The implementation of Individual Capital Adequacy Standards (ICAS) within insurance companies in the UK has been seen as a positive experience for the future implementation of Solvency II and as an aid to insurance firms embedding risk-based approaches within their businesses.
The UK’s Financial Services Authority implemented ICAS at the beginning of 2005. Under ICAS, an insurance company is required to undertake regular assessments of the amount and quality of capital which, in its view, is adequate for its business – their Individual Capital Assessment (ICA) – and to take into account risk, including operational risk, into their assessments. Firms must quantify the amount and composition of capital they need to hold to mitigate their risks to an agreed level of confidence of survival – a level typically defined as 99.5% confidence of remaining solvent over 1 year, or, in other words, to have sufficient capital to survive a 1-in-200 year adverse event.
Last week the Association of British Insurers (ABI) reported on a survey the ABI carried out reviewing the implementation of ICAS. Peter Vipond, ABI Director of Financial Regulation and Taxation, said of the survey "Firms believe ICAS has helped to embed a risk-based approach to calculating how much capital firms need. As a result, customers are being properly protected without prices being driven up, which would result if firms were required to hold additional, unnecessary capital." He went on to say that "The ABI is keen that the European Commission draws on this positive experience in establishing new capital adequacy standards for the EU through the Solvency II Directive."
Firms reported that the ICA process was helping them embed a risk-based approach within the business with 65% using their ICA for fundamental business decisions and 95% using it in day-to-day management. However over 40% stressed the need for improved dialogue, in both directions, between the firms and the regulators. Firms also noted that the need for the FSA to comment on the ICA had obviously stretched the FSA’s own resources, with another 40% having to wait for up to 12 months to receive guidance.
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