Qualitative Survey from PRA on Solvency II changes

Following its launch of the Quantitative Impact Study (“QIS”), the PRA has launched a qualitative survey on the Solvency II changes that it is considering (the Qualitative Questionnaire).  This survey asks questions on how any changes may affect the time taken by firms to carry out their reporting and the impact on their risk appetite, investment policy, reinsurance, growth expectations and systems work.

The survey has been sent to all firms, with the PRA saying that participation is voluntary but is “encouraged”.

The survey does require an understanding of the QIS, which the PRA has encouraged all firms to complete but specifically targeted larger firms.  It also requires some understanding of terms like MOCE (see below) to answer some of the questions.

There is also a stress test scenario added to the questionnaire which seems to have no relationship with the rest of the exercise.  It requires movements in assets and risk-free rates every quarter end for the next three years.  This is not a small amount of work.

Most of the survey does not affect smaller firms, asking about transitional measures on technical provisions (an easing into Solvency II that only the larger firms with annuities needed to do), matching adjustment (a loosening of the risk-free rate regime for larger firms to allow them to invest in some assets to back annuities) and internal models.

However, the survey will still require significant effort to complete the relevant parts, eg on the risk margin, and does require understanding.  The last page on stresses is not an easy modelling exercise and will require model offices being run with movements in asset values and in liability risk-free rates programmed in.

Finally, MOCE, the Margin on Current Estimates, is an alternative to the cost of capital risk margin currently in Solvency II.  A version in International Capital Standards requires an estimate of each future assumption used in the actuarial valuation at 85% of the distribution implied by the standard formula stress being at 99.5%.  Hence, it is a return to prudent valuation assumptions from best estimates but with some degree of statistics.  You then hold a best estimate and the difference to the MOCE run as your technical provisions and the SCR is the difference between the SCR stress and the best estimate