On 29 June 2023, the PRA  published CP12/23 - Review of Solvency II: Adapting to the UK insurance market, setting out the bulk of its proposals implementing HM Treasury's (HMT's) proposals.  

The consultation is a significant milestone towards adapting the Solvency II framework to the UK insurance market. It tailors the regime to the UK while maintaining robust standards for capital resources and a '1-in-200' 1-year value-at-risk measure for capital requirements. While there is some reduction in overall requirements, the PRA's own cost-benefit analysis makes clear the reforms will be of most benefit to foreign insurers operating in the UK via branches, rather than established UK firms using internal models.

The consultation also provides a first substantial glimpse into the PRA's approach to Solvency II rulemaking post-Brexit and marks a return to a UK style of more principles-based regulation. The PRA notes its proposals are in line with developing international capital standards for insurers, which is currently also under consultation.  

The release of the PRA Solvency II proposals was almost concurrent with the Financial Services and Markets Bill receiving Royal Assent (read summary from KPMG in the UK colleagues here), allowing the Government to tailor financial services regulation to UK markets. Insurers have also had sight of elements of the high-level rules via HMT's exposure draft regulations, including the Risk Margin capital reduction from 6% to 4%.  

UK Solvency II — highlights

  • Simplification of the transitional measure on technical provisions (TMTP) calculation

  • Streamlined, principles-based rules for Internal models (IMs), including approval of not wholly compliant IMs subject to two new safeguards (1) residual capital add on tool; and (2) model use requirements. IM use will also be subject to an annual attestation and Analysis of Change reporting and attestation requirement, including on the Solvency Capital Requirement (SCR)

  • Capital add-ons as to (1) mitigate 'residual model limitations' in IMs that are less than wholly compliant; (2) offset any significant deviation from risk profiles

  • Greater flexibility on group solvency calculation, including being able to add capital calculations with different methodologies while still benefiting from diversification

  • Removal of group capital risk margin for overseas branches. This will benefit 130+ firms and is particularly useful for commercial lines insurers coming into London

  • Streamlining of reporting, including removal of Regular Supervisory Report (RSR), more significant reductions likely for groups and overseas branches. Solvency and Financial Condition Report is not considered — may be reviewed in 'due course'

  • Increased threshold to enter Solvency II regime to £15 million gross written premium £50 billion technical provisions

UK Solvency II review — timelines

The PRA has provided helpful clarity on implementation timelines, which would see the UK introducing its Solvency II reforms ahead of the parallel process in the EU. The earlier release of capital following the Risk margin changes will be particularly welcome for the UK insurers.

The phased implementation consists of:

  1. Risk margin changes in place by year end 2023 
  2. Matching adjustment (MA) changes in place by half year 2024 
  3. The remainder of the proposals to be in place by year end 2024 

PRA's pipeline of consultations to get there:

  • CP 12/23: this consultation sets out the majority of the PRA's reform proposals, and focuses on simplification, improving flexibility and encouraging entry 
  • September consultation: will be crucial for life insurers, and cover rules relating to investment flexibility and the MA. This includes asset and liability eligibility rules, new attestation requirements and certain changes to the MA calculation
  • PRA Rulebook changes: the PRA intends to consult in early 2024 on transferring the remaining firm-facing Solvency II requirements from retained EU law into the PRA Rulebook and other policy materials 
    • An exception to this is elements of the PRA Rulebook relating to the Risk margin, which will be amended earlier in time for these changes to come in by this year end. This is driven by pressure for the Government to demonstrate the benefits of the reform, particularly where this allows insurers to increase their productive investment into the UK

Changes to Transitional Regime (TMTP)

The PRA is looking to significantly streamline the carry over provisions of the transition from Solvency I to Solvency II (TMTP). This introduces a simplified new default method for calculating TMTP aimed at improving consistency of methodology and flexibility. TMTP would be derived in each reporting period exclusively from figures produced under Solvency II. Insurers would not, need to calculate on a Solvency I basis as well — which the PRA points out is based on increasingly distant assumptions. Insurers also have a choice to continue with their current/legacy calculations, under certain conditions.

While the streamlined approach is intuitively appealing, insurers will need to work carefully through the implications of moving to a new default methodology before making their choice prior to the mid-2024 deadline for submitting applications to the PRA if they want to retain their existing TMTP method. Firms will be affected in different ways, and the decision cannot be reversed.

Firms therefore need to consider the impacts of the two approaches under a range of economic conditions, not just the current ones. For example, at the moment the two approaches might give a similar answer, but if interest rates decrease or increase by 3% this could change which methodology is preferable. Firms need to carry out the appropriate analysis, assess their assumptions and prepare for the relevant PRA submissions.

