Out-Law News | 24 Mar 2015 | 3:21 pm | 2 min. read
PRA chief executive Andrew Bailey said that publication of the finalised rules would allow firms to finalise their own Solvency II preparations, ahead of the new regime coming into force on 1 January 2016. The PRA has also published an additional consultation paper on the rules governing the application process for the 'volatility adjustment', which firms with long-term insurance products such as annuities will be able to apply to use to mitigate the effects of short-term market volatility on the value of their liabilities.
Insurance regulation expert Rabbani Choudhury of Pinsent Masons, the law firm behind Out-Law.com, said that the final rules had been "substantially updated" and "reshaped" the UK's first Solvency II implementation proposals, which were published for consultation by the old Financial Services Authority in November 2011.
"The publication of these rules and supervisory statements, which is likely to be the PRA's most important communication on Solvency II this year, is positive for insurers as they can at least start to have some certainty over the regulator's requirements and expectations under Solvency II, which will start to apply to them from 1 January 2016," he said. "That said, becoming familiar with and being able to navigate around the minefield of provisions will take firms some time to get used to."
"Now that the PRA has formally set out its position, the main focus for 'UK Solvency II firms' over the coming months will be to ready their Solvency II approval applications and start submitting these to the PRA and to finalise arrangements internally to make the transition to the new regime for when it starts to apply," he said.
The new Solvency II regime comes into force across the EU on 1 January 2016, and will apply to more than 400 retail and wholesale UK insurance firms and to the Lloyd's insurance market. The new rules set out broader risk management requirements for European insurers and require firms to hold enough capital to cover all their expected future insurance or reinsurance liabilities. Insurers will be able to apply to the PRA from next month for permission to adjust this capital requirement to reflect the extent to which they are already protected against market volatility.
The new rules published by the PRA set out how it will implement the 'long-term guarantees package', which will allow insurers to reduce capital and reserving requirements by 'matching' long-term liabilities with long-term assets that they also hold. Firms will be able to apply to use this 'matching adjustment' from 1 April 2015. As firms may wish to submit applications to use both the matching adjustment and the volatility adjustment, which is not yet finalised, the PRA will operate a harmonised approval process. Firms may use the contents of the draft supervisory statement to inform their volatility adjustment applications until this is finalised, according to the PRA.
The PRA said that it intended to apply the rules proportionately, and would assess applications on a case by case basis.
"The greater the impact of the volatility adjustment on the firm's financial position and risk profile, the greater the expected level of detail and justification that firms will need to provide in the application," it said.