abcd FSA’s approach to Prudential Regulation - general insurance proposals Peter Hinton Insurance Technical Risk Financial Services Authority May 2003 Scarman House

FSA’s approach to Prudential Regulation - general insurance proposals Legal background Risk based supervision Regulatory reporting Enhanced capital requirement Individual capital adequacy standards

Legal background FSMA 2000 Integrated supervisor FSA Handbook

FSMA 2000 Regulatory objectives Principles of good regulation Ability to make rules and issue general guidance Need to consult

Regulatory objectives Market confidence Public awareness Protection of consumers Reduction of financial crime

Principles of good regulation Efficient use of resources Role of management Burden or restriction proportionate to benefits Facilitate innovation International character of financial services and competitive position of UK Minimise adverse effects of regulation on competition Facilitate competition between regulated persons

Rules and guidance Act has 433 clauses but is merely framework FSA rules and guidance contain detail More flexible than legislation –despite process Must consult –masses of consultation papers –YOUR opportunity to influence things –also pre-consultation

Integrated supervisor All firms in a group have common supervisor Treat similar risks similarly in different types of firm –but allow for differences –justify or change historic practices Insurance technical risk part of Prudential Standards PSD includes capital, credit risk, liquidity, etc –teams advise on all types of firm –preparing rules for all firms

FSA Handbook High level standards –PRIN, SYSC, COND, APER, FIT, GEN Business standards –IPRU(INS) Regulatory processes –AUTH, SUP, ENF, DEC Redress Specialist sourcebooks –LLD

Principles for Businesses 3 - Firm must have adequate risk management systems 4 - Firm must maintain adequate resources 11 - Must be open with regulator and tell FSA anything we could reasonably expect These are rules

FSA Handbook Prudential rules rolled over at N2 Not yet integrated CP 97 in June 01 Continuing consultation First step insurance (+ some general rules) –Life insurance General insurance –EU solvency margin too low –Guidance on what capital is adequate

Risk based supervision Risk = risk to FSA objectives Risk = impact X probability More effort on larger firms Nature of customers Degree of risk Rules haven’t changed: practice has

Regulatory reporting Backward looking More information on risks and controls Exception reporting What data does the firm use? Comparisons across the industry –New reporting classes? What existing information can/should we drop? One-off requests are expensive

EU solvency requirements too low Insufficiently focused on risk Any competent GI actuary or insurance manager could do better Best is enemy of good Enhanced capital requirement

ICP3a consultation shortly: likely proposal Factor X asset value Factor X net technical provisions Factor X net written premium in last year ECR = total Factor depends on nature of asset, class of business. Uses information in returns. No diversification credit Exclude: mutuals not subject to solvency 1, firms in formal run-off by end 04 Enhanced capital requirement

Firm must hold higher of ECR & MCR (rmm) Equalisation reserves & innovative tier 1 count towards ECR (but not MCR) Factors in ICP3 will be tentative – both level and relativities Average between 2x and 3x rmm Subject to revision following consultation Analysis for FSA by actuarial firm ECR applies from end 2004 Enhanced capital requirement

Individual capital adequacy standards Adequate overall financial resources; no significant risk that liabilities cannot be met Assess financial resources needed Identify major sources of risk Stress and scenario tests Realistic: can liabilities be met? wef 1/1/05 FSA guidance but no mandatory tests or prescriptive approaches

Individual capital adequacy standards: probable procedure FSA will review initial self-assessment (standardised format) Individual Capital Guidance –ECR sufficient –Give ICG consistent with firm’s assessment –Give ICG higher than firm’s assessment Waiver of ECR if FSA agrees excessive Plan to restore sound financial position if breach of ECR or ICG S45 OIVOP if firm does not accept ICG

Individual capital adequacy standards: probable procedure No routine reporting Internal documentation ICG / ICAS assessed as part of continuing monitoring during supervisory visits Frequency depends on firm Firm’s own capital assessment private ICG not published

FSA’s approach to Prudential Regulation - general insurance proposals Questions & comments? How will this affect you? How will this affect your firms / clients? Are proposals practical? Are proposals sensible? Are proposals proportionate?