The PRA has published a letter1 from Sam Woods (Executive Director, Insurance Supervision) to firms which sets out the PRA’s proposed approach to the solvency capital requirement (the SCR) in Solvency II.

The letter explains how the PRA will act when a firm approaches its SCR. Mr Woods states that, when considering a contingency plan, the PRA will take into account the volatility of each firm’s capital position, the nature of its business model and the particular risks to which it is exposed. In acknowledging that these factors “will clearly differ from one firm to another”, Mr Woods suggests that the PRA will tailor its approach to individual firms.

This is supported by Mr Woods' emphasising that the PRA intends to use a judgement-based approach to prudential supervision and that, as he has previously explained2, the PRA does not have a fixed point above the SCR which will trigger a formal intervention, as this “would be incompatible with the intention of legislators to deliver a 1-in-200 level of solvency across Europe”.

In the letter, Mr Woods also notes that the SCR is more similar to the ICAS regime than to the Insurance Groups Directive (IGD) regime and that, in his view, reading across a group’s previous IGD position to its new Solvency II position would be “unlikely to have much information value”.

Mr Woods' letter also looks back at the PRA’s decision-making process for approving internal model applications. The detailed annexes to the letter contain further information about how the process was operated, and may be useful reading for firms that are considering applying for approval of an internal model.