Insurance Regulatory eBulletin - Prudential regulation

Guidelines for completing regulatory reports – SS34/15
On 28 June, the PRA published an update to its Supervisory Statement (SS34/15 'Guidelines for completing regulatory reports') for all PRA-regulated firms who are required to submit supervisory reports under the Regulatory Reporting, Close Links and Change in Control Parts of the PRA Rulebook.

SS34/15 has been updated to remove reference to FSA018 from Appendix 1, effective Friday 29 June 2018.

Letter from Sam Woods: exposure to crypto-assets
On 28 June, Sam Woods, CEO of the PRA, wrote to the CEOs of banks, insurance companies and designated investment firms to remind them of the relevant obligations under PRA Fundamental Rules 3, 5 and 7, and to confirm the PRA’s expectations regarding firms’ exposure to crypto-assets. The letter acknowledges that firms might not have been exposed to many crypto-assets to date, but that this letter may be useful to firms who are considering existing exposures to crypto-assets and to plan ahead. The aforementioned rules specify that firms should:

• act in a prudent manner;
• deal with regulators in an open and co-operative way that includes disclosure;  and
• have effective risk strategies and risk management systems in place.

Regulated fees and levies: rates for 2018/19 – PS13/18
On 28 June, the PRA issued a Policy Statement (PS) providing feedback on the responses to Consultation Paper (CP) 7/18 (Regulated fees and levies: rates proposals 2018/19). The PS outlines:

• the final fee rates, the rules to recover the PRA’s Annual Funding Requirement (AFR) and the ring-fencing implementation fee for the financial period 1 March 2018 to 28 February 2019;
• final rules needed to implement changes to the Fees part of the Rulebook.
 
Solvency II: equity release mortgages – CP13/18
On 2 July, PRA published a Consultation Paper (CP13/18) which is relevant to insurance and reinsurance companies holding equity release mortgage portfolios (ERMs), that proposes further detail on the PRA's expectations of firms investing in ERMs, as set out in Chapter 3 of Supervisory Statement 3/17. The PRA also published a Dear CEO Letter from David Rule, the PRA Executive Director, Insurance Supervision emphasising the importance of the consultation on the matching adjustment framework.

The proposals include:

• firms holding ERMs should include an explicit allowance for 'other risks' within the  Effective Value Test (EVT);
• where firms holding restructured ERMs in their matching adjustment (MA) portfolio cannot meet the EVT then this suggests that they may be taking an inappropriately large MA benefit. Accordingly, they will need to review their current approach and consider making changes to the structure, valuation or rating of restructured ERMs;
• firms using the approach and minimum calibration proposed would meet the PRA's expectations for assessing the allowance for no negative equity guarantee (NNEG) risk for the purposes of the EVT;
• firms holding ERMs that benefit from the transitional measure on technical provisions (TMTP) should adopt the same approach to an assessment of NNEG and other risks for their ICAS technical provision calculations as they do for Solvency II technical provision calculations;
• firms should consider whether they need to revise their internal models in response to any changes as above.

The proposed implementation date of the proposals is 31 December 2018. Comments should be submitted on or before 30 September 2018. 
 
Changes in insurance reporting requirements – PS 16/18
On 6 July the PRA published a Policy Statement (PS) providing feedback to responses to Consultation Paper (CP) 2/18 ‘Changes in insurance reporting requirements’. It also contains the PRA’s final policy, as follows:

• amendments to the Reporting Part of the PRA Rulebook (Appendix 1);
• Supervisory Statement (SS) 6/18 ‘National Specific Templates LOG files’ (Appendix 2);
• updated SS11/15 ‘Solvency II: Regulatory reporting and exemptions’ (Appendix 3); and
• amendments to the Change in Control Part of the PRA Rulebook (Appendix 4).

The PS is relevant to all UK Solvency II firms, the Society of Lloyd’s and its managing agents and mutuals.

The update to its Supervisory Statement 11/15 'Solvency II: Regulatory reporting and limitations' relates to the application process for Category 4 and 5 insurance firms, both solo and group templates, to replace application with a modification by consent. This modification will exempt Category 4 and 5 insurance firms from reporting to the PRA the solo and group templates provided in the Solvency II Regulations with a frequency of less than one year (i.e. quarterly reporting), subject to the table outlined in Supervisory Statement 11/15 ‘Solvency II: Regulatory reporting and limitations’. The modification is effective as of 30 September 2018.
 
Solvency II: group supervision – PS 17/18 and CP15/18
On 12 July, the PRA published a Policy Statement (PS) providing feedback on the responses to Consultation Paper (CP) 38/16 ‘Solvency II: group supervision’, and the final Supervisory Statement (SS) 9/15 ‘Solvency II: group supervision’. The PS is relevant to all UK insurance firms within the scope of the Solvency II Directive (‘the Directive’) and to the Society of Lloyd’s.

The SS sets out the PRA’s updated expectations for group supervision and incorporates the PRA’s letter ‘Solvency II: an update on implementation’ published on 25 July 2014.  The letter will be archived following the publication of the updated SS. SS9/15 explains the requirements on the following topics:

• entities excluded from the scope of group supervision;
• choice of calculation method;
• group capital add-on;
• centralised risk management;
• single own risk and solvency assessment report;
• single solvency and financial condition report;
• responsibilities of the relevant insurance group undertaking; and
• supervision in the absence of third-country equivalence.

Simultaneously, the PRA published a Consultation Paper CP15/18 ‘Solvency II: Group own fund availability’ which sets out the PRA’s proposals to further amend SS9/15 for its expectations for assessments of the availability of own funds to cover the group solvency capital requirement. The proposals in CP15/18 provide details on certain aspects of how own funds should be assessed as available, and to address responses to CP38/16 on this aspect of the PRA’s proposed policy. The further consultation covers only material in section 5A (availability of group own funds) of the SS.

