UK PRA publishes SS9/14:
Valuation risk for insurers On 22 August 2014, the PRA published a supervisory statement, SS9/14, which sets out its expectations of firms in relation to existing rules on the valuation of financial assets. It applies to all PRA authorised insurers and may also be relevant to insurance holding companies and other entities in the same group, together with their advisors. The statement is equally relevant to life and general insurers, whether they are mutuals or proprietary companies. The statement, which the PRA consulted on in May 2014, seeks to reduce the risk to the PRA’s objectives caused by intended or unintended misstatement of values and hence misstatement of capital resources, by clarifying the PRA’s existing expectations. PRA publishes SS8/19: Subordinated guarantees and the quality of capital On 22 August 2014, the PRA published a policy statement, SS8/14, which applies to all insurers authorised by the PRA and may also be relevant to insurance holding companies and other entities in the same group, together with their advisors.
The statement sets out the PRA’s expectations of firms in relation to: the use of subordinated guarantees in connection with capital instruments issued by a company, whereby the payment of coupons and repayment of principal are guaranteed by a firm (the guarantor); how subordinated guarantees should not undermine the quality of capital held by firms to meet capital requirements (this expectation applies regardless of both the motivation for using a subordinated guarantee and the structure in which a guarantee is used); and how the guarantor’s regulatory capital position should be reported if the liability created by the guarantee serves to undermine the guarantor’s quality of capital. This statement is an application of the connected transaction rules set out in General Prudential sourcebook (GENPRU) 2.2.65R and GENPRU 2.2.169R of the PRA Handbook and with effect from 1 January 2016, the PRA rule transposing Article 93 of the Solvency II Directive. The PRA says that firms should read this statement and take the relevant actions set out in section 3. In summary these are: by the end of September 2014, firms should inform their usual supervisory contact at the PRA if their capital structures involve the use of subordinated guarantees and whether they have made any adjustment to the tiering of their capital resources to reflect the existence of such guarantees; if their capital structures involve the use of subordinated guarantees, firms should provide additional information relating to their use of subordinated guarantees to their usual supervisory contact by 31 December 2014. Firms are expected to liaise with their usual supervisory contact at the PRA who will inform the firm whether any action is necessary for the purposes of year-end 2014 or 2015 reporting. The PRA expects any further issues relating to the use of subordinated guarantees to be resolved by 31 December 2015. This PRA consulted on this statement in May 2014 and the statement reflects feedback that was received by the PRA. Some responses suggested alternative wording to make the statement clearer and these suggestions have been accepted where clarity would be improved. There is no change in policy intent. Simple financial products: progress update The final report of the Sergeant Review was published in March 2013. The review looked at how financial products such as savings accounts and life insurance products could be simplified. It made eight recommendations regarding the introduction of a small suite of simple savings and protection insurance products and proposed five next steps. HM Treasury reviewed the progress made by industry on the initiative in March 2014. On 14 August 2014, HM Treasury updated its webpage on simple financial products to give details of an exchange of letters between three trade associations (the Association of British Insurers, the British Bankers’ Association and the Building Societies Association) and Andrea Leadsom, Economic Secretary to HM Treasury, giving a further update on the progress made in implementing the recommendations. These letters are: a letter, dated 24 July 2014, from the trade associations to Ms Leadsom on progress to date. The letter gives details of two accreditation frameworks, the first using the Trading Standards Institute consumer codes approval scheme and the second being developed by a bank in conjunction with the British Standards Institute;
associations’ commitment to ensure that the two accreditation frameworks mentioned in the trade associations’ letter are, and remain, properly aligned. Ms Leadsom asks the trade associations to provide a further update on the progress of their work in the autumn of 2014. INTERNATIONAL European Commission request to EIOPA for technical advice on delegated acts concerning the proposed PRIIPs KID Regulation On 11 August 2014, the European Insurance and Occupational Pensions Authority (EIOPA) published a request from the European Commission for technical advice on possible delegated acts concerning the proposed Regulation on key information documents (KIDs) for packaged retail and insurancebased investment products (PRIIPs) (the PRIIPs KID Regulation). The Regulation, which was adopted by the European Parliament on 15 