Update from the Prudential Regulation Authority (PRA) on Solvency II

On 27 March 2013, EIOPA published its consultations on preparatory guidelines for Solvency II. The guidelines cover areas that EIOPA considers to be the most stable and fundamental to ensure effective preparation by Member States starting from 1 January 2014.

Earlier this year we invited firms to take part in the long-term guarantees assessment and we submitted data to the European Insurance and Occupational Pensions Authority (EIOPA) at the end of April.

At the end of this month we will be writing to a number of life and general insurance firms with data requests for their responses by end July. More information on our data collection exercises is available on the PRA’s Solvency II web pages.

EIOPA preparatory guidelines

The stated purpose of the Guidelines (GLs) - within the four consultation papers - is to support both National Competent Authorities (NCAs) and firms in their preparation for the Solvency II (SII) requirements.

The GLs, which are addressed to NCAs, cover the areas that EIOPA considers fundamental to ensure effective preparation for SII and that seek convergence in preparations by Member States starting from 1 January 2014. The GLs cover areas that are considered to be the most stable of the SII package:

• Systems of Governance (SoG);
• Forward-looking assessment of the undertaking’s own risks (based on the ORSA principles);
• Submission of information to NCAs; and
• Pre-application for internal models.

Gathering industry input

We have held briefing sessions for industry participants at the beginning of April. These were followed with two more focussed working groups to gain technical input from industry representatives to inform the PRA’s response to the consultation, and in particular to:

• understand better the impact and/or challenges that each of the GLs present to firms, supervision and the PRA more broadly;
• inform our understanding of what should be amended or refined, where possible, during the consultation period; and
• streamline internal processes, avoid duplication of work (e.g. ICAS+) and strive to ensure consistency with the PRA approach to insurance supervision.

We are grateful to firms for their attendance and constructive input.  

We will be holding a briefing session in early June to summarise the key points we have identified.

What we will need to do as part of the EIOPA guidelines process

We will continue to consider our position over the summer so that we are ready to review the final guidelines on publication by EIOPA, currently expected in September/October.

Timeline:

19 Jun 2013: Consultation closes

Sept 2013: Final GLs agreed by EIOPA Board of Supervisors

1 Nov 2013: Final GLs published

31 Dec 2013: NCAs confirm to EIOPA whether they intend to comply or explain with    each of the GLs, with reasons for non-compliance

We appreciate that the timing is difficult as it leaves little time for us and for you to prepare. We will provide as much information to the UK industry as soon as we can.

Long-term guarantees assessment (LTGA)

The impact assessment is designed to inform the text for the Omnibus II Directive (which will amend the text of the 2009 Solvency II Directive).

Process

• The LTGA launched on 28 January 2013; submission deadline for firms was end March 2013.
• EIOPA will produce a report for the European Commission by mid-June 2013 based on the results from the assessment.
• The Commission will then produce a report for co-legislators by mid-July 2013.
• Trialogues are expected to resume following the report from the Commission; informal political discussion will start before the publication of the Commission report.

Participation by UK firms

13 life insurance entities participated in the LTGA, all submitted results. 3 non-life entities were originally included due to the inclusion of non-life annuities (PPOs) under the wider matching adjustments; in the end only one submitted results. Firms also submitted quantitative and qualitative questionnaires.

In total, 5 versions of the matching adjustment (MA) were tested

• 2 versions of the ‘classic’ (Art. 77c) MA – one including and one excluding BBB restrictions; the narrow matching adjustment applies only to longevity exposures with no policyholder options, i.e. annuities (but not with-profits).
• 3 versions of the ‘extended standard’ and ‘extended alternative’ (Art. 77e) MA; these versions of the matching adjustment both apply to all life assurance business and to non-life annuities, e.g. term assurance and periodic payment orders. The extended alternative removes the ‘upfront’ matching requirement and allows a wider set of assets (e.g. sub investment-grade assets).

A Counter-Cyclical Premium (CCP) was also tested

• The CCP is a non-permanent addition to the discount rate.  It is triggered only when markets are stressed, at present EIOPA has the final say in whether the CCP is triggered.
• The CCP is ‘exclusive’ to the MA, meaning that business can benefit from one of, but not both, mechanisms.
• The quantum of the CCP is not completely determined. The current text envisages basing the adjustment on national and/or currency-specific reference portfolios.  The LTGA assumed a CCP of 100bps across Europe in the central scenario (Scenario 1), and stressed this down to 50bps, and up to 250bps in other scenarios.  The choice of 100bps was arbitrarily selected, although we believe it is a reasonable estimate for a UK CCP in 2011, were one to be triggered.

Data collection exercises 2013

We intend to issue requests at end-May with responses by end-July. Several of our requests this time are repeats of previous exercises and/or extensions of pilots and we shall now combine requests where possible and give you reasonable response times.

Rationale

• Models are becoming far more complex under IMAP and ICAS+. We need your input to make our reviews efficient and up to date across the sector. Ultimately these numbers are critical in our judgements.
• It is essential for us (and the industry) that the data is consistent. This will allow us to identify trends and outliers.

More information on our data collection exercises is available on the PRA’s Solvency II web pages.