This consultation closes on Monday 12 November 2018
 
Solvency II: two and a half years on
On 13 July, the PRA published a letter to Chief Actuaries of life insurers as part of the ongoing dialogue between the PRA and the Chief Actuary community. The PRA encourage firms to share the letter with the board, and others at the firm as appropriate, and welcome feedback.

The purpose of this letter is to share some of our learnings and observations from our regulatory activities under the Solvency II regime, and to reiterate some of the expectations that we have published during that time. The letter addresses:

• matching adjustment (MA) in technical provisions;
• modelling of the MA in internal models;
• modelling of longevity risk in internal models;
• modelling of dependency in internal models;
• internal model documentation;
• contract boundaries / projection period for calculation of technical provisions;
• approach to stress testing in ORSAs;
• solvency and Financial Condition Reports (SFCRs);
• upcoming PRA activities and initiatives.
 
Solvency II: internal models - modelling of the matching adjustment – PS 19/18
On 13 July, PRA issued a Policy Statement (PS) providing feedback to responses to Consultation Paper (CP) 24/17 ‘Solvency II: Internal models - modelling of the matching adjustment’. It also provides the final Supervisory Statement (SS) 8/18  of the same title and an updated version of SS17/16 ‘Solvency II: internal models – assessment, model change and the role of non-executive directors’.

This PS is addressed to UK Solvency II firms and to the Society of Lloyd’s and its managing agents. It is most relevant to firms with, or seeking, matching adjustment (MA) approval and that use a full or partial internal model to determine the Solvency Capital Requirement (SCR), together with UK Solvency II firms making an assessment as to the appropriateness of the standard formula for their risk profile.

The PRA received nine responses to the CP. Respondents generally welcomed the additional clarity on the PRA’s expectations regarding the modelling of the MA for the purpose of calculating the SCR. However, respondents also raised several specific issues regarding the details of the proposals, particularly in respect of the risks that need to be allowed for when modelling the MA and considerations to be taken into account when rebalancing MA portfolios in order to maintain MA compliance in stress. There were also a number of points on which further clarification was requested.

The expectations set out in SS8/18 primarily apply to the risks arising from corporate bond assets within firms’ MA portfolios. However, much of SS8/18 could also be applied to other assets held in the MA portfolio and the PRA therefore expects firms to consider its content to be more widely applicable unless specifically stated otherwise. The PRA may issue further, more bespoke, expectations for the treatment of other assets within the MA portfolio as required. These will also be open to consultation and may be implemented as a new SS or as an amendment to this SS.

The expectations set out in SS8/18 will come into effect on Friday 13 July 2018.
 
Solvency II: internal models update – PS 20/18
On 13 July, the PRA published a Policy Statement (PS) providing feedback to responses to Consultation Paper (CP) 27/17 ‘Solvency II: Internal models update’ and the final updated expectations of firms in respect of the model change process set out in Supervisory Statement (SS) 12/16 ‘Solvency II: Changes to internal models used by UK insurance firms’, and internal model change policies set out in Supervisory Statement SS17/16 ‘Solvency II: internal models – assessment, model change and the role of non-executive directors’.

The PS is relevant to all UK Solvency II firms, the Society of Lloyd’s and its managing agents and is most relevant to firms that have an internal model approval. It may also be of interest to UK Solvency II firms seeking approval to use an internal model and to UK Solvency II firms that are part of the European Economic Area (EEA) or non-EEA groups with a group internal model.

The PRA received four responses to the proposals in CP27/17. Respondents welcomed the PRA’s proposals but also asked for further clarification, guidance and alternative wording in some areas. The PRA’s feedback to responses, and decisions, are set out in Chapter 2 of the PS.

The PRA proposes that the updates to the minor model change accumulation process and reporting processes would take effect from the day of publication of the PS. Changes to the model change policy are subject to supervisory approval in accordance with Regulation 48 of the Solvency II Regulations (2015/575) and the PRA’s expectations of that procedure, set out in paragraph 2.14 of the updated SS12/16.
 
Solvency II: changes to reporting format – PS 21/18
On 26 July, the PRA issued a Policy Statement (PS21/18) providing feedback to responses to Consultation Paper (CP) 11/18 ‘Solvency II: Changes to reporting format’. It also contains the PRA’s final policy, as follows:

• amendments to the Reporting Part of the PRA Rulebook (Appendix 1);
• updated Supervisory Statement (SS) 25/15 ‘Solvency II: regulatory reporting, internal model outputs’ (Appendix 2);
• updated SS26/15 ‘Solvency II: ORSA and the ultimate time horizon – non-life firms’ (Appendix 3);
• updated SS7/17 ‘Solvency II: data collection of market risk sensitivities’ (Appendix 4); and
• updated SS15/16 ‘Solvency II: monitoring model drift and standard formula SCR reporting for firms with an approved internal model’ (Appendix 5).

The PS is relevant to all UK Solvency II firms, and to the Society of Lloyd’s and its managing agents.
The PRA will release public working drafts and final versions of the relevant technical artefacts in the coming months. On Friday 29 June 2018, the PRA published a web update to provide indicative dates for the availability of the relevant materials required for implementation of the reporting changes.

The changes to the reporting format will be effective for submissions of year-end 2018 information, from 31 December 2018 onwards.

The PRA received one response to the CP. The feedback was generally supportive of the changes proposed, although it noted that firms should have sufficient time to update their software capabilities to enable submission via XBRL format.