The UK’s Prudential Regulation Authority (PRA) plans to release its final rules on Solvency II in mid-November, with the new requirements for insurance firms and groups taking effect on Dec. 31, 2024, according to Bank of England report.
The key aspect of PRA’s 2024 proposal is to restate the law assimilated from the EU’s Solvency II framework into its own policy with minimal changes. Solvency II will be renamed Solvency UK as the country shifts away from EU regulations.
The PRA noted it made limited policy changes this year since many reform priorities were covered in earlier consultation papers. Adding major updates now would delay implementation.
The multi-year reviews of Solvency II in the EU and the UK are approaching completion, despite the very different macroeconomic environment since these reviews began in 2020 and 2021. The reforms fundamentally aim to boost investments in long-duration assets or businesses.
The proposed reforms are expected to alleviate capital strain and enhance Solvency II ratios for these insurer. The timeline for implementation is notably short, with new rules for a lower Risk Margin potentially in place by the end of 2023 and further updates, including a more flexible Matching Adjustment, anticipated by the end of 2024.
Higher market interest rates mean that insurers’ sensitivity to duration-related reforms have substantially reduced but we still expect both reviews to conclude in 2024.
Insurers to deploy some of the capital freed up by the reforms into these long-term investments, attracted by the prospect of higher returns, we believe they would stay within their existing risk appetites and avoid depleting their capital enough to jeopardise ratings.
Statement
This is relevant to all PRA regulated UK Solvency II firms and groups that are currently subject to PRA directions containing waiver or modification of PRA rules. A separate letter will be issued to third-country branches shortly.
The PRA intends to publish its final package of rules relating to the Solvency II Review in mid-November 2024. These rules will come into effect on 31 December 2024. The PRA has published three major policy statements (PS) on the Review of Solvency II:
- PS2/24 – Review of Solvency II: Adapting to the UK insurance market
- PS3/24 – Review of Solvency II: Reporting and disclosure phase 2 near-final
- PS10/24 – Review of Solvency II: Reform of the Matching Adjustment
The PRA intends to publish its final PS for CP5/24 – Review of Solvency II: Restatement of assimilated law, in mid-November 2024.
These final rules may affect existing PRA directions in respect of waivers or modifications of PRA rules held by insurance firms (UK Solvency II firms, groups and third-country branch undertakings).
In particular, where waivers and modifications of PRA rules include references to Solvency II assimilated law (ie retained EU law) or the PRA Rulebook, these references may need to be updated to reflect the final PRA rules which are due to come into effect on 31 December 2024.
The UK SII review aims to reduce the risk margin – a part of the value of technical insurance provisions. The reform will introduce changes to broaden assets eligibility to the matching adjustment, an increase in an insurer’s liability discount rates (see How the New Solvency II Reforms Boost the UK Insurance Market?).
The EU review also proposes changes to the risk margin. The proposal would ease the SII capital burden associated with long-duration liabilities, with proposed reforms that could release significant amounts of regulatory capital for investment.
In mid-November the PRA will contact affected firms to provide further instructions and request consent to vary the wording of their existing directions (where necessary) so that they will remain valid from 31 December 2024. The PRA will look to make the process of providing consent as simple as possible for firms.
Once details of the process are available, affected firms will need to provide their consent before 30 December 2024 to ensure that the directions can continue and reflect the new rules as appropriate.
In the meantime, firms should familiarise themselves with the relevant waivers and modifications that they currently hold.
For instance, 2023’s consultation paper addressed changes to matching adjustment regulations, improved risk management, and placed more accountability on senior managers.
One potential reform area involves transitional rules in the own funds section of the PRA’s rulebook. The PRA is considering allowing firms to treat legacy paid-in preference shares, issued before Jan. 18, 2015, as not relevant when evaluating compliance with certain T1 Own fund requirements, for 25 years.
The proposals also include updates to the conversion rate for accounts that primarily use euros.
