PRA is consulting on its review of Solvency II to adapt the framework to the UK insurance market. The significant reforms proposed build on the Government’s response to its own Solvency II review consultation, and covers all those areas where the Government has chosen not to legislate directly.
PRA considers that the proposals will allow a meaningful reduction to the existing administrative and reporting requirements for the UK insurance sector, to decrease costs and complexity, while maintaining strong prudential standards. It considers that the reforms will advance its primary objectives of safety and soundness and policyholder protection, its secondary competition objective, and its new secondary competitiveness and growth objective arising out of the FSM Bill, which has now been granted Royal Assent.
The main areas of reform are as follows:
- Improvements to the calculation of the transitional measure on technical provisions (TMTP)
- Streamlined rules for internal models (IMs) used to calculate capital requirements
- PRA proposes a principles-based approach to assessing modelling standards, allowing it to remove the majority of the detailed requirements firms have previously had to meet in order to get IM approval.
- Rather than having to reject IMs that have residual limitations, PRA proposes two new safeguards to support granting of model permissions, where required, in order to maintain an appropriate level of prudential soundness: a residual capital add-on tool, and model use requirements.
- Greater flexibility for insurance groups in calculating group solvency requirements
- Removal of certain requirements for branches of international insurers operating in the UK
- Given a branch cannot fail independently of its legal entity as a whole, PRA judges that branch capital requirements and the risk margin for branches are not effective tools to support the safety and soundness of branches operating in the UK.
- Streamlined reporting requirements
- Includes the removal of requirements that PRA considers are not needed for the UK insurance sector, in particular, the Regular Supervisory Report (RSR).
- New ‘mobilisation’ regime
- PRA would offer new insurers the option of using a set period of extra time to build up systems and resources while operating with business restrictions and proportionate regulatory requirements. The proposals would enable PRA to lower minimum capital requirements during mobilisation.
- Increased size thresholds at which small insurers are required to enter the Solvency II regime
The consultation closes on 1 September 2023 for the proposals in Chapters 2 – 10, and 31 July 2023 for the proposals in Chapter 11 (covering minor consequential changes to the Rulebook).