ARC drives ahead with next phase of ICA Model Initiative

Under the next phase in its initiative to develop an individual capital adequacy (ICA) model for discontinued underwriting operations, ARC, the UK trade body for legacy management professionals, and global consulting firm, Watson Wyatt, have established a Key Stakeholder Group (KSG) - which includes representatives from AXA Liabilities Managers, Pearl Group, Copenhagen Re, GLOBAL Re UK, Cavell Management Services Ltd and RITC Syndicate Management.

ARC appointed Watson Wyatt in September to develop the ICA run-off model following a competitive tender process.

A first in the legacy sector, by providing an affordable ‘user friendly’ product, the new ICA model will assist ARC members to meet the Individual Capital Adequacy Standards (ICAS) requirements of the UK Financial Services Authority (FSA). If required, users will also be able to tailor the product to meet particular requirements of their businesses.

The KSG, which consists of members of the ARC Board as well as key representatives from the legacy sector, will provide Watson Wyatt with the necessary feedback to develop a capital model, based on an upgraded version of its proven technology, that incorporates the capability to meet the specific needs of the legacy sector. These include:

• Detailed modelling of reserves to enable identification of areas where commutation or additional reinsurance might be beneficial;

• Application of individual large historic claims to back year reinsurance to help identify the likely benefits of individual reinsurance treaties and potential targets for outwards commutation;

• A capital repatriation tool that can support Part VII negotiations, potential schemes of arrangement and assist with pricing of incoming run-off books of business;

• Outwards reinsurance commutation management facilities;

• A detailed reinsurance credit risk model.

ARC chairman, Philip Grant, said: “All UK authorised insurers are required to have the means to monitor the adequacy of their capital resources and it is clear from emerging practice, that regulated entities in run-off will increasingly wish to maintain ICA models as an embedded part of their business. The FSA has welcomed the initiative, and ARC will be keeping the market updated as the project progresses.”

Rob Collinson of Watson Wyatt said: “Feedback from ARC members confirmed that creating a flexible ICA core model, which could then, if necessary, be tailored to meet the specifics of a particular run-off entity, would be a valuable addition to the range of services offered to members. We are delighted to be working in partnership with ARC on producing such an important tool for the legacy sector.”

ARC deputy chairman, Paul Corver, commented: “At the moment, more often than not, it appears the legacy sector only tends to make active use of capital adequacy modelling when some form of change - such as a sale or a Part VII transfer - is contemplated. However, as the principle of risk-based capital takes root throughout Europe, and as shareholders with legacy business look to improve the efficient management of their committed capital, run-off entities will increasingly create and maintain ICA models as part of the daily management of their business.”