PS10/24 – Review of Solvency II: Reform of the Matching Adjustment

On 6 June 2024, the Prudential Regulation Authority (PRA) issued a comprehensive policy statement, providing detailed feedback on responses to their earlier consultation paper (CP) 19/23 – Review of Solvency II: Reform of the Matching Adjustment. This statement marks a significant step forward in regulatory reforms, and sets the implementation deadline of the new requirements and the delivery of the first Matching Adjustment (MA) Attestation as 31 December 2024.

This article summarises the key changes to the draft policy:

1. Investment Flexibility

• • Amendments to the proposed changes to SS7/18 clarify the PRA’s policy intent regarding the treatment of existing assets with ‘fixed’ cash flows and ensure that no unintended changes arise for these assets.
  • The PRA proposes a more flexible calibration of the additional matching tests in SS7/18 to accommodate additional investment capacity in assets with HP cash flows, increasing the thresholds for Matching Tests 4 and 5 from 3% to 5%.
    

2. Liability Eligibility

• • Amendments to the final rules ensure that all in-payment income protection business and in-payment group dependant annuities are MA eligible.
  • MA Permissions and Applications
  • Removal of references to ‘new risks’ triggering variations of MA permissions in SS7/18 and the MA Statement of Policy (SoP).
  • A new chapter has been added to the MA SoP, outlining the PRA’s monitoring of the MA permissions framework, including a commitment to publish regular reports on the MA framework covering application review and approval rates.
  • Amendments to the MA SoP for firms submitting MA applications, including reduced documentation requirements.

3. Matching Adjustment Attestation

• • Firms should group assets into Homogeneous Risk Groups (HRGs) to determine if Fundamental Spread (FS) additions are needed. These HRGs must be granular enough to ensure similar types and levels of risk within each group. The grouping should facilitate a top-down initial approach, followed by examinations of specific assets where necessary, ensuring no fewer risks are identified compared to an asset-by-asset analysis.
  • Firms analysing corporate bond portfolios that align with calibration data and have current, accurate credit ratings are generally expected to rely on the basic FS.

4. MALIR Instructions

1. • Companies are no longer required to provide cash flows extending beyond 50 years. These cash flows must be discounted to the last month of the 50th year.
   • MALIR 2 – 2.8 and MALIR 2 – 2.9 in the proposed MALIR template have been merged to ensure consistency with the Quantitative Reporting Templates.
   • Changes have been made to the asset type definitions.

5. Implementation Date for Notching Rules

• As per the PRA’s clarification, companies can choose to incorporate notching in their MA calculations starting on 30 June 2024. However, the mandatory requirement for the MA calculation to integrate notching will not take effect until 31 December 2024.

The final regulations and policy materials are scheduled to come into effect on 30 June 2024. From this date, firms can apply to include assets and liabilities in MA portfolios with expanded eligibility criteria, remove the Sub Investment Grade MA cap, implement internal credit assessments, adopt changes in MA permissions, implement notching, and optionally apply voluntary FS additions.

Want to learn how 4most can help your organisation navigate these changes?

Contact us – info@4-most.co.uk.

Further reading:

https://www.bankofengland.co.uk/prudential-regulation/publication/2024/june/review-of-solvency-ii-reform-of-the-matching-adjustment-policy-statement/