The UK’s Prudential Regulation Authority has adopted and published a new Supervisory Statement: “SS10/16 Solvency II: Remuneration requirements“.
Solvency II (re)insurers are already:
- (actually) obliged to comply with article 275 of the Solvency II Delegated Regulation; and
- (effectively) obliged to comply with EIOPA’s “Guidelines on System of Governance“.
The PRA’s Supervisory Statement describes the PRA’s Regulation & Guidelines compliance expectations.
Under article 258(1)(l) of the Solvency II Delegated Regulation, an in-scope Solvency II (re)insurer is required to “adopt a written remuneration policy“. And, when it does that, article 275 requires the (re)insurer (a) to comply with 7 principles and 8 sub-principles; and (b) to design its remuneration policy so that it takes “into account the [(re)insurer’s] internal organization …, and the nature, scale and complexity of the risks inherent in its business“.
The 7 principles are:
- the remuneration policy and practices must be consistent with the (re)insurer’s “business and risk management strategy, its risk profile, objectives, risk management practices and the long-term interests and performance of the [(re)insurer] as a whole and … incorporate measures aimed at avoiding conflicts of interest“;
- the policy must promote “sound and effective risk management … and not encourage risk-taking that exceeds the [(re)insurer’s] risk tolerance limits“;
- the policy must apply to the whole (re)insurer, and include “specific arrangements that take into account the tasks and performance of the [board], persons who effectively run the undertaking or have other key functions and other categories of staff whose professional activities have a material impact on [its] risk profile“;
- the board must establish and oversee the implementation of the policy for those staff whose professional activities have a material impact on the (re)insurer’s risk profile;
- there must be “clear, transparent and effective governance with regard to remuneration, including the oversight of the remuneration policy“;
- in appropriate cases, there should be an independent remuneration committee that can support the board when it oversees the design of the policy and practices, as well as their implementation and operation; and
- the policy must be disclosed to each member of staff.
The 8 sub-principles expand on the “specific arrangements” referred to in principle 3, and apply to things like “remuneration schemes that includes both fixed and variable components“; performance related pay; the assessment and measurement of performance; and termination payments.
The PRA’s Supervisory Statement explains:
- how the PRA thinks a (re)insurer should approach the identification of its “Solvency II staff” – i.e. those referred to in principle 3;
- what the PRA thinks a principle 3- and 8 sub-principles- compliant long-term incentive plan and bonus arrangement looks like;
- the PRA’s views about performance measurement, from an 8 sub-principles perspective; and
- the PRA’s thoughts on the application of the proportionality principle to these requirements.
The Supervisory Statement closes with a plug for a new PRA template that will “enable firms to demonstrate how their policies, practices and procedures .. meet … the requirements in the Solvency II Regulation and the expectations in [the Supervisory Statement] … The template meets the PRA’s expectation[s when it comes to] the level of detail which should be included … to demonstrate compliance with the Solvency II Regulation. However, use of this template is voluntary … some firms may prefer to document how their remuneration policies comply with the Solvency II requirements in a different way“. The template is available under the heading “Self-assessment templates and tables” here