Insurance Regulatory eBulletin - Prudential regulation

Solvency II: life insurance product reporting codes – PS6/18 and SS36/15
On 29 March, the PRA issued a Policy Statement (PS6/18) which discusses the PRA's feedback to responses received regarding chapters 2-6, 9 and 10 of the PRA’s Occasional Consultation Paper (CP18/17). The PS includes within its appendices the final rules as well as the updates for Supervisory Statements 13/13 and 36/15.

The update to the PRA’s Supervisory Statement (SS36/15) regards the life insurance reporting codes that the PRA expects UK insurance firms to use. The Supervisory Statements explains how the PRA expects firms to submit information for annual reporting regarding life product reporting.

The effective date for the changes to the rules and the Supervisory Statements detailed in the Policy statement is 30 March, 2018.

Financial Services Compensation Scheme - Management Expenses Levy Limit 2018/19 – PS5/18
On 29 March, the PRA published its Policy Statement (PS5/18) following its consultation, on which there were no responses, and sets out the final rules for the Financial Services Compensation Scheme (FSCS) Management Expenses Levy Limit (MELL) for 2018/2019.

The consultation proposed a MELL of £77.7 million for 2018/19 that comprised of FSCS management expenses of £72.7 million to cover FSCS's ongoing operational costs, and £5 million for an unlevied contingency reserve.  The Policy Statement is relevant to all PRA-authorised firms and the final rules, outlined in the appendix, will apply for the financial year ending 31 March 2019.

PRA Business Plan 2018/19 and fees consultation – CP7/18
On 9 April, the PRA published its Business Plan 2018/19. In the foreword Sam Woods, Deputy Governor for Prudential Regulation and PRA CEO, notes “Prudential regulation, like annual reporting, is about looking both ways.  This year we are turning to face new challenges – especially those related to EU withdrawal and operational resilience – while staying mindful of the lessons of the past.”

The Business Plan sets out the PRA’s strategy and work plan for the coming year, including its strategic goals which are to:

  • have in place robust prudential standards comprising the post-crisis regulatory regime;
  • continue to adapt to changes in the external market and to hold regulated firms, and those who run them, accountable for meeting its standards;
  • ensure that firms are adequately capitalised, and have sufficient liquidity, for the risks they are running or planning to take;
  • develop its supervision of operational resilience in order to mitigate the risk of disruption to the provision of critical economic functions;
  • ensure that banks and insurers have credible plans in place to enable them to recover from stress events, and that the PRA has a credible resolution strategy to manage a firm’s failure – proportionate to the firm’s size and systemic importance – in an orderly manner;
  • facilitate effective competition by actively considering the proportionality of our approach as it contributes to the safety and soundness of the UK financial system;
  • deliver a smooth transition to a sustainable and resilient UK financial regulatory framework following the UK’s exit from the EU; and
  • operate effectively by ensuring that resources are allocated to work that best advances its strategy and reduces the greatest risks to the delivery of its statutory objectives.
Alongside the Business Plan the PRA published a Consultation Paper (CP7/18) setting out proposals for the PRA’s fees and levies for 2018/19. The proposals include:
  • the fee rates to meet the PRA’s 2018/19 Annual Funding Requirement (AFR) which is decreasing by 9% from £268m to £245m;
  • amendments to the Ring-fencing Implementation Fee (RFIF) rules;
  • amendments to the International Financial Reporting Standard (IFRS) 9 Implementation Fee rules;
  • an amendment to the Model Maintenance Fee rules;
  • amendments to the rules for determining fees for non-directive general insurers and for all firms where data to calculate fees has not been reported;
  • how the PRA intends to distribute a surplus from the 2017/18 AFR, the Ring-fencing Implementation Fee and the IFRS9 Implementation Fee; and
  • how the PRA intends to distribute the retained penalties for 2017/18.
The consultation is relevant to all firms that currently pay PRA fees or are expecting to do so within the 2018/19 fee year and closes on Monday 21 May 2018.

Adequacy of PRA resources and the independence of PRA functions
On 9 April, the PRA published its annual report by the Prudential Regulation Committee (PRC) to the Chancellor of the Exchequer regarding the adequacy of PRA resources and the independence of PRA functions, for the period of 1 March 2017 to 28 February 2018, as required under paragraph 19 of Schedule 6A to the Bank of England Act 1998 (as amended).

The report summarises the PRC's responsibilities and the statutory framework under which the PRA operates, and how the PRA has published approach documents which set out how it intends to implement its statutory objectives regarding banking supervision and insurance supervision.

In future this report will be published as part of the PRA’s Annual Report.

