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PRA Consultations & Policy Statements - October & November 2017

PRA: Solvency II: Data collection of market risk sensitivities – SS7/17 published 18 October 2017

This supervisory statement sets out the Prudential Regulation Authority’s (PRA) expectations in respect of the reporting of sensitivities of solvency position to various changes in market conditions.

The firms in scope are those insurance or reinsurance firms most exposed to market risks. These are primarily Category 1 and 2 firms in the life sector, and any other category life firm or general insurance firm, or composite insurance firm that demonstrates material market risk exposures. The PRA will inform firms individually through their usual supervisory contacts whether they fall within the scope outlined above. A firm that has not been contacted but would like to submit the information may do so after discussion with its usual supervisory contact.

The information requested will enable the PRA to understand how a firm’s financial situation, and through extrapolation that of the sector, as a whole, might alter in a stressed scenario.

The PRA expects firms in scope to report sensitivities to various changes in market risks half-yearly, four weeks after the formal submission of solo quarterly Quantitative Reporting Templates for end June and end December.

See the publication here.


PRA: Solvency II: Matching adjustment – CP21/17 published 25 October 2017

This consultation is relevant to all UK Solvency II firms and to the Society of Lloyd’s and its managing agents where they are applying or have applied to use the MA.

In this consultation paper the Prudential Regulation Authority sets out its proposed expectations of firms in respect of the application of the matching adjustment (MA). The MA allows firms to adjust the relevant risk-free interest rate term structure for the calculation of a best estimate of a portfolio of eligible insurance obligations.

The CP has been developed by the PRA as part of its work on adjustments to the insurance prudential framework in the light of experience following the UK introduction of Solvency II, including in areas recommended for reform by the Association of British Insurers and discussed with the Treasury Committee.

The CP proposes to consolidate and update material previously set out in Directors’ letters, Executive Director’s letters and feedback statements (‘Directors’ letters’) published in the period 1 April 2013 to 15 February 2016 in a new supervisory statement (SS). The CP will allow firms to provide feedback to the earlier published material and new guidance, provide greater clarity on the PRA’s expectations in relation to the MA, and help firms realise the intended benefits of MA.

The proposed expectations in the draft SS cover two areas: i) incorporation of existing Director’s letters, and ii) the introduction of updated guidance in relation to aspects of the MA.

The PRA proposes additional guidance in the following areas

  • asset eligibility – demonstrating cash flow fixity
  • criteria for assessing ‘sufficient compensation’
  • restructuring asset cash flows using special purpose vehicles (SPVs)
  • trading in the MA portfolio
  • consequences of breaches of MA requirements
  • changes to MA portfolio approval

This consultation closes on Wednesday 31 January 2018.

See the consultation here.


PRA: Authorisation and supervision of insurance special purpose vehicles - PS26/17 published 01 November 2017

This Policy Statement provides feedback to responses to Consultation Paper 42/16 ‘Authorisation and supervision of insurance special purpose vehicles’.

It sets out the PRA’s final approach and expectations in relation to the authorisation and supervision of insurance special purpose vehicles (ISPVs), subject to the Risk Transformation Regulations 2017 (RTR) being passed through parliament.

This PS is relevant to all parties who wish to apply to the PRA for, or have obtained authorisation as, an ISPV. It is also relevant to insurers and reinsurers seeking to use UK ISPVs as risk mitigation in accordance with Solvency II.

This PS includes the following materials:

  • Supervisory Statement (SS) 8/17 ‘Authorisation and supervision of insurance special purpose vehicles’ (Appendix 1);
  • amendments to the Insurance Special Purpose Vehicles Part of the PRA Rulebook (Appendix 2);
  • an application form in relation to the authorisation and supervision of ISPVs (Appendix 3); and
  • two sets of notification forms for MISPVs (Appendices 4 and 5).

The rules will be made and the SS and forms will be formally adopted once the Risk Transformation Regulations 2017 (RTR) have passed through Parliament. If this does not happen, the rules will not be made and the SS and forms will not be formally adopted by the PRA.

See the publication here.


PRA: Solvency II: Supervisory approval for the volatility adjustment – CP22/17 published 03 November 2017

The CP is relevant to insurance and reinsurance companies using or intending to use the VA.

This consultation paper sets out the PRA’s proposals to clarify its expectations in respect of firms seeking approval to apply a volatility adjustment (VA) to insurance and reinsurance business.

The proposals clarify the risks that may arise from use of the VA and how firms are expected to consider those risks. The PRA proposes to update Supervisory Statement (SS) 23/15 ‘Solvency II: supervisory approval for the volatility adjustment’.

In the course of reviewing firms’ VA applications the PRA has identified particular areas of prudential risk that may arise from using the VA, and which have had to be addressed in the review process. The CP aims to alert all firms considering applications to use the VA to those risks, and to help them to produce high-quality applications that successfully address those risks.

This consultation closes on Friday 9 February 2018.

See the consultation here.


PRA: Financial management and planning by insurers – CP23/17 published 09 November 2017

The CP is relevant to all UK insurance firms, and groups, in scope of the Solvency II Directive, and to the Society of Lloyd’s and managing agents (‘insurers’).

In this consultation paper, the PRA seeks views on a draft supervisory statement on effective financial management and planning by insurance firms and groups.

The purpose of these proposals is to set out how the application of effective risk management and governance may be linked together with the need for insurers to maintain a sound financial condition going forward, by issuing an SS setting out the PRA’s expectations on financial management and planning by insurers.

The PRA considers that effective financial management and planning is especially important for those insurers with a high-risk appetite, and for those insurers with capital levels that may fluctuate significantly.

As explained in ‘The PRA’s approach to insurance supervision’, the PRA expects to see proper board scrutiny and challenge at an insurer of the ongoing financial management of the insurer, including the sustainability of its capital management and dividend policies, in the context of its risk appetite.

This draft SS is intended to complement existing policy material, rather than to set any new expectations on governance or risk management for insurers. The PRA considers that most insurers will already be meeting the expectations set out in this draft SS.

This consultation closes on Friday 9 February 2018.


PRA: Solvency II: Internal models - modelling of the matching adjustment – CP24/17 published 10 November 2017

The CP is addressed to UK Solvency II firms and to the Society of Lloyd’s and its managing agents.

This consultation paper seeks feedback on a draft supervisory statement setting out the PRA’s proposed expectations of firms regarding the application of the Solvency II matching adjustment (MA) within the calculation of the Solvency Capital Requirement (SCR).

It is most relevant to firms with or seeking MA approval and which use a full or partial internal model to determine the SCR, together with UK Solvency II firms when making an assessment as to the appropriateness of the standard formula for their risk profile.

The purpose of the proposals in The CP is to update and consolidate all of the PRA’s expectations regarding the modelling of the MA in internal models into a single SS in order to provide clarity.

The PRA recognises that the MA requirements were finalised later than other elements of the Solvency II Directive. This presented internal model development challenges for firms seeking to reflect the MA in their models ahead of Solvency II day 1. The PRA is aware that, as a result, a number of firms may wish to make changes to their existing modelling approaches for the MA. There are also likely to be new firms seeking to obtain approval for models that cover the MA. The PRA recognises the complexity involved in modelling the MA for the purposes of calculating the SCR but also the risk management benefits of doing so. The PRA therefore seeks to support firms wishing to develop models in this area by giving more clarity as to its expectations of appropriate practice.

This consultation closes on Friday 9 March 2018.