April 2014, introduces a KID that will provide retail investors with information about a broad range of investment opportunities, including insurance-based investment products, structured investment products and investment funds. The request, which is dated 30 July 2014, relates to Articles 16(8) and 17(7) of the PRIIPS KID Regulation. These provisions cover temporary product intervention powers for EIOPA and other competent authorities. The Commission has set EIOPA a deadline to deliver the technical advice within six months of the PRIIPs KID Regulation coming into force. A footnote to the request states that the entry into application of the PRIIPS KID Regulation will be two years from its entry into force (November/December 2016) which implies that the entry into force date is expected to be November/December 2014. EIOPA update on EU-US insurance dialogue project The EU-US insurance dialogue project began in January 2012 and in December 2012, its steering committee published the Way Forward document which outlined a set of objectives and initiatives to be pursued through 2017. In light of recent developments in the EU and the US and of progress to date on the project, on 1 August 2014, EIOPA announced the publication of a revised and updated Way Forward document. The updated document now includes new relevant initiatives that will contribute to achieve the overall goals of the project. As part of its strategy to involve different stakeholders, the project is organising a public event dedicated to the evolution in group supervision. This will take place In Amsterdam on 25 October 2014 and will provide a platform for opinion exchange among key regulatory and industry representatives from both the EU and the US. During one of the panel discussions the steering committee will discuss the Way Forward document, achievements and next steps of the project. IAIS consults on meeting participation procedures and development of supervisory and supporting material In 2013, the International Association of Insurance Supervisors (IAIS) began a review of its strategic goals, financial outlook and resources with the goal of developing proposals to improve its structures, operations and the allocation of resources. Over the last 12 months, the IAIS has been carefully implementing a package of decisions designed to increase the effectiveness of its activities, ensure adequate coordination of standard setting, standard implementation and financial stability work and improve the process for obtaining and enhancing the quality of stakeholder input.
On 4 August 2014, the IAIS published a consultation paper on draft procedures for meeting participation and the development of supervisory and supporting material. As a result of the new draft procedures and policy, the IAIS would commit to: publicly consult on the development of all supervisory and supporting material; hold public sessions with its executive committee; conduct public dialogues and/or hearings; provide timely public information on IAIS activities. Comments are requested by 2 September 2014. California and Virginia sign IAIS MMoU On 28 August 2014, the International Association of Insurance Supervisors (IAIS) announced that the insurance supervisors of California and Virginia have signed the IAIS multilateral memorandum of understanding (MMoU). There are now 42 jurisdictions admitted as signatories to the MMoU, representing nearly 60% of worldwide premium volume. The press release says that California is the largest insurance marketplace in North America. The MMoU is a global framework for cooperation and information exchange among insurance supervisors. It sets minimum standards to which signatories must adhere, and all applicants are subject to review and approval by an independent team of IAIS members. SOLVENCY II PRA update letter On 19 August 2014, the PRA issued the text of the latest update letter from Andrew Bulley, its Director of Life Insurance and Chris Moulder, its Director of General Insurance, sent to all Solvency II-affected life and general insurers. The letter includes a timetable of activity from August to December 2014 giving more information on when the PRA will be communicating with firms. The PRA says that this timetable will be updated in future letters to ensure firms have the latest information. To help firms find information the PRA is also currently updating the Solvency II pages on the Bank of England website and says that this will become the main channel for all future correspondence. Firms are encouraged to review the website regularly to ensure they keep up to date on the latest information. The letter also contains information, including a draft agenda, on the PRA's conference on Solvency II, which is to be held on 17 October 2014. PRA publishes CP10/14: Transposition of Solvency II, part 3 On 11 August 2014, the Prudential Regulation Authority (PRA) published a consultation paper, CP16/14, which is the third consultation on the transposition of the Solvency II Directive. The consultation paper consults on rules to transpose the amendments to the Directive introduced by the Omnibus II Directive (OMD II) and on the implementation of areas deferred from the previous two consultation papers published by the PRA’s predecessor, the FSA. CP11/22 was published in