On 10 December 2018, the Prudential Regulation Authority (PRA) published a policy statement, PS31/18, which provides feedback to responses to its July 2018 consultation paper, CP13/18, "Solvency II: equity release mortgages". Chapter 2 of the policy statement gives details of feedback to the consultation.
The PRA has also published an updated version of Supervisory Statement SS3/17 "Solvency II: Matching adjustment - illiquid unrated assets and equity release mortgages”, which will come into effect on 31 December 2019.
Also on 10 December 2018, the PRA published the text of a Dear CEO letter on Solvency II equity release mortgages sent by its Executive Director, Insurance Supervision, David Rule. In his letter Mr Rule says that having considered the responses received to CP13/18, the core of the PRA's proposals is unchanged.
However, in response to the feedback received, the PRA has decided to make a number of changes to the proposals. These are listed in paragraph 1.6 of the policy statement. Mr Rule highlights two key points:
- the PRA is not taking forward the proposal to apply an equivalent of the effective value test (EVT) as a single approach to determining the illiquidity premium in the pre-Solvency II individual capital adequacy standards regime for the purposes of the transitional measure on technical provisions;
- the PRA reflected on the feedback that the new approach may make insurers’ balance sheets more sensitive to interest rates. Its current thinking is that the minimum deferment rate should be updated periodically in line with movements in real interest rates, although it would always remain a positive rate. It believes a minimum deferment rate of 1% is appropriate currently.
Mr Rule says that the PRA intends to follow up with a consultation in the first quarter of 2019 on the ongoing assessment of the EVT, and how best to address excessive interest rate sensitivity that may arise over time. It also intends to include in that consultation principles for how the PRA thinks the EVT may be applied in stress by insurers using internal models to calculate their solvency capital requirement. Further details of this consultation are given in paragraph 1.9 of the policy statement.