KPMG says many UK insurance companies will struggle to calculate their group solvency margin, as required by the new Supplementary Supervision on Insurance Undertakings in a Group (IGD) directive issued by the Financial Services Authority (FSA). Hitesh Patel, partner in KPMG’s Financial Services regulatory division, said: “The new directive is likely to present several challenges to insurance companies, including dealing with any deficits, determining the levels at which calculations need to be made, restatement of overseas companies and valuing surplus assets. Our experience has shown that there are a number of complexities in the calculations which will need to be addressed by companies in a very short time-frame – this is going to prove difficult for many.”
If the group solvency calculation produces a deficit position, the insurance company will have to submit a statement to explain the reasons for the deficit and plans to take any remedial action. The FSA could potentially take action against insurance entities within the group to ensure that the group has adequate capital. This will put increased pressure on retained capital within insurance groups. While individual insurance entities may meet the solvency requirements under local regulations, there will be some cases where they may not do so on a group basis. This is especially pertinent for groups with double gearing, those that have financed large acquisitions resulting in high levels of goodwill and complex group structures.
The first calculations need to be submitted by 15 April for years ended 31 December 2001.Companies will find it difficult to meet the demanding timetable for submission of the calculation, getting to grips with the complexity of the calculations and reporting to the FSA. This is exacerbated by current uncertainty over how some of the rules should be interpreted and applied. A critical aspect to the process is obtaining appropriate information from other group companies on a timely basis and ensuring that the report can be generated by the FSA’s tight deadline.