PRA speaks on ‘Fundamental Spreads’ – next steps for Solvency II reforms

Sam Woods, Deputy Governor for Prudential Regulation and PRA CEO, has delivered his speech ‘Fundamental Spreads’, highlighting the next steps for reforming the Solvency II insurance regulations in the UK.

Mr Woods spoke on the progression of the Solvency UK package the government has put forth to Parliament, which if agreed, will move from the debating phase into the implementation phase of regulatory reform. Despite opposing views between the PRA and the annuity sector regarding the approach the PRA should take to capitalisation of that line of business in the future, especially with respect to what form to adopt for the fundamental spread, the government intends to keep the fundamental spread predominantly as it is, with a large cut to the risk margin and the rest of the reforms.

Mr Woods also addressed recent industry concerns that the PRA would use the additional tools that the government intends to provide the PRA (senior manager attestations on the appropriateness of the levels of matching adjustment benefit being taken, scope for voluntary top-ups of the fundamental spread, and publication of individual firm results in stress testing) to attempt to reverse-engineer the effect they had been seeking to achieve through the fundamental spread reform. Mr Woods assured that the PRA would not be using these tools to achieve fundamental spread reform by alternative means. He also expressed that the PRA’s approach would continue to focus primarily on policyholder protection, and the adequacy of valuations and ratings for assets in matching adjustment portfolios.

Mr Woods highlighted that apart from the heated topics of risk margin and fundamental spread, the remainder of the Solvency UK package is about competitiveness and growth, and provided an overview of the various elements the PRA will seek to achieve this. The PRA is working closely with the Treasury to publish consultations on a set of rules as soon as possible, and expect to publish a first consultation regarding the more pressing topics in June, followed by a second consultation in September. If Parliament passes the Financial Service and Markets Bill, then the PRA will progress these actions under a new secondary objective to facilitate competitiveness and growth.




FIN. Team