November 2011 and CP12/13 was published in July 2012. CP16/14 also contains draft supervisory statements which set out the PRA’s expectations of firms and what firms may expect of the PRA. CP16/14 consists of four sections: Section I (Chapters 2-7) considers the proposed rule changes necessary to implement the Directive as amended by OMD II. This includes the most substantial component, the long-term guarantees (LTG) package. The changes will require amendments to the draft rules consulted on in CP11/22 and CP12/13; Section II (Chapters 8-12) covers areas not considered in the previous two consultations, or where the PRA’s approach has developed since the previous consultation papers. In particular, it includes new proposals on surplus funds in response to feedback received on CP12/13; Section III (Chapters 13-14) provides feedback on responses to two parts of CP12/13: firstly, the approach to Lloyd’s and secondly, public disclosure of capital add-ons and undertaking specific parameters; Section IV (Chapter 15) provides an economic cost benefit analysis that considers the impact, as a whole, of the most material proposed rule changes introduced in CP16/14, the LTG package. The PRA has also published appendices to CP16/14 which are: proposed changes to the PRA Rulebook (appendix 1), draft supervisory statements (appendix 2) and national specific templates and log files (appendix 3, together with a webpage containing links to the proposed national specific templates, in Excel format, with a corresponding LOG file). Comments are requested by 7 November 2014. The PRA will publish a policy statement with feedback, finalised rules and final supervisory statements in early 2015. The PRA anticipates further changes to its Rulebook and the issue of further supervisory statements in order to implement Solvency II. The PRA is required to transpose Solvency II by 31 March 2015, and the Solvency II regime will apply to all affected firms from 1 January 2016. HM Treasury publishes consultation on resolving the remaining policy issues for UK implementation Following on from the Solvency II Directive consultation paper published in November 2011, on 6 August 2014, HM Treasury published a short consultation paper which is intended to complete the process of consultation on how the Government should implement the Solvency II Directive in the UK. The Government says that because of the work to finalise Omnibus II, which amends the Solvency II Directive, it has not been able to complete the consultation process before now. With the Omnibus II Directive coming into force on 23 May 2014, HM Treasury is now working to complete the arrangements for transposition of Solvency II in order to ensure a smooth transition to the new prudential regime for insurance business. The consultation paper seeks views on two policy issues related to UK transposition of Solvency II: the use by undertakings of the volatility adjustment and whether it should be subject to prior approval by the PRA; the approach to be adopted in removing business permissions where an undertaking fails to meet the minimum capital requirement. HM Treasury has also published two annexes to the consultation paper: annex A on the architecture of Solvency II and annex B containing draft statutory instruments. The PRA will also publish a consultation paper covering amendments it proposes to make to its regulatory rules, to complete its part of the transposition process, including how it intends to apply the long-term guarantee measures in its rulebook. Comments are requested by 20 September 2014. A further publication will take place later this year to include feedback on this and the previous Solvency II consultation paper, an updated impact assessment and a final statutory instrument to be submitted for Parliamentary approval. EIOPA updates information on guidelines on submission of information to NCAs On 18 August 2014, EIOPA published a cover note on updated information concerning the guidelines on submission of information to national competent authorities (NCAs), relating to the Solvency II Directive. EIOPA says that it has published the updated information as a result of additional questions and answers (Q&As) received and answered by EIOPA since the publication of errata on the guidelines in February 2014. The updated information also reflects the publication of the XBRL taxonomy version 1.5.2, which was published in July 2014. The updated information consists of two documents in Excel format, the first document relates to amendments to Appendix I of the guidelines (quantitative reporting templates) and the second document relates to Technical Annex II. Both documents summarise the amendments arising from the errata, the Q&As and alignment with the taxonomy documentation. EIOPA says that, as a result, all templates now published are up-to-date and differences are highlighted in yellow cells and red text and additional comments/explanations are included, also in red. The latter are not part of the template but are useful information to support implementation. The cover note says that from now on any amendments/clarifications will be made to the version to be consulted on relating to implementing technical standards on the templates for the submission of information to the supervisory authorities.