Conclusion of the Solvency II Review
On 15 November 2024, the Prudential Regulation Authority (PRA) published Policy Statement 15/24 finalising PRA rules and policy materials that will replace Solvency II assimilated law. The publication marks the conclusion of the PRA’s phased consultation approach to the Solvency II Review. The PS15/24 outlines final policy changes related to the Solvency II regime, as part of adapting UK insurance regulation post-Brexit.
The policy restates the Solvency II rules inherited from the EU into the PRA Rulebook, adapting them for the UK insurance market. The key proposals are:
- Transitional Arrangements: Introduces temporary measures, like allowing legacy paid-in preference shares issued before January 2015 to count as Tier 1 own funds for 25 years.
- Standard Formula Adjustments: Updates rules on the calculation of the solvency capital requirement (SCR), including risk-specific parameters and deferred tax adjustments.
- Risk Margin Updates: Restates methods for risk margin calculations using updated formulas from UK legislation.
- Own Funds Reforms: Clarifies the definition and eligibility of restricted own funds and adjusts their treatment in reconciliation reserves.
The other proposals implemented by the PRA are the updates to Technical Provisions, Public Disclosure, Insurance Special Purpose Vehicles, mobilisation Regime for Prospective Insurers, Group Supervision, System of Governance, updates to Reporting and Disclosure Templates, Ring-Fenced Funds and simplifications for Non-Directive Firms. For firms outside the scope of Solvency II, the PRA has proposed proportionate rules to ensure these firms can meet compliance without excessive administrative burdens.
Significant feedback led to changes, such as:
- Delaying certain permission requirements for deferred tax adjustments to December 2025.
- Refining definitions, such as “Ring-Fenced Funds” (RFF) and “Restricted Own Funds” (ROF), to align with practical interpretations.
- Enhancing the clarity and formatting of rules and formulas to improve usability.
The rules now reflect changes from UK laws, including the Financial Services and Markets Act 2023 and associated regulations. References to EU directives have been replaced or clarified to align with UK-specific requirements.
It consolidates the PRA’s final policy on supervisory statements, reporting templates, and related instruments, effective from 31 December 2024, with transitional measures for certain elements extending into 2025.
The PS15/24 is crucial for UK insurers, reinsurers, and related entities to understand the new regulatory environment.
Additionally, the PRA has published CP15/24 – Proposed changes to the UK Insurance Special Purpose Vehicles (UK ISPV) regulatory framework. This CP is relevant to UK ISPVs and firms wishing to obtain authorisation as a UK ISPV, UK Solvency II firms, the Society of Lloyd’s and its members and managing agents, (re)insurance groups, third country (re)insurance undertakings (including those that have a UK branch, a third country branch undertaking), and UK insurance holding companies. The consultation closes on 14 February 2025.
The PRA will continue to evolve its prudential regulatory framework for the insurance sector as part of its continuing policy making activity in 2025 and beyond.
Consultant
Email: ricardo.melo@sda-llp.co.uk
Read Ricardo’s biography