The Financial Services Authority (FSA) has criticised insurance firms for inadequate planning in the run up to Solvency II in a letter distributed to firms yesterday.
The letter stated that insurance firms are not doing enough work to ensure that their business modelling is sufficiently detailed to reflect their risk profile.
Most insurance companies are using an 'internal model approach' to ensure they satisfy Solvency II requirements.
Solvency II is a set of regulatory criteria that aim to establish new European Union-wide capital adequacy requirements and risk management standards for the insurance industry.
'Validation', which is fundamental to the 'internal model approach', requires that insurers have established rigourous processes that can demonstrate that their business is sound and able to meet the Solvency II standards.
The letter was also critical of the modelling approaches adopted by some firms. It stated that they were often too complex and so less likely to be properly understood or used than if they were easier to understand.
In addition, the letter refers to cases where a company has put its validation framework through the full governance process, but has missed out key areas - one example given is companies not assessing the appropriateness of their validation tools.
The letter also explains that these failing need to be addressed as: "recent trends in global economic development have seen the rising importance of emerging markets seeking insurance protection."
Although the letter is critical throughout, Julian Adams, FSA director of insurance told the industry at the Insurance Day Summit yesterday that the criticism was being given in the context of a "high level of engagement and excellent progress" with the industry.
"[This engagement provides] a good degree of confidence in the work being done by firms," he added.
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