PRA publishes policy statement on Solvency II reform

Following its consultation in June 2023 (CP12/23), the PRA has published its policy statement on Solvency II reform (PS2/24). As a reminder, the main areas of reform proposed in the consultation were:

• simplifications and process improvements to the calculation of the TMTP to reduce costs and complexity for firms, including the costs involved in retaining legacy Solvency I models;
• a new, streamlined set of rules for internal models (IM) where these are used by insurers to calculate their capital requirements, designed to maintain robust standards while reducing the number of prescriptive requirements firms have to meet under the current framework;
• greater flexibility for insurance groups in the calculation of group solvency requirements to provide more flexibility in the development of group IMs and allow a better reflection of groups’ underlying risks;
• removal of certain requirements for branches of international insurers operating in the UK, to facilitate entry/expansion and competition, and the international competitiveness of the UK insurance sector;
• a new ‘mobilisation’ regime to facilitate entry and expansion for new insurers and to facilitate competition, and the international competitiveness and growth of the UK insurance sector; and
• an increase to the size thresholds at which small insurers are required to enter the Solvency II regime, to increase proportionality for smaller or newer insurance firms.

Having considered the feedback received to those proposals, the PRA has identified several areas where it is appropriate to make adjustments to the draft policy, including:

• the removal of the proposed requirement for firms to disclose residual model limitation capital add-ons (RML CAOs) and removal of safeguards (including RML CAOs) from the PRA’s regular aggregate report on CAOs (see Chapter 4 PS2/24 – Capital Add-Ons);
• allowing explicitly for the possibility of setting a CAO which moves dynamically in line with certain outputs calculated by a firm in order to reflect how the underlying risk deviation varies over time (eg due to changes in the business and economic conditions), which may also benefit firms in mitigating the need for as frequent reviews of CAOs (see Chapter 4 – Capital Add-Ons);
• allowing an insurance group up to six months after an acquisition to create a clear and realistic plan to integrate any internal models, amending the proposal that required this plan at the point of acquisition, and a two-year period thereafter to implement this plan (see Chapter 5 – Flexibility in calculating the group SCR);
• increasing the threshold for gross written premiums above which a firm enters Solvency II to £25 million, a further increase of £10 million compared with the CP12/23 proposals (see Chapter 8 – Thresholds); and
• the PRA confirmed in December 2023 that it will no longer expect firms to carry out the FRR test when recalculating the TMTP, subject to case-by-case assessments for some firms, which is a year earlier than the proposed date to remove the FRR test in CP12/23 (see Chapter 2 – TMTP).

Further detail about the policy changes and updated supervisory statements are set out in the appendices to PS2/24 – Appendix 1 contains a full list of the materials that have been amended, introduced, or deleted as part of the PRA’s final policy.

The implementation date for final rules and policy materials set out in PS2/24 is 31 December 2024. The PRA’s feedback on reporting and disclosure will be set out in a separate policy statement to follow, together with the feedback received on its reporting phase 2 consultation. The PRA also intends to consult, in Q2 2024, on transferring the remaining firm-facing Solvency II requirements from assimilated law into the PRA Rulebook and other policy materials, without significant policy reforms. These changes will also take effect from 31 December 2024.