The PRA released yesterday a suite of materials to bring Solvency UK (SUK) closer to live.? These cover internal models (IM), capital add-ons, third country branch capital, mobilisation and the thresholds for entering the Solvency II regime.
The publications include:
These all have an effective implementation date of 31 December 2024, as expected.
In addition, HM Treasury (HMT) has laid down a Statutory Instrument (SI), which enables the PRA to give firms permission to disapply or modify the application of aspects of certain rules to them.
Finally, the PRA today has also released its ‘near final’ policy on disclosure and reporting, following the PRA’s CP12/23 and CP14/22.??
The package of publication does not include:
- Matching Adjustment reform (further to PRA’s CP19/23) – the PRA is expected to publish final rules on this in June 2024, to come into (almost) immediate effect.? The HMT SI is expected at the same time.? The PRA has signalled that insurers have all the information they need to plan adjustments to their investment portfolios.
- Transposition of assimilated (EU retained) law into PRA Rulebook – this is expected in Q2 2024.? In the meantime, existing applicable EIOPA guidelines continue to apply as per this SoP.
- Final reporting taxonomy: this is to follow shortly.
The final policies and SS provide helpful clarity on the PRA’s approach and processes. ?However, they bring no major surprises and overall closely mirror what the PRA has already consulted on.?
This reinforces the PRA’s message to firms that they should not expect material changes from the package consulted on and, given the timing of next SSs, firms need to continue to progress SUK change programmes based on reliable working assumptions from CPs.
Increased thresholds
- The Gross Written Premiums (GWP) threshold for firms to enter into the Solvency II regime has increased to ￡25 million (￡10m more than previously proposed). The PRA’s Cost Benefit Analysis estimates this would result in 6 more firms being eligible to operate under the Non-Directive Firms regime (15 firms compared to 9 under original proposals in CP12/23).
Internal models
- The PRA has made it explicit that it will allow firms 6 months to develop plans to integrate IMs after an acquisition into a single group internal model. Firms then will have up to two years to implement the plans and develop the group IM, with temporary permission to use two or more different calculation approaches in the interim period to calculate the group consolidated SCR.
- There is strengthened wording to confirm that the PRA will consider complete IM applications within 6 months – the PRA has been at pains to emphasise SUK will bring a genuine streamlining of partial and full IM applications and modifications
- There is a clarification on expectations around negative model limitation adjustments (MLAs) and that MLAs are not expert judgements (EJs).? The distinction matters because MLAs need to follow the governance process set out in the model change policy and be included in the Assessment of Change (AoC) exercise and model logs.? EJs, on the other hand, are listed in the EJ log and are subject to EJ governance.
- Clarification that the format and timing of the CRO’s annual attestation on compliance with SCR and IM requirements is at the discretion of the firm – this is in the spirit of the SUK approach of shifting responsibility of adequate compliance and governance onto firms.
- Explanation that splitting or combining risks already within the IM scope, or adding risks which fall within the sub-modules of risks already within the scope of the IM, may not necessarily amount to including new risks.? These adjustments may therefore be ?classified as minor, rather than major, model changes.
TMTP
- There are no significant policy changes, but the PRA has clarified that there is only one circumstance in which the PRA would consider granting a new TMTP permission – an acquisition. ?This is subject to supervisory?approval.
- The PRA has also made several clarifications, such as allowing firms flexibility in how MA-eligible business to be allocated across the dynamic and non-dynamic components of TMTP, providing insurers with greater flexibility.
Capital add-ons (CAO)
- Insurers will welcome the PRA’s commitment that it does not intend to use capital add-ons to structurally increase the capital held in the market.
- The PRA has also helpfully allowed firms not to disclose residual model limitations (RML) CAOs separately in their Solvency and Financial Condition Reports (SFCRs).? The PRA also will not include safeguards in its summary report on CAOs for significant deviations.
- The PRA has also set out further detail around (i) circumstances under which the PRA expects to consider setting a CAO; (ii) methodologies for COA calculation; (iii) CAOs at group level; (iv) process for setting the CAO; and (v) ongoing monitoring, reporting, and removal of a CAO.
Group SCR
- Confirmation that the PRA may allow a UK group’s overseas sub-group SCR to be included in the consolidated group SCR under method 2, thereby allowing diversification benefits between the method 2 entities within that sub-group. However, this is only applicable if the third country is deemed equivalent or provisionally equivalent.
Numerical thresholds in GBP
- The PRA has included a helpful table setting out various numerical thresholds under SUK in GBP, including the MCR floors for firms with various permissions.
Reporting and disclosure
The final policy in today’s PS3/24 is largely as consulted.? The PRA has mostly pushed back on industry's ask to minimise changes in templates, justifying this as a needed to deliver on its primary objective of insurer safety and soundness and policyholder protection?.?
There are a few improvements and clarifications at the margin though - although also some further changes to templates.
The reporting taxonomy is to follow shortly, and the final rules come into effect on Friday 31st December 2024 for triennial, annual, semi-annual and quarterly requirements with a reporting or disclosure reference date as of 31 December 2024 and onwards. ?
Insurers therefore need to start preparing for the necessary system and data changes to meet these truncated timelines.? For groups with insurers in both UK and EU, there is the additional complexity of managing separate and increasingly divergent taxonomies across UK and EU.
Final note
To conclude, yesterday’s publications bring us a step closer towards a fully operational Solvency UK. While the policy changes are not major, there is a significant level of detail on how the SUK will operate in practice.? Firms with internal models and TMPT permissions in particular would want to familiarise themselves with the PRA expectations and application processes.? ?
How KPMG can?help
- KPMG colleagues in the UK can assist with all aspects of both day 1 compliance and systems changes, as well as act as a strategic partner on operational, balance sheet and governance implications
- While not covered in this package, for firms with MA permissions getting the attestation processes up and running remains a key priority – KPMG article on what needs to be done and how we can help here
- Please do reach out if you want to discuss the implications from yesterday and today’s publications.? Examples of where we could help include:
o?? Assessing current Analysis of Change (AoC) capability for internal models against PRA requirements
o?? Ensuring there is appropriate governance and MI for CROs to make their annual attestations to compliance with SCR and IM requirements, and developing a credible plan for any areas requiring a remediation plan
o?? Assess TMTP approaches, including benefits of each approach under a range of scenarios and the cost of maintaining each one
o?? Evaluating the merits and/or assisting with full or partial IM applications or adjustments
o?? Supporting with reporting system changes, drawing on KPMG's recent experience in operationalising IFRS17 programmes
With my thanks to
Radhika Bains
,
Maria Grech
and
Rukhsar Shaikh
for a great team effort of going through the masses of material.
