The deadline for member states to transpose the Solvency II Directive into national legislation is fast approaching – Tuesday 31 March 2015 is less than two weeks away. This morning the Prudential Regulation Authority (“PRA”) published the latest tranche of final rules which will incorporate the provisions of the Solvency II regime into the PRA Rulebook. These are set out in:
- PRA PS 2/15: Solvency II: a new regime for insurers; and
- PRA supervisory statements 1/15 – 17/15: Transposition of Solvency II.
The policy statement provides feedback on the following consultations:
- CP16/14: Transposition of Solvency II: Part 3
- CP22/14: PRA’s approach to with-profits business
- CP23/14: Solvency II approvals
- CP24/14: Solvency II: further measures for implementation
- CP3/15; Solvency II: transitional measures and treatment of participations.
Earlier this month, HM Treasury published the Solvency 2 Regulations 2015 which, together with the Financial Services and Markets Act 2000 (“FSMA”), implement the Solvency II Directive into UK legislation and establish a regulatory system for operating the Solvency II regime.
Today’s publication provides a lot for the insurance industry to digest, but there are few surprises.
Of note is the expected confirmation that UK branches of overseas insurers will not be required to perform an SCR calculation on a world-wide basis. Similarly, the PRA has confirmed that firms in run-off, whose groups contain no active insurers and which are expected to cease their operations by 1 January 2019, will be exempt from the Solvency II rules until then. One potentially more onerous issue is the PRA’s confirmation that UK insurers who are subject to a capital add-on will have to disclose the add-on separately from the full SCR for financial years ending in and after 2018, rather than 2021 as it could have permitted. The PRA has also provided a number of clarifications in relation to with-profits business, including confirming its willingness to consider waivers where appropriate, particularly in respect of mutual insurers.
The industry will welcome the PRA’s decision that current Pillar 2 liabilities can be used as the basis for the transitional deductions on technical provisions, where approved by the PRA – this will increase the size of the transitional deductions that the PRA can allow. However, there is no new material on the matching adjustment, and insurers will continue to await feedback on their pre-applications on that topic, expected at the end of March. The parallel publication of the consultation paper on the volatility adjustment will be helpful to insurers who are planning their applications for that adjustment.
The PRA has confirmed that it will require insurers to submit reports using the proposed UK national specific templates, with some revisions reflecting industry comment, despite the additional cost for insurers of up to £800,000 in the most complex cases. Insurers continue to await finalisation of the EU-wide reporting templates, currently being developed by EIOPA. Much work will be required on internal systems to accommodate these templates, and insurers will be aware of the delay faced by banks for their new reporting templates when the Capital Requirements Regulation was introduced last year.
The next three months will see extensive activity as insurers finalise their applications for various approvals from the PRA, in particular for internal models and the matching adjustment.
The policy statement and supervisory statements are a welcome step forward for the insurance industry and its advisors and will help provide clarity as they prepare for Solvency II which comes into effect on 1 January 2016. However final rules on a few topics remain outstanding. The consultations by the PRA and the Financial Conduct Authority (“FCA”) on incorporating the governance provisions in Solvency II through the adoption of a senior insurance managers regime and changes to the approved persons regime closed on 2 February. Final rules are due to be published soon. A consultation on the approach to non-executive directors in Solvency II firms (and banks) (CP15/5) is on-going and closes on 27 April 2015, with final rules due in May/July 2015. In addition, this morning the PRA published CP 11/15: Solvency II: Supervisory approval for the volatility adjustment. This consultation closes on 20 April 2015. The FCA is also due to publish this month a policy statement on new Solvency II rules for the FCA Handbook.