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    Solvency II (near) final rules

    Direction for insurers on internal models, capital add-ons and reporting

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    The PRA has released a suite of materials to bring Solvency UK (SUK) closer to implementation. These cover reporting requirements, internal models (IM), capital add-ons, third country branch capital, mobilisation and the thresholds for entering the Solvency II regime.

    The publications include:

    Policy statement PS2/24 — Review of Solvency II: Adapting to the UK insurance market. This sets out the PRA's response to most areas of the June 2023 consultation.

    Supervisory statement SS1/24 — setting out expectations for meeting the PRA's internal model requirements.

    Four further Statements of Policy (SoP) — on capital add-ons, the approach to granting regulatory permissions in relation to the transitional measure on technical provisions (TMTP), insurance group supervision (in particular the calculation of group Solvency Capital Requirement (SCR)) and the use of internal models.

    Policy Statement PS3/24 — Review of Solvency II: Reporting and disclosure phase 2 `near-final' policy, following the PRA's CP12/23 and CP14/22.

    These all have an effective implementation date of 31 December 2024, as expected.

    In addition, HM Treasury (HMT) has laid down a Statutory Instrument (SI), which enables the PRA to give firms permission to disapply or modify the application of aspects of certain rules to them.

    The publication package does not include:

    Matching Adjustment reform (further to PRA's CP19/23) — the PRA is expected to publish final rules on this in June 2024, to come into (almost) immediate effect. The HMT SI is expected at the same time. The PRA has signalled that insurers have all the information they need to plan adjustments to their investment portfolios.

    Transposition of assimilated (EU retained) law into the PRA Rulebook — this is expected in Q2 2024. In the meantime, existing applicable EIOPA guidelines continue to apply as per this SoP.



    Final reporting taxonomy —
    this is to follow shortly.

     

     

     

    The final policies and SS provide helpful clarity on the PRA's approach and processes. They bring no major surprises and overall closely mirror what the PRA has already consulted on.

    This reinforces the PRA's message to firms that they should not expect material changes from the package consulted on and, given the timing of next supervisory statements, firms need to continue to progress SUK change programmes based on reliable working assumptions from the CPs.

    What is in the PRA's new Solvency UK policies?

    • The Gross Written Premiums (GWP) threshold for firms to enter into the Solvency II regime has increased to £25 million (£10m more than previously proposed). The PRA's Cost Benefit Analysis estimates this would result in six more firms being eligible to operate under the Non-Directive Firms regime (15 firms compared to nine under original proposals in CP12/23).

    • The PRA has made it explicit that it will allow firms six months to develop plans to integrate IMs after an acquisition into a single group internal model. Firms then will have up to two years to implement the plans and develop the group IM, with temporary permission to use two or more different calculation approaches in the interim period to calculate the group consolidated SCR.
    • There is strengthened wording to confirm that the PRA will consider complete IM applications within six months — the PRA has been at pains to emphasise SUK will bring a genuine streamlining of partial and full IM applications and modifications.
    • There is a clarification on expectations around negative model limitation adjustments (MLAs) and that MLAs are not expert judgements (EJs). The distinction matters because MLAs need to follow the governance process set out in the model change policy and be included in the Assessment of Change (AoC) exercise and model logs. EJs, on the other hand, are listed in the EJ log and are subject to EJ governance.
    • Clarification that the format and timing of the CRO's annual attestation on compliance with SCR and IM requirements is at the discretion of the firm — this is in the spirit of the SUK approach of shifting responsibility of adequate compliance and governance onto firms.
    • Explanation that splitting or combining risks already within the IM scope, or adding risks which fall within the sub-modules of risks already within the scope of the IM, may not necessarily amount to including new risks. These adjustments may therefore be classified as minor, rather than major, model changes.

    • There are no significant policy changes, but the PRA has clarified that there is only one circumstance in which the PRA would consider granting a new TMTP permission — an acquisition. This is subject to supervisory approval.
    • The PRA has also made several clarifications, such as allowing firms flexibility in how MA-eligible business is to be allocated across the dynamic and non-dynamic components of TMTP, providing insurers with greater flexibility.

    • Insurers will welcome the PRA's commitment that it does not intend to use capital add-ons to structurally increase the capital held in the market.
    • The PRA has also helpfully allowed firms not to disclose residual model limitation (RML) CAOs separately in their Solvency and Financial Condition Reports (SFCRs). Additionally, the PRA will not include safeguards in its summary report on CAOs for significant deviations.
    • The PRA has also set out further detail around (i) circumstances under which the PRA expects to consider setting a CAO; (ii) methodologies for CAO calculation; (iii) CAOs at group level; (iv) process for setting the CAO; and (v) ongoing monitoring, reporting, and removal of a CAO.

    • Confirmation that the PRA may allow a UK group's overseas sub-group SCR to be included in the consolidated group SCR under method 2, thereby allowing diversification benefits between the method two entities within that sub-group. However, this is only applicable if the third country is deemed equivalent or provisionally equivalent.

    • The PRA has included a helpful table setting out various numerical thresholds under SUK in GBP, including the Minimum Capital Requirement (MCRB) floors for firms with various permissions.

    • The final policy in PS3/24 is largely as consulted. The PRA has pushed back on industry's ask to minimise changes in templates, justifying this as a requirement to deliver on its primary objective of insurer safety and soundness and policyholder protection.
    • The reporting taxonomy is to follow shortly, and the final rules come into effect on Friday 31 December 2024 for triennial, annual, semi-annual and quarterly requirements with a reporting or disclosure reference date as of 31 December 2024 and onwards.
    • Insurers therefore need to start preparing for the necessary system and data changes to meet these truncated timelines. For groups with insurers in both the UK and the EU, there is the additional complexity of managing separate and increasingly divergent taxonomies across both jurisdictions.

    What does this mean for insurers?

    The PRA's publications are a step closer towards a fully operational Solvency UK. While the policy changes are not major, there is a significant level of detail on how SUK will operate in practice. Firms with internal models and TMPT permissions in particular will want to familiarise themselves with the PRA's expectations and application processes.

    How KPMG in the UK can help

    KPMG professionals in the UK can assist with all aspects of both Day 1 compliance and systems changes, as well as act as a strategic advisor on operational, balance sheet and governance implications.

    While not covered in this package, for firms with MA permissions, getting the attestation processes up and running remains a key priority.

    Examples of where we can help include:

    • Assessing current Analysis of Change (AoC) capability for internal models against PRA requirements.
    • Fostering appropriate governance and management information (MI) for CROs to make their annual attestations to comply with SCR and IM requirements, and developing a credible plan for any areas requiring a remediation plan.
    • Assess TMTP approaches, including benefits of each approach under a range of scenarios and the cost of maintaining each one.
    • Evaluating the merits and/or assisting with full or partial IM applications or adjustments.
    • Supporting with reporting system changes, drawing on KPMG's recent experience in operationalising IFRS17 programmes.

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