BOE to Rule on Insurers’ Risk Models in December: Woods

The Bank of England will issue its verdict in December on the models insurance companies use to quantify risk and determine capital requirements as the industry prepares for the new European Union rules known as Solvency II.

“I consider it vital that our approval process is entirely consistent across firms, and that the timing and communication of our decisions is consistent with orderly markets,” Sam Woods, the BOE executive director for insurance supervision, said in a speech in London on Thursday.

So-called internal models for risk assessment must be approved by an insurer’s supervisor. Woods said companies that don’t have an internal model will use a prescribed standard formula to determine their capital requirement under the EU law, which enters fully into force on Jan. 1.

The BOE is working with insurers as they adapt to the new regulations, which set stricter capital standards to help firms withstand a repeat of the financial crisis. Woods sought to dispel the “myth” that the BOE would use the implementation of Solvency II to “load the sector with more capital now so that it is baked into the new regime once operational.”

“Let me state very simply: there is no such plan within the Bank of England,” he said.

The Association of British Insurers welcomed the December decisions on internal models. “The industry will work closely with the PRA over the coming months to ensure this process can work in practice,” ABI Director General Huw Evans said in an e-mailed statement.

Woods also said the BOE will allow insurers to make use of transitional rules in Solvency II that can affect capital requirements in its decisions about whether they can pay dividends.

AFI’s Evans said the transitional measures are a “key part of the new regulatory regime, and it is reassuring to receive formal confirmation that the PRA will allow the full use of these measures to firms, including for the payment of dividends.”

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