The countdown is on to final implementation of the Solvency II regime on 1 January 2016. On 20 March 2015, the Prudential Regulation Authority (PRA) published its final rules for implementing Solvency II in the UK. Solvency II will apply to around 400-500 retail and wholesale UK insurance firms and to the Lloyd’s insurance market.

PRA approach

Andrew Bailey, PRA chief executive, said that the finalised rules will provide “clarity for UK firms on how the PRA will implement the new regime – acting in the interests of the wider economy and ensuring an appropriate level of policyholder protection”. 

While the PRA has chosen to use an ‘intelligent copy out approach’ to transposing Solvency II, sticking as closely as possible to the Solvency II text, the supervisory statements set out the PRA’s interpretation of the rules and how it intends to apply them. It remains to be seen whether the UK’s interpretation and approach will differ from that taken by other member states.

As the EU Level 2 delegated acts and technical standards have direct effect in the UK, firms will need to have regard to these, as well as the PRA rules and supervisory statements and the Solvency 2 Regulations 2015 (of which more below).

‘A new regime’

The policy statement contains the new chapters of the PRA rulebook transposing Solvency II, as well as 17 supervisory statements. The final rules and supervisory statements in most areas remain unchanged from the draft proposals in the consultation papers.

There are however some changes or clarifications in the following areas:

  1. Volatility adjustment: as HM Treasury has decided to exercise the option for supervisory approval of the volatility adjustment (in the Solvency 2 Regulations 2015) the PRA has published a draft supervisory statement in a separate consultation paper (CP 11/15) outlining its approach to supervisory approval for the volatility adjustment
  2. Transitional measures on technical provisions: The PRA’s proposed rules and supervisory statement have been amended to reflect HM Treasury’s decision to transpose the substance of the transitional measures in the Solvency 2 Regulations 2015. The PRA rulebook provisions on this are now quite limited
  3. Third country branches: Rule 9 of this part has been amended to clarify which of the reporting rules apply to third country branches and with what modifications. The PRA has confirmed that it will consider applications to waive requirements for branches carrying on only reinsurance business, subject to a basic level of reporting. The proposed rule dealing with restrictions in calculating worldwide financial resources has been deleted
  4. Surplus funds for firms carrying on with-profits business: the PRA has made three additions to the surplus funds supervisory statement to enhance clarity
  5. National specific templates: changes have been made to a number of the reporting templates
  6. With-profits business: amendments have been made to the definitions of “with profits fund” and “with profits policy liabilities” and to the supervisory statement in order to clarify the material regarding affordable and sustainable distribution strategies
  7. Actuaries: the PRA has confirmed that the chief actuary function could be performed by an individual in another group company, or an external actuary

Other related matters

The final rules and supporting supervisory statements are one of the latest in a succession of key materials recently published which include the following:

PRA supervisory statement on applying EIOPA’s Set 1 Guidelines to PRA-authorised firms SS22/15, 22 April 2015: explains the PRA’s expectation of firms in relation to EIOPA’s Solvency II Set 1 guidelines. The statement follows consultation paper CP5/15, Solvency II: applying EIOPA’s Set 1 Guidelines to PRA-authorised firms, published on 19 February 2015

PRA consultation paper on consistency of UK GAAP with Solvency II CP16/15, 10 April 2015: relates to a proposed supervisory statement on expectations of firms considering applying the derogation in Article 9 of the Solvency II Regulation (EU) 2015/35, which permits firms to value some assets and liabilities using local GAAP if certain criteria are fulfilled. Comments by 10 July 2015

PRA consultation paper on treatment of sovereign debt in internal models under Solvency II CP 14/15, 31 March 2015: the PRA seeks comments on supervisory statement designed ensure that firms take into account material risks associated with sovereign debt. Comments by 1 May 2015

Joint PRA and FCA consultation paper on forms, consequential changes and transitional arrangements for new accountability regime for Solvency II firms, PRA CP13/15 / FCA CP15/16, 27 March 2015: The proposed amendments to the FCA Handbook and the PRA Rulebook are intended to create a structure within Solvency II firms that will make it more likely that individuals and roles are appropriately matched, and that high standards of conduct are observed. Comments by 15 May 2015 (see page 11 of this newsletter)

Approvals and waivers under the Solvency II Directive, 20 March 2015: provides information to firms wishing to apply to the PRA for a Solvency II approval or a Solvency II waiver and additional information on the transitional measure on technical provisions

Solvency 2 Regulations (SI 2015 No. 575) made on 6 March 2015: The regulations implement certain elements of Solvency II. They can be found on legislation., together with an explanatory memorandum, a final impact assessment and a transposition table

Final countdown

Speaking at the PRA Solvency II Conference in late 2014, Paul Fisher, Deputy Head of the Prudential Regulation Authority, observed that “there is a great deal of work to do, time is short” in terms of getting ready for Solvency II. However, given the amount of time and investment which has gone into preparing for Solvency II over the years, it would appear that most UK insurers are in very good shape.

Among the steps firms will now need to take are:

  1. Prepare and submit formal applications for Solvency II approvals, such as exclusion of entities from group supervision, application of “other methods” of group supervision for groups headquartered in third countries, use of the matching adjustment, use of the volatility adjustment, and preparation of contingency plans to address refusal of those applications
  2. Analyse existing capital instruments against the required features for basic own funds under Solvency II to determine which instruments can be classified as Solvency II compliant and which will need to be dealt with under transitional measures. Requirements for transitional measures are set out in both PRA rules and Level 2 measures
  3. Consider whether their articles of association permit dividends to be declared on a conditional basis, so that ordinary shares can be classified as Tier 1 or Tier 2 capital
  4. Consider whether any changes to systems and processes are required in light of the new national reporting templates
  5. Ensure necessary applications are made for approval or grandfathering of individuals under the new senior insurance managers regime (see page 11 of this newsletter)
  6. In the case of qualifying run-off firms, inform the PRA of their assessment of the circumstances that mean they meet the criteria for exclusion from the scope of Solvency II