The UK Financial Services Authority (FSA) says the calibration model it intends to use to check that insurers meet the Solvency II requirements will be crucial.

In a briefing to UK insurers at Lloyd’s, FSA CEO Hector Sants says there have been concerns the benefits of the new Solvency II regime may be outweighed by its cost.

There are also concerns the standard model used to set solvency could be wrongly calibrated.

Mr Sants says the correct calibration of the standard model will be key for insurers, even if they intend to use their own models to calculate solvency.

“As required, we will be laying out a UK cost-benefit analysis in the next year, but this is largely an ‘after the fact’ exercise, in the sense that the directive is already agreed,” he said.

“Our ambition has not been to increase or decrease the amount of capital supporting the UK insurance industry, but rather to ensure that capital is more appropriately aligned with risks.”

Mr Sants says the FSA is continuing to request the European Commission (EC) for the appropriate calibration for non-life catastrophe risk for UK insurers.

But the work by the FSA in sorting out the calibration model for insurers will come at a cost to the industry. He says the industry will have to bear the cost of implementing the Solvency II requirements.

“The FSA has worked hard to minimise its direct costs of implementation, and following our most recent work we are currently estimating the FSA’s implementation costs at about £100 million ($160 million), which is towards the low end of our previously announced range.”