PRA updates on Solvency 2: Andrew Bulley, Director of Life Insurance at PRA, has written to firms updating them on the status of Solvency 2 preparations. The letter:

  • states PRA intends to publish information on issues arising from the stage one balance sheet process by the end of May;
  • reminds firms that the submission period for the first annual returns for the preparatory phase of the regulatory reporting process begins on 1 June, with submissions due by 30 June;
  • reiterates PRA's approach to the standard formula and how it will be applied to firms;
  • reiterates PRA's approach and guidance on the use of internal models;
  • notes that EIOPA is currently consulting on currency reporting requirements under Solvency 2;
  • draws firms' attention to the new BoE webpage dedicated to Solvency 2 approvals and waivers; and
  • reminds firms that PRA has issued a draft questionnaire for firms' comments regarding the upcoming general insurance stress test.

(Source: PRA Director's Solvency 2 Update)

PRA consults on contractual stays: PRA is consulting on a proposal for a new rule for the PRA Rulebook requiring the contractual adoption of UK resolution stays in certain financial contracts governed by the law of a jurisdiction outside the European Economic Area (EEA). The proposed rule would apply to UK banks, building societies and designated investment firms as well as their qualifying parent undertakings in respect of financial contracts governed by the law of a non-EEA jurisdiction. It would:

  • prohibit firms from creating new obligations or materially amending an existing obligation under such a financial contract without the required counterparty agreement. The prohibition applies unless the counterparty has agreed in writing to be subject to similar restrictions on termination, acceleration, close-out, set-off and netting as would apply as a result of the firm’s entry into resolution, or the write-down or conversion of the firm’s regulatory capital at the point of non-viability, if the contract were governed by the laws of the UK; and
  • oblige firms to ensure that, where their subsidiary credit institutions, investment firms and financial institutions trade in these products under third-country law, the subsidiaries, regardless of location, also obtain agreement to the stay from their counterparties.

Consultation closes on 26 August. (Source: Contractual Stays in Financial Contracts Governed by Third-Country Law)

PRA feeds back on ring-fencing responses: PRA published a policy statement providing feedback on the responses received to its consultation on the implementation of ring-fencing. Overall, PRA decided that the responses did not necessitate major changes to the overall approach to implementing ring-fencing. The policy statement comments in detail on consultation responses relating to:

  • the legal structure of ring-fenced bodies (RFBs): specifically, entities that an RFB may own and entities that can own an RFB;
  • governance: in particular, PRA and the Financial Reporting Council commentary on corporate governance and financial reporting; the application of governance rules where an RFB sub-group is formed; board membership and senior managers for risk management and internal audit; PRA policy on consideration of waivers and modifications of ring-fencing rules; personnel dependency; independence criteria; remuneration; vacancies for independent non-executive directors on RFB boards; disclosure requirements for RFBs; rules on RFB board audit committees; and compliance with the ring-fencing obligations; and
  • continuity of services and facilities: particularly, group services arrangements, and group and third party service arrangements.

The government intends to implement ring-fencing by January 2019. (Source: PRA: Structural Reform - Responses to Ring-fencing Consultation)

PRA speaks on Solvency 2: Andrew Bulley spoke on Solvency 2. He highlighted that:

  • there are many similarities between the current Individual Capital Adequacy Standards (ICAS) regime for insurers and Solvency 2 meaning that the latter should be seen as an evolutionary rather than revolutionary development;
  • chief amongst these similarities is the shared objective of improving the risk management culture within firms to protect policyholders;
  • Solvency 2 will harmonise EU insurance regulation, replacing disparate and disjointed national regulatory regimes with a single, consistent and coherent rulebook transposed directly into national law;
  • importantly, Solvency 2 empowers supervisory authorities to approve the models from which capital numbers are derived, not the numbers themselves;
  • Solvency 2 requires firms to demonstrate that senior management understand and know how to use their firms' internal models;
  • Solvency 2 offers the possibility also for regulatory approval of matching adjustment and volatility adjustment models;
  • the introduction of the Own Risk and Solvency Assessment (ORSA) ensures risk and capital are considered together;
  • unlike ICAS, Solvency 2 introduces consistent group supervision across Member States; and
  • increased reporting requirements and increased publicity of this information will also help to ensure consistency and drive high standards.

He concluded by saying that PRA will continue to work closely with firms as they prepare to comply with Solvency 2's implementation in six months' time. (Source: Andrew Bulley, PRA: Reflecting on Solvency 2: Continuity and Change)

PRA sets expectations on VA applications: PRA has published a supervisory statement that sets out its expectations on insurers applying for permission to use a volatility adjustment (VA). The statement clarifies what items should be included in the application, how PRA will assess the applications, and how this approval process interacts with other parts of Solvency 2 implementation. (Source:Supervisory Approval for VA)

PRA consults on Solvency 2 reporting codes: PRA is consulting, until 10 July, on two draft supervisory statements covering, respectively:

  • the reporting codes that insurers using internal models must assign to each component of their internal models; and
  • codes for reporting information on life business or annuities that result from non-life business.

(Source: Internal Model Reporting Codes and Components and Life Product Codes)

PRA writes to insurers on MA: PRA has provided insurers that will apply Matching Adjustment (MA) in complying with Solvency 2 with further clarity on:

  • management of collateral arrangements;
  • collateral received against stock-lending activity; and
  • the treatment of reinsurance.

(Source: Solvency 2: MA)

PRA publishes XBRL filing manual: PRA has published the first version of its Solvency 2 XBRL filing manual. (Source: XBRL Filing Manual)