PRA-regulated insurers will be able to apply to use the Article 77b ‘matching adjustment’ (MA) under Solvency II when calculating their capital requirements. This will be available from April 2015 and will remove the requirement to compensate for market volatility to which they are not exposed. The criteria under Article 77b define specific features that the portfolio of assets, and in some cases the individual assets within it, must have. Any assets that meet the eligibility criteria and have fixed cash-flows will be eligible for inclusion in the MA.
Large insurers hoping to take advantage of this “less stringent” capital requirement will nevertheless need to ensure that their application satisfies the overall broader Solvency II regulatory requirements and will also need to submit a solvency plan. Firms entering into hedging or other arrangements to secure compliance with the criteria in Article 77b of Solvency II must ensure that these arrangements also meet the Solvency II risk management requirements. This means that firms will need to demonstrate that they have assessed the hedging arrangements and that they have mitigated against the risks generated from stress and counterparty exposure.
To view Solvency II, please see http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32015R0035