Update on the future regulation of insurance John Tiner Managing Director, FSA

Agenda Tiner Project FSA approach to regulation Senior management responsibilities New prudential regime What does the FSA want from actuaries? Conclusion

Tiner Project FSA’s statutory objectives Baird report Project set up September 2001 Progress report September 2002

Tiner Project A fair deal for consumers Soundly managed insurance firms with adequate financial resources Smarter regulation

FSA approach to regulation Risk-based –risk = impact X probability Themes More pro-active Transparent … but what does this mean for firms?

Risk-based approach Risk assessments for c.200 insurance firms by end 2002 Assess risks to FSA objectives –market confidence –consumer protection –consumer understanding –financial crime Risk mitigation plans sent to firms Range of supervisory tools

Issues identified so far Outsourcing Risk management Documentation Delegation of responsibilities Business continuity plans Stress/scenario testing

Senior management responsibilities Approved persons regime New regime seeks to reinforce the responsibilities of senior management Not trying to second guess management But when things go wrong we shall look directly to senior management and hold them accountable

New capital requirements EU minimum is not enough Risk-based capital –Solvency 2 3 pillars –minimum capital requirements –supervisory review –market discipline

Enhanced pillar 1 Aims: –Introduce risk-sensitivity –Set minimum at a more appropriate level –Provide a more transparent measure

Enhanced pillar 1 Insurance risk Credit risk No explicity calculations for operational risk Impact on overall capital

Pillar 2 CPs 97 and 136 –firms assess their own capital needs –applies to all firms Stress and scenario testing Internal models

Capital Adequacy Standards EU directive Liquidity risk Operational risks Insurance risks Market risk Credit risk FSA risk-based requirement Group risk Capital Appropriate allowance for correlation

Timetable Consultation on rules in January 2003 –enhanced pillar 1 –internal capital assessment Final rules Autumn 2003 Implementation late 2004

What does the FSA want from actuaries? Actuaries are part of senior management –need to have impact with Board –key role in systems and controls Actuarial input: –reserves –underwriting/pricing Maintain and develop professional standards

Conclusion FSA regulation of insurance firms will be unlike anything in the past Our expectations of management are more explicit Capital regime will incentivise god risk management Actuaries will have a key role but will need to adapt