We believe that the Solvency II Own Risk and Solvency Assessment, the ORSA, will help give us a better understanding of an insurer’s business. It is therefore logical for us to make early adjustments to our existing regime to incorporate the ORSA under ICAS plus. This will mean that UK insurers are better prepared for the introduction of Solvency II. To monitor the on-going appropriateness of internal models, we have introduced the use of early warning indicators based on metrics that are independent of the model calculations. In cases where the indicator’s threshold is breached it will trigger an immediate supervisory  4  BIS central bankers’ speeches  response; a capital add-on is, in all but exceptional cases, likely to be the most effective way to restore compliance with the Solvency II calibration requirement (i.e. 99.5% over a one-year period). Importantly, we expect that where internal models are used for regulatory capital purposes, they should contribute to prudent risk management and measurement. And they should be updated regularly in order to reflect the insurer’s risk profile and not just to ensure compliance with the letter of our requirements. My view is that we still have a good way to go to make the Solvency II regime manageable in its use and implementation. I have to say that I think the early design did not come up to the mark in this respect.
But it raised an important theme that has to be considered more widely, namely that our approach to supervision of firms ensures that senior individuals are properly accountable and thus incentivised. The record of the banking crisis indicates that this senior accountability was not effective in banks that failed. Often, the simplest points are the most powerful, and complexity is a poor guide. Andrew Tyrie and his colleagues have done a great service by making a simple but powerful  BIS central bankers’ speeches  3  point – as supervisors we must incentivise and hold to account those at the top, and not seek to do the job of management by influencing excessively further down. I could not end without talking about Europe and Solvency II and wider global developments in insurance regulation. A month or two ago I ruffled a few feathers by criticising the cost and time taken preparing for a European Directive that isn’t finalised. I have no regrets, because as public officials we have to speak honestly and transparently. I was making a point on behalf of firms because I feel strongly that you have been put to too much expense and time spent by management and boards. But, in saying this, I should be clear that the PRA has not withdrawn from involvement in Solvency II, far from it. As Tidjane said this morning, the insurance industry and its regulators cannot operate in a vacuum.