OAC and KPMG UK respond to the PRA’s Policy Statement on Solvency II

Leadership members of actuarial consultancy OAC have addressed the Prudential Regulation Authority’s (PRA) recently published Policy Statement on Solvency II, the prudential regulatory framework for insurers and reinsurers.

If you recall, in June 2023, draft regulations to reform Solvency II were made available by the UK Government for the purpose of early engagement.

Moreover, the Financial Services and Markets Bill was first introduced to Parliament in July 2022.

As a result, the bill creates new powers for the Treasury by regulations to make transitional amendments to, restate, or modify retained European law relating to financial services and markets.

An important factor to note, is that the new UK prudential regime for insurers will eventually be known as ‘Solvency UK’.

In their Policy Statement, the PRA has highlighted a number of areas that it feels are appropriate to make adjustments to the draft policy.

Some of these material changes include, the removal of the proposed requirement for firms to disclose residual model limitation capital add-ons (RML CAOs), as well as the removal of safeguards – which includes RML CAOs – from the PRA’s regular aggregate report on CAOs.

Notably, one of the key changes that was identified by the PRA was allowing for the possibility of setting a CAO which moves in line with certain outputs calculated by a business in order to reflect how the underlying risk deviation varies over time.

As well as this, the PRA also states that insurance groups should be allowed up to six months after an acquisition to “create a clear and realistic plan” to integrate any internal models, therefore amending the proposal that required this plan at the point of acquisition, and a two-year period thereafter to implement this plan.

Additionally, the PRA also confirmed back in December 2023 that it will no longer expect companies to carry out the FRR test when recalculating the TMTP, subject to case-by-case assessments for some firms, which is actually a year earlier than the proposed date to remove the FRR test in CP12/23.

Bharat Raj, Head of London Markets, commented: “The PRA’s Policy Statement is a positive step for the UK insurance market and will deliver practical improvements to the way internal models are managed and regulated.

“The Policy Statement also makes a number of positive improvements to the draft framework set out in PRA’s consultation paper in June last year. We are pleased to see greater practicality in the calculation Capital Add-Ons and the improved clarity on timeframes for reviewing internal model applications.”

Adding: “We also welcome the additional clarity on timeframes for insurers that need to combine their internal models, for example, following a merger or acquisition. We believe that the timeframe set out in the Policy Statement is reasonable and realistic.”

Kathryn Moore, Head of Personal Lines, said: “The PRA’s Policy Statement on adapting Solvency II for the UK provides further clarity and further detail for insurers and other industry stakeholders.”

She continued: “We are particularly pleased to see a further increase in the gross written premium threshold above which insurers are regulated under the Solvency II rules.  This increase from the originally proposed £15 million to £25 million means that more smaller insurers will fall out of the scope of Solvency II.

“Boards of affected firms should take this opportunity to assess how these proposals will impact their solvency position going forward.  Those firms who do not exceed the threshold can continue to operate under Solvency II regime by applying for a voluntary requirement (VREQ).”

“With the amended regime coming into force at the end of this year, time is of the essence for insurers to prepare and firms are encouraged to notify any changes in status with their supervisor at the PRA,” Moore added.

Huw Evans, Insurance Partner, KPMG UK , also commented: “Today’s publications by the PRA clarify important details relating to how the Internal Model and Capital Add-On regimes will work in practice. All-important final rules on reporting and the Matching Adjustment regime are still outstanding.

“The changes to the capital add-on regime are modest but intended to be helpful. Insurers will welcome the PRA’s commitment that it does not intend to use capital add-ons to structurally increase the capital held in the market.”

He added: “Insurers will certainly welcome a new six-month grace period to integrate internal models following an acquisition. This is a sensible adjustment to the original proposal to require alignment on Day 1 following completion of a deal. Increasing the threshold for companies to enter the Solvency UK regime from £15m premium income to £25m is also welcome and should contribute to making the UK a more attractive place to set up an insurance business.”

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