Life Insurance Regulatory Snapshot

Below we provide an overview of the regulatory publications released in December 2023 that pertain to Life Insurers.

Solvency II Review – considerations for year-end 2023 [1]

On 8 December, the Prudential Regulation Authority (PRA) and HM Treasury (HMT) released a joint statement outlining the reforms to Solvency II to be implemented at year-end 2023. These include:

• The requirement on firms to submit the Regular Supervisory Report (RSR) will be removed with effect from 31 December 2023.

• The PRA is content not to receive the following SII Quantitative Reporting Template (QRTs) for the period prior to the implementation of the final policy (proposed implementation date 31 December 2024): S.07.01, S.08.02, S.21.01, S21.03, S.31.02, NS.06.

• Firms required to limit the Transitional Measure on Technical Provisions (TMTP) due to the FRR test in their last recalculation can contact their supervisors to request the removal of the FRR test at year-end 2023 (which be assessed on a case-by-case basis). For all other firms, the PRA no longer expects firms to carry out the FRR test when recalculating TMTP. This will also apply to any recalculations required between 31/12/23 and 30/12/24.

• Periodical Payment Orders (PPOs) are eligible for the 0.9 risk tapering factor given they are treated as life insurance obligations under the existing regime. The PRA does not object to firms applying 0.9 risk tapering factor to potential PPO obligations calculated on a probabilistic basis.

• The PRA encourages firms to propose simplifications to their risk margin calculation to their supervisor if they do not have the systems in place to project capital requirements on PPO obligations only.

PS19/23 – Responses to proposed minor amendments in CP8/23, CP12/23 and CP22/23 [2]

PS19/23 provides feedback to responses to the three CPs issued in 2023, which outlined proposals to implement minor changes to rules and a Statement of Policy (SoP)

(1) CP8/23 – Occasional consultation paper April 2023

• The PRA proposed to make two amendments to its approach to deriving the reference portfolios for the volatility adjustment that will take effect from 31 March 2024. PS19/23 provided clarification that the VA RPs are intended to reflect all UK firms’ asset exposures, irrespective of whether they apply the VA.

• The PRA has updated its SoP on the publication of Solvency II TI to reflect the proposed changes.

(2) CP22/23 – Occasional consultation paper October 2023

• The PRA proposed a change to the Depositor Protection Part (DPP) of the PRA Rulebook to facilitate the ability of the Financial Services Compensation Scheme (FSCS) to pay compensation to eligible depositors of insolvent deposit takers via electronic transfer on an online portal (rather than the current method of issuing a cheque), to support faster payouts. The PRA responded to feedback and acknowledged that there may be situations where depositors without access to the portal may have to wait slightly longer however the PRA expects that the compensation for all depositors will be made as quickly as possible.

The implementation date for amended rules reflected in CP8/23 and CP22/23 is 22 December 2023.

(3) Chapter 11 of CP12/23 – Review of Solvency II: Adapting to the UK insurance market

The PRA proposed minor changes to the PRA Rulebook to update definitions and ensure that PRA rules refer to the SII CDR as amended by HMT’s legislation. As no concerns were raised the PRA is proceeding with the propels outlined in Chapter 11 of CP12/23.

The implementation date for amended rules reflected in CP12/23 is 31 December 2023.

PS23/18 Smarter Regulatory Framework: The Insurance Distribution Directive [3]

In 2018 the UK implemented the Insurance Distribution Directive (IDD). As part of the implementation, some of the requirements were contained in EU delegated regulations which are part of retained European Union (EU) law (REUL). Following the UK’s exit from the EU, the Treasury’s Smarter Regulatory Framework includes the repeal of the IID delegated regulations, which means they will cease to apply directly to UK firms.

Consultation Paper (CP)23/19, issued in September 2023, is relevant to all firms involved in insurance activities. The CP sets out the Financial Conduct Authority’s (FCA) proposals for transferring part of the regulatory requirements on insurance firms from current EU legislation into FCA rules. These requirements relate to:

• Standardised presentation format for the insurance product information document.

• Product oversight and governance requirements for insurance undertakings and insurance distributors.

• Information requirements and conduct of business rules applicable to the distribution of insurance–based investment products.

The FCA’s proposals outlined in the CP maintain the consistency of the regulatory framework and ensure consumers continue to be protected to the same extent as they currently are. The proposals do not include any new requirements on firms, nor remove existing requirements. CP23/19 outlined changes to various sourcebooks which would be needed to maintain the requirements which currently apply to firms.

The FCA received responses to CP23/19 and based on the positive feedback, it is noted in Policy Statement (PS)23/18 the rules will be set in line with those outlined in the CP without any material changes. The changes outlined in CP23/19 and PS23/18 will come into effect on 5 April 2024, aligning with date that Parliament repeals the REUL.