PRA set to make Solvency II regulation stick

Financial Services analysis: As the deadlines for approvals move ever closer Catherine Drummond, a partner in Lane Clark & Peacock’s insurance consulting practice, says with the Prudential Regulation Authority (PRA) reiterating its no-nonsense stance on Solvency II regulation, clear guidance on its expectations enables firms to better align their plans to maximise their chances of approval.

Original news

PRA sets out Solvency II approvals policy, LNB News 15/10/2014 116

The PRA’s expectations of firms in relation to Solvency II approvals are set out in a draft supervisory statement issued for consultation. The statement also provides details regarding the PRA’s pre-application process for approval to use the matching adjustment and provides clarity in relation to applying for certain Solvency II approvals. The consultation is open until 9 January 2015. Firms can formally submit applications to the PRA for Solvency II approvals from 1 April 2015.

What is the PRA proposing and why?

The PRA’s consultation paper seeks views on a draft supervisory statement which clarifies the PRA’s expectations of firms applying for Solvency II approvals, specifically in relation to:

  • internal models
  • matching adjustments, ancillary own funds, and undertaking-specific parameters
  • other approvals relating to groups including:

- exclusion of an entity from the scope of group supervision

- producing a single own risk and solvency assessment (ORSA)

- solvency and financial condition report dispensation

  • approval for the use of alternative methods for calculating the group solvency capital requirement (other than the default accounting consolidation-based method)

The supervisory statement is intended to help streamline the transition to Solvency II by providing firms with detailed check-lists and clear guidance on the evidence required to apply for regulatory approval. This should help firms focus their efforts as they compile their applications and will also help the PRA with processing the applications by improving consistency of application formats.

It also sets out guidelines for the pre-application process for firms intending to make use of the matching adjustment. While not compulsory, the PRA strongly encourages firms to participate in the pre-application process to enable early feedback on the likelihood of meeting the formal application requirements.

The paper also states that firms should consider the implications of an unsuccessful application on the submission of other applications and develop contingency plans accordingly.

What are the next steps?

Firms who want to take part in the consultation have until 9 January 2015 to respond. The PRA expects to publish a Solvency II policy statement in 2015 Q1 which will include the final supervisory statements.

Firms intending to participate in the pre-application process for the matching adjustment will need to inform their supervisors of this by the end of November 2014 and provide submissions between 1 December 2014 and 6 January 2015.

The formal application process for approvals begins on 1 April 2015 and the PRA's aim is to respond to applicants within six months of receiving a completed application.

Firms should also look out for additional guidance from the PRA, due in November 2014, addressing other approvals, which is expected to include transitional measures for technical provisions and for the risk-free rate, as well as the volatility adjustment, which is conditional on the selection of a preferred approach from the Treasury.

What can firms do to prepare?

Firms need to be aware that the approval process could involve a significant amount of work in a short space of time. Resource limitations mean it is important that firms carefully consider their applications and whether they will need additional external resources or expertise to help them maximise their chances of obtaining approval.

Firms should also ensure they are familiar with other published materials, including:

the Solvency II Framework Directive 2009/138/EC

the European Commission’s implementing measures (delegated acts)

European Insurance and Occupational Pensions Authority’s implementing technical tandards

other PRA material relevant to approvals (including Paul Fisher’s letter which provides more information on the matching adjustment and on the PRA’s interpretation of the asset eligibility requirements)

It is important that firms develop detailed contingency plans considering scenarios in which some or all approvals are not granted. This will help highlight where approvals are inter-dependent and where there may be advantages in applying for approvals in a specific order.

For example, firms should be clear on whether their capital will still be sufficient if their internal model is not approved or if an application to use a matching adjustment is rejected.

Early engagement with the PRA is key. This means:

taking part in the pre-application process for the matching adjustment

sharing a draft group ORSA with the PRA where a group is planning to apply for exemption from individual ORSAs

considering the detailed check-lists and setting up comprehensive plans for preparing the necessary evidence

communicating regularly with supervisors to ensure that preparation focuses on the areas most in need of attention

submitting formal applications as early as possible to reduce the burden on the PRA from a back-loading of submissions close to final deadlines

The paper contains welcome details for firms as the deadlines for approvals move ever closer. With the PRA reiterating its no nonsense stance on Solvency II regulation, clear guidance on its expectations enables firms to better align their plans to maximise their chances of approval.

Catherine Drummond has wide-ranging experience as a non-life consulting actuary, including reserving, capital modelling and all aspects of Solvency II implementation. Her clients include Lloyd’s syndicates, non-life insurers and public sector insurance bodies.

Interviewed by Kate Beaumont.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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First published on LexisPSL Financial Services.

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