Solvency II: external audit of the public disclosure requirement – CP8/18
On 11 April, the PRA published a Consultation Paper (CP8/18) outlining a proposal to amend the rule that requires the external audit of parts of the Solvency and Financial Condition Report (SFCR). The proposals remove ‘Small Insurers’ from the audit requirement although the Board will still be responsible for the ongoing appropriateness of the information disclosed, and approval of the SFCR. Small Insurers are defined using a firm risk metric (‘Score’). This metric applies a risk factor to reported gross written premiums (GWP) and best estimate liabilities (BEL) and firms would be able to calculate their Score by multiplying their GWP and BEL by these specific risk factors. The PRA proposes a threshold Score of ‘100’ as a ceiling below which firms would be defined as Small Insurers.

The PRA estimates that the proposed amendments would remove the SFCR external audit requirement for more than 150 smaller UK Solvency II firms (including mutuals) and groups, thus improving the proportionality of the requirement. The firms and groups preparing the affected SFCRs would be those that report lower values of GWP and BEL.

Responses to the consultation should be sent by Wednesday 11 July 2018.

Solvency II: internal models – modelling of the volatility adjustment – CP9/18
On 11 April, the PRA published a Consultation Paper (CP9/18) outlining its proposal to consider applications from internal model firms that include a dynamic volatility adjustment (DVA). The paper also outlines the PRA's draft expectations of internal model firms when determining the risks that may arise from the DVA when calculating the solvency capital requirements (SCR). These proposals are presented in the draft Supervisory Statement (SS) and amendments to SS17/16.

The CP explains that EIOPA has identified that the DVA is an area where supervisory convergence needs reinforcing. EIOPA has issued an Opinion which implicitly accepts that firms that use an internal model to model credit risk may, as a general principle, apply a DVA by allowing the VA to change when modelling credit spreads during the one-year forecast of basic own funds.

As a result, the PRA proposes to consider applications from internal model firms that include a DVA within an internal model subject to the consideration of factors set out in the draft SS including:
  • the three statutory approval conditions set out in Regulation 43(4) of the Solvency II Regulations for applying the VA can also be met in stress; and
  • consideration has been given to the Prudent Person Principle and the system of governance requirements relating to the adequacy of a firm’s liquidity plan in the PRA Rulebook.
Comments should be submitted on or before 11 July, 2018.

Capital extractions by insurance firms in run-off
On 12 April, the PRA published a Dear CEO Letter relating to the inadequacy of the accompanying information for some capital expectation requests from insurance firms in run-off.

The letter reminds firms they should consider Supervisory Statement (SS) 4/14 ‘Capital extractions by run-off firms within the general insurance sector’ before submitting their requests. The PRA has also set out the types of information that should accompany a capital extraction request and encouraged firms to engage with the PRA before making such requests to avoid unnecessary delays in the process.

Solvency II: updates to internal model output reporting – CP10/18
On 20 April, the PRA published a Consultation Paper (CP10/18) on its proposed updates to Supervisory Statement (SS) 25/15, 'Solvency II: regulatory reporting, internal model outputs', and SS26/15, 'Solvency II: ORSA and the ultimate time horizon - non-life firms'.

The PRA proposes to amend the life, counterparty and non-life templates and the associated instructions (LOG files) in SS25/15 and SS26/15 with the changes set out in the Appendices to the CP. The proposed changes would take effect from 31 December 2018 for financial year-end 2018 reporting onwards. The proposals follow the analysis of the year-end 2016 PRA internal model output request, feedback from individual firms and the PRA’s package of insurance reporting reforms. The PRA has also considered the areas recommended for reform made by the Association of British Insurers (ABI) and discussed with the Treasury Select Committee.

The CP proposes changes to reporting of internal model outputs for the following templates and LOG files:
  • Internal model risk outputs (life) (IM.01) (SS25/15);
  • Internal model counterparty risk (IM.02) (SS25/15 and SS26/15); and
  • Internal model outputs (non-life) (IM.03.01 to IM.03.11 and MO.03.01 to MO.03.11) (SS25/15 and SS26/15).
Comments on the proposals should be submitted by 13 July 2018.

Solvency II: changes to reporting format – CP11/18
On 20 April, the PRA published a Consultation Paper (CP11/18) containing proposals to change the file type and reporting format for a number of regular reporting submissions to bring them into line with Solvency II quantitative reporting templates and international data standards.

The proposed changes would alter the required reporting format from Microsoft Excel workbooks to XBLR (eXtensible Business Reporting Language) standards for:
  • National Specific Templates (NSTs);
  • internal model outputs (IMO);
  • market risk sensitivities (MRS); and
  • standard formula reporting for firms with an approved internal model (model drift).   
The PRA's proposals do not affect the underlying content of the reports, although there are separate consultations on the contents of NSTs and the IMO within CP2/18 and CP10/8 respectively.

This consultation is relevant to all UK Solvency II firms, and the Society of Lloyd's and its managing agents, and if implemented would apply to submissions relating to financial year-end 2018 onward.

Comments should be submitted on or before Friday 1 June 2018.