December 2023

As part of the UK review of Solvency II, the PRA is consulting on reform of the matching adjustment (MA) — see a summary from KPMG in the UK practitioners here. One of the more controversial areas is the requirement for an attestation on both the sufficiency of the fundamental spread (FS) and quality of the MA.

This article aims to offer a practical guide to MA attestations:

  • What is required — and how to go about meeting the requirements.
  • Key areas of difficulty — and how to overcome them.
  • Timelines to be ready for the first attestation — and going forward.
  • Turning the challenges of the attestation into an opportunity to improve operations — and how KPMG professionals can help.

What started with the PRA exploring alternative formulations of the MA framework to address assets with features that were not part of the calibration of the published FS has evolved into keeping the MA framework unchanged but putting the onus on insurers, and one individual in particular (most likely the CFO), to attest to both the FS and MA. 

The PRA has provided detailed guidance on its expectations. The consequences of not taking this seriously could be severe for both the firm and the responsible Senior Manager. The conduct rules impose requirements on individuals to act with integrity, due skill, care and diligence and to be open and cooperative with regulators. The PRA could impose sanctions against both the individual and the firm if they are not satisfied with the approach they are taking, though this would most likely start with a Section 166 Skilled Person Review into compliance with the rules and guidance. 

The new attestation process presents significant operational challenges for firms, who will need to develop quantitative and qualitative processes to back up the attestations. Solvency II review in the UK is intended to give insurers greater investment flexibility and the PRA has made much of the streamlining of requirements and processes. However, for firms not currently using the MA, the additional complexity of the MA attestation may well be a factor that puts them off considering making an application.

KPMG in the UK expects the PRA's proposals to be close to final — not least because of the truncated timelines, with the final rules expected in Q1 2024, to be ready to come into force at mid-year 2024. 

MA Attestation — what is required

Attestation requirements 

Framework Process, system and controls Regulatory filings

What the attestation needs to cover

The PRA suggests the attestation process should cover three steps, spread across the two key elements of the attestation:

Sufficiency of FS — assess if any assets require an FS add-on

Step 1: consider assets with a risk profile that is consistent with the assumptions underlying the MA and the data used to calibrate the PRA-published FS, e.g. corporate bonds/private placements.  

Insurers should consider:

  • Are there risks that are not adequately captured, such as idiosyncratic risks or future-looking climate risks? 
  • Are there rating lags or names on negative rating watch which reflect increased risk?
  • If so, consider an FS add-on and document the reason.

Step 2: identify and consider assets not included in Step 1. This would include internally rated or valued assets, privately placed, restructured assets and assets with highly predictable cashflows (HP).

Insurers should consider:

  • Any retained risks, as for Step 1.
  • Additional risks such as legal, conduct and political risks where there is limited historic data.
  • Risks related to performance of collateral including liquidity and reinvestment risks.
  • Where HP assets have been included, does the FS addition capture all risks related to cash flow variability?
  • Are any of the asset classes sufficiently material to warrant developing an insurer's own FS model?
  • Assess and document the reason for any add-on to the FS.

 Quality of MA — as an independent check on reasonableness of the FS

 Step 3: review asset-level MA for `material' assets, with a focus on the biggest contributors to the MA.

  • Identify the largest individual contributors to the MA.
  • Identify outliers, whether that is versus the average corporate bond index spread or within an asset class whether the spread is an outlier versus others in the same asset class, and explain why the MA can be earned with confidence. For example, firms may explain an apparently outsized spread as due to specialist origination or structuring skills, or on-going investment management expertise or other market factors.

Who is required to attest

The Senior Manager with the prescribed responsibility for the production and integrity of the firm's financial information and its regulatory reporting — for most firms, this will be the CFO.

How firms are required to attest

Firms will need to develop an Attestation Policy, approved by the board or relevant governing body, outlining:

  • Responsibility;
  • Riggers for out-of-cycle attestation as a result of a material change in risk profile;
  • Process for reviewing FS and MA, including criteria for subjecting assets to a more detailed review; and
  • The approach for determining any FS add-on.

