The eagerly awaited follow up from the PRA to CP12/23 (Review of Solvency II: Adapting to the UK insurance market [1]) was issued on February 28, addressing responses to the consultation and confirming some of the final policy wordings. While this provides much needed clarity on some of the reforms, life insurers will have to wait a little longer for the final wording on Matching Adjustment reforms, which is not due until June this year.

Key proposals from the Consultation Paper (CP12/23)

The 2023 consultation paper proposed various reforms, including:

  • Transitional Measure on Technical Provisions (TMTP): Introducing a simplified approach for calculating the TMTP, removing the need for calculation of the old Solvency I metrics, and ensuring a smooth run off by 2032, and removing the Financial Resource Requirement (FRR) test. A limited number of firms who are materially adversely impacted by the new approach will have the option to apply to use the “legacy approach.”

  • Internal Model (IM) framework: Simplifying the approach for approval of new internal models, and changes to existing models, and introducing a new suite of safeguards and an Internal Model Ongoing Review (IMOR) framework.

  • Capital Add-Ons (CAOs); changes to calculation of Group SCR; and thresholds for entering the Solvency UK regime.

Response to the consultation – Policy Statement (PS2/24) [2]

The content of the consultation paper has been the subject of much debate over recent months, as reflected in the PRA’s summary of the feedback received. While many respondents supported the intention to simplify the regime and enhance transparency of the internal model process, others were more critical and felt the proposals did not go far enough in reducing the operational burden of the solvency reporting requirements. Indeed, some of the proposals were suggested to be even more burdensome than the existing rules.

While some of the responses have warranted adjustments and clarifications, the changes to the original consultation were more minimal than anticipated by many.

The key changes are:

Transitional Measure on Technical Provisions (TMTP):

Effective from December 2023 (i.e., a year earlier than initially proposed), the PRA no longer require firms to conduct the FRR test, except for cases where TMTP is constrained by the test. In such instances, the PRA will undertake a case-by-case assessment for potential removal of the FRR test. The PRA also confirmed its decision to fully remove the FRR test from the TMTP framework by YE 2024.

Internal Models:

Clarifying wording around timing of new approvals, providing guidance around the inclusion of risks (emphasizing that changes in risk categorization may not always constitute the inclusion of new risks) and clarifying expectations around model limitation adjustments.

Capital Add-Ons:

No separate disclosure of RML CAOs in SFCRs, and instead included in SCR calculation using IM, to ensure quicker IM approval and reduced cost; explicitly allowing for dynamically adjusting CAOs in line with certain firm outputs, ensuring alignment with changing risk profiles over time; and other minor adjustments.

Flexibility in Calculating the Group SCR:

Firms will be granted a temporary modification for 6-months to devise integration plans for multiple group SCR calculation approaches, followed by a 2-year implementation period.

Thresholds:

The Solvency II threshold for gross written premium income has been raised to £25m; this threshold determines whether a firm is regulated under Solvency II or the non-Directive sector rules (NDF).

Urgent action required

Any firms who intend to apply to use the legacy TMTP approach will need to do so by 30 June 2024. Considering the analysis required to support such an application, this work will need to be commenced immediately.

Conclusion

With 2024 bringing significant regulatory development to the insurance industry (including Solvent Exit proposal, Solvency UK Reforms, funded reinsurance regulatory changes and of course the major overhaul of the matching adjustment framework), staying compliant is a task not to be underestimated.

Partner with 4most for expert guidance and support as you navigate these changes. Contact us at – info@4-most.co.uk to learn more.

References