II Internal Model ICA Model Counter-cyclical premium Risk calibration methodology Contract boundaries Projection to ultimate for GI business Liquidity/Matching premium Model enhancements 1-year new business treatment Closure of new business risks Loss-absorbing capacity Ring-fenced funds Diversification Benefit Management actions modelling Group Risk Equivalence Pension Schemes Treatment Treatment of non-EEA undertakings Liquidity Risk Intra-group arrangements Fungibility requirements Basic risk free rate • There does not appear to be a technical difference between an ICAS and an ICAS+ model • For an ICAS+ model, there should be a proportionate amount of effort on validation and calibration relative to Solvency II, although specific and observable benchmarks will be needed • The delay to Solvency II may also allow an increased proportion of validation and calibration process to be internal.

4. Implications for Pillars 2 and 3 • Pillar 2 • For Pillar 2, EIOPA and PRA guidance will require early implementation of many Solvency II based requirements, including: • ORSA type requirements (‘Forward looking assessment of risk’) • Forward looking stress and scenario testing • Embedding of risk appetite in decisions on business strategy • Given the delay to Solvency II, it is reasonable to focus on incrementally refining of BAU processes to address key requirements • Pillar 3 • Given the uncertainty on the timing of Solvency II and ultimate Pillar 1 requirements, we expect companies to focus on ensuring that any development effort is cost efficient • The Pillar 3 reporting requirements of Solvency II are clearly still onerous for the industry and early implementation must be avoided until there is greater certainty on timing and Pillar 1 requirements. The EIOPA interim measures take a pragmatic approach to this issue. • A key area of uncertainty is how requirements can be met from a process perspective – key questions include: • How acceptable will a roll-forward approach be? • How accurate do results have to be? • How often will calibrations need to be refreshed?

5. Implications for the Board • ICAS+ / Pillar 1 • Under ICAS+, we expect the PRA to look for additional evidence that the Board: • Is aware of the key limitations of the models, data and assumptions • Understands the importance of judgement in the models • Is comfortable that any management actions in the models are appropriate • Is comfortable that the capital requirements for key risks are ‘reasonable’ • Has ensured that Management has established an adequate model control framework • Pillar 2 • The introduction of obligations around the ORSA (forward looking assessment of risk under the EIOPA interim measures) will be a key change • We expect to take a pragmatic approach, avoiding duplication of processes and reporting, by leveraging existing management information from: • Plan submissions • Capital and liquidity reports (including forward looking stress & scenario testing) • CRO Reports • However, Boards will still need to be clear that they have met the ORSA requirements

6. Key areas of concern • We see ICAS+ as pragmatic and helpful • We would be concerned if the UK gets too far ahead of the rest of the EU: • No other EU supervisor has an interim approach, so ‘benchmarks’ may be set too high • In addition, the level of effort expected on calibration and validation may ultimately be higher than necessary • On Pillar 2, we are keen to ensure that lessons from the exiting ICA regime are factored into the development of supervisory thinking: • ICA numbers already reflect an economic view of risk and are used to steer the business • An ICA-based ORSA would be a sensible interim option in the UK • Close engagement with EIOPA and other EU supervisors will be essential to ensure that ICAS+ evolves alongside the EIOPA interim measures, to maintain alignment and try to minimise rework as the timetable for Solvency II becomes clearer