The attestation process is likely to follow the PRA's suggested 3 steps, described above. Assets must be considered on an individual basis, for both the FS and MA, with no cross-subsidy allowed where prudent treatment on one can offset optimism on others. Firms may challenge this when responding to the consultation, since it will almost certainly result in a need for some level of FS add-on, though the PRA has not given any indication of the likely increase in technical provisions or required capital it expects to see resulting from this process.

Firms should develop a consistent confidence level across all asset classes and be able to explain the size of residual spreads. The confidence level should be materially more certain than a 50th percentile or best estimate basis. As a guide for firms, elsewhere in the consultation the 85th percentile is mentioned in relation to HP assets as demonstrating “adequate provision for the additional retained risks given the requirement for the MA to be able to be earned with a high degree of confidence.” This is not too different to the level of confidence insurers consider in setting the Risk Adjustment under IFRS 17.

The PRA identifies sources of MA that may be earned in addition to illiquidity. This might include asset classes with barriers to entry or asset classes where a firm has invested in specialised skills to source, develop and manage the investment, and part of the spread represents compensation for the upfront investment and on-going expense of management. The burden of evidence is expected to be high for firms making this argument. Where firms believe they have unique origination expertise, they also need to consider whether the increase in MA may be due to understating the valuation of the asset.

What documentation outputs are needed

As part of the attestation process, firms need to produce the following documentation:

Attestation Document:

  • Short document attesting to FS and MA, confirming the date of the attestation, identifying the portfolio and the SMF signing off.

Attestation Report Including:

  • Attestation policy (or statement that policy is unchanged).
  • Statement of compliance with policy.
  • Identification of individual assets where FS has been increased, with amount of add-on, resulting MA and reason for the add-on.
  • Detailed list of evidence relied on to make the attestation. The PRA may require sight of this evidence as it reviews Attestation Reports.

Disclosure in Solvency and Financial Condition report (SFCR):

Confirmation that the attestation has been made, though the attestation report does not have to be publicly disclosed.

The first two documents are for private submission to the PRA, while the SFCR disclosure is public.

When the attestation needs to be made

This needs to coincide annually with publication of the SFCR i.e. within 14 weeks of year-end. An out-of-cycle attestation may be required on a material change in risk profile of the business, subject to prior consultation with the PRA.

Key areas of difficulty — process and methodology


Who will need to be involved?

Key attestation stakeholders

Board and Committees

The PRA has stated that having a single nominated individual to provide the attestation will encourage individual accountability and improve the governance and oversight of the MA.

Nonetheless, there are likely to be many individuals involved in compiling the evidence supporting the attestation, including:

  • The Board: expected to approve the Attestation Policy. May also be asked to sign-off the attestation, even if given by the CFO (similarly to statutory accounts).
  • Chief Actuary: is likely to be involved, with responsibility either for producing the FS add-ons in Line 1 or challenging the process in Line 2.
  • Finance & Actuarial: assumption and methodology teams are likely to be involved in providing the analysis behind both the sufficiency of the FS and quality of the MA. The area with responsibility for internal ratings will need to ensure ratings are up-to-date, accurate and un-biased, and provide additional information such as watch lists and additional risk factors that should be considered but are not yet reflected in the rating.
  • CRO: will have interest in integrity of the process and ensuring that the FS reflects all retained risks.
  • Internal Audit: will have interest in integrity of the process and the governance arrangements. 
  • External auditors: not formally required to audit the full attestation or underlying evidence. However, auditors do sign off on technical provisions of which the FS and any judgements around imposing or not imposing an add-on are a part. There will therefore be an increase in work for auditors who, subject to audit materiality, will audit the judgements made by firms on whether or not to impose an FS add-on and the supporting evidence. This is less work than auditing the full attestation report but should not be underestimated. Firms may also ask for independent assurance that internal ratings are unbiased.

The CFO may require “sub-attestations” from various stakeholders within the business e.g. risk and actuarial, to provide him or her with the necessary confidence to sign-off.

Link with other reporting:

Firms will be pulling together an asset-by-asset listing to meet the Matching Adjustment Asset and Liability Information Return (MALIR) reporting requirements. It would make sense to align the process for assessing the FS and MA with the process for collating information for the MALIR, perhaps enriched with additional fields to identify material contributors to the MA and outliers in the data.

