Huw Evans, KPMG UK Insurance Partner, said:
“This detailed final set of proposed changes to Solvency II will primarily affect the 19 life insurance companies in the UK that use the Matching Adjustment mechanism.
“This is an important set of design changes which should enable more flexible investment of assets by life insurers and a more streamlined process. However, with these additional benefits, the PRA is also introducing more complexity to the modelling, risk management and reporting of the Matching Adjustment which may well be more costly than the PRA’s initial cost benefit analysis allows for.
“Put simply, life insurers will gain some more freedoms but with significantly more complex responsibilities to go with them.”
James Isden, KPMG UK Insurance Director, said:
“Insurers will welcome the widening of asset eligibility for the Matching Adjustment to allow the inclusion of assets with ‘highly predictable’ cash flows and to remove the cap on sub-investment grade assets. But insurers will need to be sure the uplift on Fundamental Spread requirements does not negate the benefit of including ‘highly predictable’ assets and that the granular and complex regulatory requirements are going to be worth it.”
Matthew Francis, KPMG UK Insurance Director, said:
“Life insurers will need to enhance their risk management approaches to respond to the risks of investing in novel asset classes. The changes introduce senior manager attestation over the appropriateness of the size of the Matching Adjustment and data collection for the new Matching Adjustment Asset & Liability Information Return (MALIR). Firms’ use of internal credit assessments will also be subject to more independent external assurance.”
