Cp19/23

A lot is riding on this.

Charlie Finch , Partner. James Silber , Principal. The final consultation proposals have now been published on the UK's transition from Solvency II, which determines the capital reserves insurers are required to hold. Will it improve pricing and insurer capacity? Will it water down policyholder security?

Cp19/23

This will result in:. The draft SI published by HMT in June gives the PRA the power to make additional rules governing the MA and it had been expected that additional controls would be introduced to counter-balance some of the loosening of restrictions. This has indeed been the case, in particular in the context of limits on the use of assets with non-fixed cash flows, expectations in respect of the use of sub-investment grade assets and the new matching adjustment attestation. HMT confirmed in its response document that MA asset eligibility would be loosened to allow assets with highly predictable cash flows to be included in the MA portfolio. The draft SI published in June allows assets with non-fixed cash flows to be included where the risks to the quality of matching are not material and subject to a limit to be determined by the PRA. This requirement will only be satisfied if the contractual terms of the asset provide for a bounded range of variability in respect of the timing and amount of the cash flows, and breach of those terms is a default. In addition:. These restrictions will potentially make investment in assets with non-fixed cash flows a less attractive prospect than may have been anticipated from the HMT response document. Currently, the fundamental spread is increased where necessary to ensure that the MA for assets with SIG credit quality does not exceed the MA for assets of investment grade quality, of the same duration and asset class. This is hoped to, among other things, increase investment in green and digital assets.

Do assumed management actions under stress for example, selling off SIG assets if they downgrade need to be cp19/23

These key areas are:. Given the short timelines available to make model changes before YE24, firms will need to quickly form a view on their approaches to each of the areas described above. Firms should identify changes needed for the end of the year and those that could be made later and prioritise accordingly. This will help minimise nasty surprises close to year-end and provide valuable insight on the net effect on capital and solvency of the overall reforms. Board members, senior executives, and actuaries of UK insurers with MA and Internal Model approvals who work on balance sheet management, pricing, reporting, capital optimisation, risk, finance, and compliance.

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Cp19/23

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Many of the proposals, for example the FS addition for HP assets and the implementation of notching are principle based rather than prescriptive and allow scope for firms to implement them in the most efficient way. Nevertheless, the PRA does not consider regular or frequent breaching and restoration of MA compliance, within the two-month window, to be acceptable for normal management of the MA portfolio. If firms intend to remove the SIG cap within their Internal Models, they should consider whether the SIG stresses in their Internal Models would remain appropriate or if more robust calibrations will need to be introduced. Although firms will hope to avoid such safeguards, given the speed with which the MA changes will come into force, we may see some use of these across the industry for at least FY Our use of cookies We use necessary cookies to make our site work for example, to manage your session. Include full content. The extent to which firms assume increases that are above the contractual minimum would be assessed in the context of risks to the quality of matching and with regards to the economics of the asset. In some cases, early repayment without adequate compensation to replace the redeemed cash flows is permitted to avoid default, so such an option may in practice be used to enhance a credit rating. If only the overall FS were to be applied on a notched basis, then this would diminish the extent to which the increased risk sensitivity of the FS is reflected in how firms manage their MA portfolios as assets would continue to be matched to MA liabilities using the existing risk-adjustment by CQS, making them less responsive to small changes in credit quality. There are two specific have regards; supporting the Government's ambition to encourage economic growth in the interests of consumers and businesses, and the Government's strategy to promote competitiveness. Other examples of rational economic behaviour driven variability include future rent increases that are linked to an index, and Residential Mortgage-Backed Securities where prepayment behaviour may be linked to the economic cycle. A formal process covering a rejection of an application will be put in place as part of wider work operationalising sBA of FSMA These updates cover notching, assets with HP cash flows, increased liability eligibility, the assumptions underlying the MA portfolio, the treatment of assets related below investment grade, the MALIR data request, attestations, and other consequential rule changes. Thus, firms moving into this space could consider whether it is appropriate to allow for diversification benefits within the Internal Model SCR calculations between HP assets and assets with fixed cash flows.

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Where this is the case, focus will be required on the modelling of these assets, including within the Internal Model, in order to meet YE24 deadlines. Firms that adopt a less complex investment strategy where the investments are publicly traded and rated by a CRA will therefore be able to take a more proportionate approach. The PRA has also sought to separate estimates for initial implementation costs vs the ongoing costs of complying with regulatory requirements. In doing so, the PRA aims to address risks and opportunities in a responsive and dynamic manner, appropriately tailored to the circumstances of the UK. Cancel Delete. You've previously logged into My Deloitte with a different account. We will retain all responses for the period that is relevant to supporting ongoing regulatory policy developments and reviews. Email Invalid special characters found. Removing the limit on the amount of MA that may be claimed from sub-investment grade SIG assets, to facilitate more investments close to and below the boundary between investment and SIG assets. The PRA has also taken into account comments made previously by firms when designing the new data collection template Chapter 8 of this CP and the data provided by firms will be used to help prioritise future policymaking. The PRA notes that historically some firms may have placed less focus on the calibration of stresses for SIG assets due to the existence of the cap. As a result, risk concentrations in the MA portfolio can have a much bigger impact than concentrations in assets outside of the MA portfolio.