Closing liquidity reporting gaps: The PRA’s proposed reforms for life insurers

The Prudential Regulation Authority’s (PRA) proposed reforms to liquidity reporting for internal model (IM) life insurers aim to enhance supervision, improve liquidity data access through four new templates, and remove outdated reporting requirements. The changes address the growing complexity of financial instruments and emphasise robust liquidity risk management.

The consultation runs until March 31, 2025, with compliance expected by December 31, 2025.

We delve into each reform, highlighting the most critical developments and their potential impact on firms.

Key proposals

The PRA has introduced two major changes:

1) Enhanced liquidity reporting requirements

Life insurers using the IM methodology will be required to submit detailed liquidity reports through four newly developed templates which will capture cashflow data, margin, collateral flows and derivative exposure related risks:

• Cashflow Mismatch Template (T+10, monthly): Assesses liquidity adequacy under stable and stressed conditions, covering cashflows, counterbalancing capacity, and external event-driven outflows.
• Cashflow Mismatch (Short Form) Template (T+1, monthly/daily in times of liquidity stress): Focuses on rapidly changing liquidity drivers and cashflow data from financial transactions.
• Committed Facilities Template (T+70, annually): Identifies additional liquidity sources under stress, including lender facilities, collateral needs, and contingent liquidity.
• Liquidity Market Risk Sensitivities Template (T+30, quarterly): Evaluates market-driven liquidity risks, analysing asset sensitivity to interest rates, inflation, FX, and credit spreads.

2) Discontinuation of SF.01 for IM life insurers

The PRA will discontinue the SF.01 template for IM insurers, as Standard Formula (SF) under Solvency Capital Requirements (SCR) is ineffective for detecting model drift. Instead, tools like IM.01 and Quarterly Model Change data offer better insights. Firms must still provide SF SCR estimates upon request, per Rule 3.4 of the PRA Rulebook.

Impact and challenges for insurers

The PRA’s proposed changes will apply to firms meeting specific asset valuation, derivative exposure, and securities financing transaction (SFT) exposure thresholds, as specified below:

• Asset valuation: Solo UK Solvency II firms with assets averaging more than £20 billion over the last three quarterly reporting periods are affected, excluding index or unit-linked assets.
• Derivatives exposure: Firms with a gross notional value of derivative contracts exceeding £10 billion are included in the scope.
• SFT exposure: Firms with securities lending or repurchase agreements totalling more than £1 billion are impacted, excluding index or unit-linked holdings.
• Exclusions: The PRA excludes assets and derivatives in index and unit-linked funds from these thresholds. Additionally, the Society of Lloyd’s and its managing agents are not subject to these rules for proportionality reasons.

The changes will be applied retrospectively, requiring firms meeting all three thresholds by 31 December 2025 to comply, based on their prior three quarterly balance sheets.

Process upgrade

Firms need efficient data systems for quick collation and review. A gap analysis is required to determine data granularity, and upgrades will be necessary for data flows and asset models. A robust reporting process must be established.

Timelines

Reporting clashes with existing cycles, making delivery difficult, especially for T+1 submissions. Firms must implement well-designed processes and possible system enhancements to manage the tight deadlines.

What’s next for insurers?

To successfully navigate these changes, firms should:

• Verify entities meet PRA thresholds for assets, derivatives, and SFTs.
• Conduct a gap analysis on data and model differences between the existing and proposed process.
• Identify process improvements and technology needs.
• Assess and plan liquidity process changes such as data requirements, model builds for 2025 delivery.
• Implement changes with controls, reviews, and documentation by Dec 31, 2025.

Contact us

For further guidance on adapting to these changes, please reach out to: info@4-most.co.uk.