PRA consults on reforms to Matching Adjustment

PRA is consulting on reforms to the Matching Adjustment (MA) as part of a package of measures on Solvency II. The proposals covers reforms to MA regulation relating to greater investment flexibility and revised eligibility rules, along with risk management enhancements and a greater role for senior manager responsibility.

The reforms aim to improve the flexibility for life insurers to make more productive, long term investments in the UK economy while supporting, soundness and policyholder protection. Insurers will be able to make quicker and broader investments, while the PRA will be supported in holding insurers to account for managing the additional risks involved. The latter will be achieved through a range of supervisory measures.

More specifically, the reforms to the rules on long term insurance products like annuities are designed to:

  • Improve business flexibility by widening the range of investments and insurance products that can benefit from the advantages of applying the MA;
  • Be more responsive to the level of risk by streamlining the PRA’s processes for simpler and lower risk investments and making more proportionate the consequences of accidental breaches of the MA rules, and by increasing the sensitivity of the rules to levels of credit risk; and
  • Enhance insurance firms’ responsibility for risk management through high level controls such as an attestation from senior management that they understand and are taking appropriate account of the risks in their investments.

MA reforms are expected to be finalised and implemented by 30 June 2024, subject to consultation responses and the Government’s legislative timetable.

Consultation closes on 5 January 2024.

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