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News & Opinion

Recalculation of the TMTP

31 July 2021
Ricardo Melo

The PRA published on 19 July a statement related to the recalculation of the Transitional Measure on Technical Provisions (TMTP).

This is a brief summary of the PRA’s intentions and considerations from the statement:

  • The PRA has been monitoring market conditions since December 2019.
  • Recent movements in risk-free rates (RFR) meet the limit for a material alteration in risk profile in line with SS6/16 (Maintenance of the ‘transitional measure on technical provisions’ under Solvency II).
  • The PRA is willing to accept applications from firms to recalculate TMTP as at end of June 2021.
  • Applications must include:
    • evidence that a material change in risk profile has occurred,
    • a forward-thinking view of how the risk profile is likely to progress as a consequence of the GBP RFR transition to SONIA.
  • Applications received at this time would be in addition to the estimated biennial TMTP recalculation in December 2021.

These changes would support the PRA’s risk margin reforms and also the Government’s reviews on the Solvency II requirements and framework.

Unexpected consequences are driven from using GBP RFR at a present low interest rates. Hence, a fall in the magnitude, and sensitivity of, the risk margin to risk-free rates would reduce the motivation to reinsure longevity risk outside the UK. It would also give insurance companies better flexibility to manage their balance sheets and to price the variety of products and services delivered.