The latest Solvency II consultation paper released today by the Prudential Regulatory Authority (PRA) adds important clarifications, particularly for UK life insurers.
The paper mainly relates to the transitional measures on risk-free rates and technical provisions, which is an important area for UK life insurers. The paper adds some important clarifications regarding the calculation and sets out the process that firms would need to follow to apply to apply for these transitional measures.
Janine Hawes, director at KPMG commented: “Solvency II allows two alternative approaches to smooth the impact of moving from current to new reserving requirements on life contracts. However, a key piece of the puzzle that has been missing for UK life assurers has been what starting point to use.
“The PRA has today answered that question by confirming that, subject to European minimum standards being met, individual capital assessment (ICA) pillar 2 technical provisions should be used. This is an important clarification as it will allow life assurers to determine the potential benefit, and therefore whether to apply for approval to use either transitional measure.”
There are important aspects built into Solvency II to ensure no reduction in the level of consumer protection as a result of application of either transitional measure, as Janine explains: “Firstly, throughout the 16 year period, there is a base level to insurance contract provisions on existing life contracts, so that the provisions can never be lower than would have been required under existing rules. The PRA has now clarified that this includes pillar 2 for UK firms. While this could mean lower transitional benefit for UK firms compared to other jurisdictions, it also means that consumers will continue to benefit from the higher levels of protection built into the UK regime many years ago."
“Secondly, if at any time in that period an insurer would breach its Solvency II capital requirement without use of the transitional measure, it must within two months submit plans to the PRA to restore its solvency compliance before the transitional measure expires, with annual update reports required."
The second area covered in the paper relates to the capital treatment applied by internal model firms (life and general) to their investments in subsidiaries and participations.
The PRA emphasises the need for the solvency capital requirement (SCR) to reflect the economic risks associated with such investments and suggests looking through to the underlying entity’s own assets and liabilities, considering both the underlying risks and the extent to which there any barriers to transferring resources between companies.
KPMG believes it is important for affected insurers to consider how these clarifications may impact their approach to Solvency II.
The consultation ends on 20 February 2015.
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.