Internal models

The PRA proposes to streamline the requirements for Internal Models (IM) and remove a significant portion of prescriptive 'tests and standards' in favour of a principles-based approach. Also, firms that have substantially completed their IM would be able to receive PRA permission, subject to additional requirements. This will be welcomed by firm as it is an improvement on the inflexibility of the current regime under which minor limitations preclude IMs from being approved, sometimes leading to lengthy delays or firms shelving their IMs altogether.

The PRA's objective is to introduce more flexibility while maintaining the same robustness of modelling and supervisory oversight standards. To this end, supervisors will have additional tools at their disposal, including capital add ons (CAOs) and model use limitations. Firms will have to meet a new 'Analysis of Change (AOC)' requirement, a substantial additional challenge firms should prepare for. Under AOC, firms will analyse changes in their SCR over time, submitting the results and an attestation — typically by the CRO — to the PRA. The first AOC report needs to be submitted by year end 2025, but the PRA expects firms to use year-end 2024 to develop a robust approach to AOCs.

While many of the prescriptive rules will be gone, moving to the new IM approach will involve a significant amount of implementation work which should not be under-estimated by firms or regulators.

Capital add ons

The PRA is proposing to introduce two new types of CAOs to:

  • Temporarily compensate for IM deficiencies, until full permission is received, as outlined above
  • Address IM with a 'significant risk profile deviation in exceptional circumstances'. This is where the PRA is concerned that the firm's IM is inadequate or its SCR no longer appropriately reflects the firm's risk profile better than a Standard Formula

This gives further discretion to the PRA to impose capital uplifts. It is similar in approach to the MA, where proposed improvements are also accompanied by a PRA safeguard allowing for the benefits to be reduced. 

Group SCR

The PRA proposes to allow insurance groups greater flexibility in the methods available to calculate the group SCR, to address certain situations where the existing calculation may lead to a higher group SCR than is necessary to adequately cover group risks. Groups will be allowed to add the results of two or more different calculation approaches when calculating the consolidated group SCR (for example, two different IMs, or an IM and Standard Formula) in a way that preserves diversification benefits.

This is helpful to insurance groups, particularly on acquisition of a new entity, allowing for faster release of any capital/diversification benefits.  

Third country branches

UK branches of overseas insurers may be the biggest beneficiaries of this stage of the UK Solvency II review. Changes include the removal of the requirement for third-country branches to calculate and report branch capital requirements, including the need to calculate and report a branch Risk Margin.

The changes will be particularly welcome for commercial lines (re)insurers operating in the UK via a branch. This should help the UK's attractiveness to these firms. These proposals help to support the PRA's incoming secondary competitiveness objective reflect the PRA's overall approach to the authorisation and supervision of third country branches, which emphasises the 'supervisability' of the UK branch, including the extent to which it can rely on the home supervisor.


The PRA has already gone through two phases of reviewing insurers' reporting requirements (read our analysis here), to a mixed reception by firms. CP12/23 proposes further changes, most notably the removal of the regular supervisory report (RSR), which insurers currently submit privately to the PRA on an annual basis. This will be welcomed by insurers, as the RSR is not seen as adding value on top of the other quarterly and annual reporting obligations. 

There are no changes proposed to Solvency and Financial Condition Report (SFCR), although this may be reviewed in 'due course'. It will be interesting to see the PRA's approach in due course, especially as this is an area of reform in the European Solvency II review, with the SCFR split into one section aimed at policyholders, and a longer one for other users such as analysts.

Easing the way for new entrants

The PRA is proposing an optional 'mobilisation' stage of up to 12 months, beginning at the point of authorisation, during which a new insurer would operate with business restrictions while it completes the final aspects of its development. During this period, the new entrant will benefit from 'proportionate' regulatory requirements and a £1 million absolute floor to the Minimum Capital Requirement (MCR).


The PRA proposes to increase the threshold beyond which insurers enter the Solvency II regime:

  • A firm's gross written premium income is redenominated from EUR to GBP and increased from €5 million to £15 million
  • Firm and group technical provisions are increased from €25 million to £50 million

Next steps for insurers

The spirit of the PRA consultation is that of streamlining, flexibility and improving the competitiveness of the UK for overseas and new entrants. This nevertheless does not preclude substantial implementation work for firms, particularly those using TMTP or Internal Models. The earlier implementation of the Risk margin and Matching adjustment changes mean that firms need to now consider their approach to capital management and balance sheet optimisation — not least because the UK Parliament's Treasury Committee appears to expect a progress update on the share of the '£100 bn' of capital released that goes towards investment in transition to Net Zero and UK Plc.

UK Solvency II —next steps for insurers

  • Respond to the consultation

  • Assess TMTP approaches, including benefits of each approach under a range of scenarios and the cost of maintaining each one

  • Build new RM calculation

  • Assess current AoC capability against PRA requirements

  • Updating pricing, followed by balance sheet optimisation

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