Treasury Committee calls for PRA action on Solvency II

The House of Commons Treasury Committee published its report on “The Solvency II Directive and its impact on the UK Insurance Industry” on 25 October 2017.

If it were an end-of term school report on the Prudential Regulation Authority (‘PRA’), it might be summarised as “Has undertaken some excellent work, but at times is so focussed in their desire to meet primary objectives that they do not fully consider the impact of their actions on those around them”. 

In general, the Committee agrees with many in the industry that the PRA could be more flexible and proportionate in its application of Solvency II requirements.

In particular, the Committee presents a shopping list of topics it wants the PRA to explore, in close collaboration with the industry.  These are to:

• provide a solution for the Risk Margin to improve its calibration;
• develop proposals for the introduction of forbearance at the national level to deal with procyclicality;
• develop proposals for the Matching Adjustment and the Volatility Adjustment which allow more flexibility and a more principles-based approach and which reduce the requirement for insurers to develop complex structures in order to achieve the regulatory treatment that they warrant;

• agree with the industry on an approach to the treatment of illiquid assets,
• balance prudential concerns with the desire not to create unreasonable barriers to insurers investing in long term assets;
• set out proposals which reduce the amount of data required from firms to the level that the PRA can clearly demonstrate is proportionate and necessary for prudential safety;
• develop rules for contract boundaries which reflect their economic substance rather than their legal form;
• develop proposals for simplifying the calculation of and approval process for, the Transitional Measure on Technical Provisions provided for in the Directive;
• provide a view of where it might be possible better to align UK regulation post Brexit with IFRS17, weighing the disadvantages of change against the benefits of harmonisation;
• develop proposals which remove limitations in the standard formula for both existing and new entrants to the insurance market;
• develop proposals for improving the sophistication and usefulness of internal models by (a) maximising the proportionality allowed in the Directive for the approval of internal models and (b) simplifying the approval process for changes to models; and
• develop a solution for firms who will lose the legal validity of their contracts after Brexit.

It expects the PRA to report back on these items by 31 March 2018, setting out time constraints and considering the “end goal”, including areas that can be developed post Brexit.

The ball now appears to be firmly in the PRA’s court!

Read our briefing note for further details.