Separately, it might be difficult to explain why an IFRS haircut for risk is higher than used under Solvency UK. Firms may wish to align their approaches. They may also use their Internal Models (where available) to ensure a consistent confidence level for the FS across asset classes.


Steps 1 and 2:

Specific challenges for insurers regarding steps 1 and 2 include:

  • Bucketing assets with similar features into broad sector categories for analysing the sufficiency of the FS. This might include sectors with exposure to real estate, agriculture, education, transportation or energy. The challenge will be deciding how granular to make this depending on the availability of relevant historic data by sector.
  • Considering the latest credit rating information such as assets on rating agencies' and internal negative watch lists. For example, firms may want to assess if the proportion of assets on negative watch is higher or lower than average, and whether to take this into account (for the FS to be a through-the-cycle allowance for risk rather than point-in-time). A conservative approach may be to introduce sub-notching and linear interpolation to reflect these nuances in ratings.
  • Capturing forward looking risk not already included in historic data and therefore the credit rating. Climate change is mentioned as an important area for consideration but firms will need to reflect on the extent to which this is already captured by rating agencies. Firms may also want to consider if the impact of climate risk should be treated differently to other risk factors reflected in the historic data used in the calibration of the FS e.g. risks due to obsolete technologies or business models, etc.
  • Assessing whether the portfolio is subject to concentration risk in certain industries or risk categories which differ to the general corporate bond market used by the PRA to calibrate the published FS and determining a suitable add-on to reflect this.  

Firms may also need to review the academic research into spread decomposition, mentioned by the PRA, to justify why their approach may differ or where they make different assumptions.

Step 2-specific:

Challenges include:

  • Internally rated assets: consider which forward looking risks are already captured in credit ratings, and which ones need to be added.
  • HP assets: currently designated fixed assets may need to be reclassified as HP assets given tightened up wording in the PRA's Supervisory Statements. The FS add-on for cash flow variability may be hard to determine where there are insufficient market price comparables and where it is difficult to calibrate to a target confidence level.
  • Downgrade experience: consider if this is likely to be different for Type 2 assets versus the experience with corporate bonds used by the PRA in calibration of the published FS.
  • Materiality and availability of sufficient data: can firms develop their own FS for certain classes of Step 2 assets?

Step 3:

 The PRA suggests methods to identify outliers and material contributors to the MA on an asset-by-asset basis. These could be:

  • The [w] largest contributors to MA.
  • Corporate bonds where the spread is more than [x] standard deviations from the index mean. This could involve breaking down the index into its constituent parts and determining the standard deviation of spreads on the valuation date and comparing this to the spread on the Step 2 asset. 
  • Liquid assets with spread greater than [y] bps over an equivalent corporate bond.
  • Corporate bonds or illiquid assets where MA as percentage of spread exceeds [z] %. The number of assets falling within this category is likely to increase in times of stress.

(The parameters referred to above are placeholders as per the Supervisory Statement for the actual criteria the insurer will have to set).

It is possible to reduce the impact of Step 3 by bringing the MA on certain internally valued assets into line with others by revising their valuation upwards, rather than using an FS add-on. A change in valuation is broadly neutral to the insurer's capital position under an MA framework (apart from a knock-on impact on the size of the SCR), whereas an FS add-on is not. It will be important to demonstrate independence between valuation and determining the need for an FS add-on.

A further challenge in this area is the difficulty in valuing illiquid assets, which by their nature are not actively traded. Different market practitioners may well assign quite different values to the same asset which would result in very different residual spreads. As above, under an MA framework this is broadly neutral to the balance sheet (with the size of the FS reflecting the margin for risk) and so a focus on residual spread may be misplaced.

There is also a tension here between an FS that is calculated using a through-the-cycle approach and providing an attestation at a particular point-in-time. Firms will need to consider how far they think it reasonable to reflect current market spreads in their FS add-on. For example, they could apply a fixed % increase to published FS when spreads rise above a certain threshold to reflect stressed credit conditions. Alternatively, they could apply a more market related increase by taking some percentage of spreads into their FS — though they can never go below the published FS if spreads have tightened significantly.

