The Prudential Regulation Authority (PRA) today issued a further consultation regarding the application of Solvency II, building on the third transition paper issued in August. The paper deals with a number of matters, including:
Janine Hawes, insurance director at KPMG, commented: “These further clarifications are helpful in setting the context of the PRA’s interpretations. Smaller insurers in particular will welcome the PRA’s reduced quarterly reporting requirements. The proposals are proportionate, requiring the half year Solvency II balance sheet and own funds and quarterly minimum capital requirement templates and basic information only. This will remove a significant resourcing burden for these firms, who should be able to avail themselves of this waiver opportunity.
“In respect of own funds, the PRA has provided helpful guidance on how the requirements should be applied, including in a group context. However, the guidance would effectively prevent the servicing of debt on any of a group’s capital providers while it has any insurance entity in the process of being wound up, until after all related policyholder liabilities have been met. A key question will be when winding up is deemed to commence and how long the process to meet all the claims takes. The answer could potentially be different depending on the geography in which the entity operates. Within the UK, clarification will be needed of what this means for schemes of arrangement, although normal run-off procedures appear to be excluded. This could have implications for the attractiveness of tier 2 capital issuances by insurance groups and group capital management.
“On group pension schemes, the PRA has clarified the risk that internal model firms need to address – namely, the risk of having to provide future funding above current balance sheet provision levels, including under deteriorating financial positions. For standard formula firms, the PRA has provided the greatest indication yet that this may not be addressed solely as a pillar 2 matter, requiring them to include pensions risk within the appropriateness of standard formula assessment and consider whether a partial internal model approach is needed. This could present practical challenges for firms that have a significant pensions risk that are not currently within the internal model process.”
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Simon Chan, PR Assistant Manager, KPMG
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This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.