Although the above analysis is carried out asset-by-asset, there is also a need to consider diversification in the portfolio and whether concentration risk may mean there is increased risk of not earning the MA with the same degree of confidence as for a diversified traded and externally rated corporate bond portfolio. Therefore, there may also be a need for an FS add-on to allow for concentration risk with the difficulty of determining an appropriate allowance.

Implications for SCR calculation and stressed FS:

The PRA has stated it does not expect firms to reduce their SCR as a result of an FS add-on i.e. if an add-on is required then firms will have the challenge of considering how this might change in stress. Removing it would reduce the SCR which is counter to the PRA's expectations. Instead, firms may need to consider whether an increase is necessary depending on the reason for introducing it in the first place e.g. whether this was due to a perceived increase in the general credit risk environment (an increase to the add-on may not be necessary) or because the asset is exposed to certain risks that were not captured in the published FS (an increase may be necessary depending on the current methodology for calculating the FS under stress).

Implications for balance sheet volatility:

The process of making FS add-ons may create balance sheet volatility. This is particularly likely when the signal for requiring an add-on comes from looking at the MA as a proportion of spread, or looking at assets with a spread uplift beyond a fixed bps threshold versus corporate bonds, in times of market stress, and trying to keep within certain bounds. Firms may need to maintain a buffer in addition to their current Capital Management Policy (CMP) to allow for a degree of volatility from period to period. 


The MA reform proposals come into effect from `mid-2024'. However, whether this is 30 June 2024 or 1 July 2024 makes a difference to the timing of having to apply any FS add-ons. This is despite the first attestation, based on year-end 2024 figures, not being due until early 2025.

If firms need to consider FS add-ons for their 30 June 2024 results, most of the work (steps 1 and 2 in particular) needs to be complete before 30 June to meet the timetable for publication. If the rules come in from 1 July, there will be no requirement for public disclosure until the year end and while firms will report their Q3 results privately to the PRA, they can perhaps explain their progress in determining FS add-ons. However, even in this scenario, firms may come under pressure to give investors some indication of the likely impact of FS add-ons before the year-end.

The following cycle of disclosures are expected going forward:

  • Pre-cycle: most of the analysis supporting FS add-ons (especially for steps 1 and 2) to be complete prior to year-end, in a similar way to other assumption-setting for Solvency II and IFRS. 
  • On-cycle: firms to refresh their analysis at year-end (especially for step 3) to capture end-of-year data on spreads and the latest credit ratings data. This has to be finalised early in/around January to determine the FS add-ons and give time for calculation of the SCR and some level of disclosure in published accounts.
  • Off-cycle: as part of their Attestation Policy, firms will need to identify triggers for when an off-cycle attestation may be necessary. When a material event occurs, they will need to discuss their decision on whether an attestation is necessary with the PRA. 

Turning challenges into an opportunity and how KPMG in the UK can help

Many firms have reasonably clunky processes around determining their MA, including significant spreadsheet work and / or data collection from multiple systems. This includes assets data, cashflow production, stressing, the MA calculation and pulling the MALIR data together. Given the MALIR reporting requirements are at an individual asset level, some firms may look to roll the MALIR reporting and attestation review into a wider technology transformation project, to both tidy up their MA process and harmonise the discount rate setting across all metrics e.g. Solvency II, IFRS 17 and economic capital.

Technological solutions could also help firms improve their credit modelling capabilities which may become useful as they develop their own FS models and look to incorporate HP assets over time.

KPMG in the UK has supported many firms through such technological transformation projects (most recently around the introduction of IFRS17) as well as advising on the streamlining of Solvency II processes.

In addition, KPMG in the UK can provide independent validation for the internal valuation of illiquid assets, validate the internal ratings process for no-bias and advise on governance, process and methodology for determining FS add-ons.

Please speak with your usual KPMG contacts for more information on how firms can turn what could be viewed as a large compliance exercise into an opportunity to create a more efficient process for calculating the MA and other discount rates used across their business.

Concluding remarks

Firms should be prepared to carry out a lot of work ahead of their first attestation. Some may be able to leverage work in support of their earlier MA applications and internal model development but may still need to devise a robust and systematic process for confirming the sufficiency of the FS and quality of the MA and check its resilience to changing market conditions.

Given the work involved it makes sense to also take the opportunity to streamline the MA calculation process and harmonise the production of discount rates across financial metrics. 

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