Review of Solvency II: Adapting to the UK insurance market

This article was first published in July 2023. In October 2020, HMT launched a Call for Evidence that set out the areas in scope for the Solvency II review. HMT published its response to the Call for Evidence in 2021.

On 29 June 2023, the PRA published the Consultation Paper 12/23 – Review of Solvency II: Adapting to the UK insurance market. The Consultation Paper (CP) represents a notable achievement in the process of tailoring the Solvency II framework to better suit the UK insurance industry.  The suggested alterations to the Solvency II framework outlined in this CP encompass the following components:

1. Simplifications and process improvements to the calculation of the transitional measure on technical provisions (TMTP).
2. A new, streamlined set of rules for internal models (IM) where these are used by insurers to calculate their capital requirements.
3. A proposed approach to the use of capital add-ons.
4. Greater flexibility for insurance groups in the calculation of group solvency requirements.
5. The removal of certain requirements for branches of international insurers operating in the UK.
6. The streamlining and removal of reporting requirements
7. A new ‘mobilisation’ regime
8. An increase to the size thresholds
9. Redenomination of monetary values within the Solvency II Firms Sector of the PRA Rulebook from euros (EUR) to pounds sterling (GBP).

The changes in this CP are designed to be implemented by December 2024.  The previously announced change in the cost of capital risk margin is confirmed and will be implemented for December 2023.  Systems of valuation will need to be revised for the latter.

The TMTP revisions, the revisions to internal models and the group solvency requirements do not affect any of SDA’s clients and we ignore them below.  If you are interested in them, please ask us for our view.

The PRA considers that the reporting and disclosure proposals would result in an overall reduction of reporting for all Solvency II firms. The proposals included would:

• Remove, for example, the requirement for all Solvency II firms to submit the regular supervisory report (RSR).
• Amend, for example, the requirement for insurance groups to report the SCR separately by the calculation approach; the reporting requirements on the Transitional Measure on Technical Provisions (TMTP); and the Quarterly Model Change reporting requirements.
• Introduce, for example, the new reporting requirements on the change in internally modelled SCR through the year and an extended scope of application of certain ‘national specific templates’ (NSTs) to cover third-country branches.

The PRA proposes to increase the Solvency II thresholds relating to:

• a firm’s gross written premium income and redenominate it from EUR to GBP – the threshold would change in the PRA Rulebook from €5 million to £15 million.
• firm and group technical provisions and redenominate them from EUR to GBP –the thresholds would change in the PRA Rulebook from €25 million to £50 million.

The companies that do not exceed the planned thresholds would continue to be able to apply for a voluntary requirement (VREQ) to conduct business within the Solvency II regime if they prefer.  The advantages of the suggestions include:

• corporations that fall below the proposed thresholds could choose to run under the NDF sector rules.
• enabling organizations to review their compliance with the thresholds without needing to convert the monetary amounts from euros.
• having more room to grow their businesses before reaching the thresholds for regulation under Solvency II.

There is no mention on the transitional provisions from Solvency UK to non-directive firm status.  Is the move to be instantaneous or are there some form of transitional requirements for the move?  Firms will now find that the quantification of risks within the ORSA will no longer be of any value given the non-directive prudential technical provision regime and the ORSA may become just a qualitative statement of risks.

The CP also introduces a “mobilisation regime” for new insurers which will allow a gradual move through the authorisation process and allow firms to build experience and be in the position to guarantee roles to senior management and technical staff and show profits to suppliers of capital.  The regime can only last up to 12 months post authorisation but comes with a MCR of £1 million.  This may be of interest to new insurers.

Third country branches will no longer have to maintain the SCR in the UK, but PRA will review the home countries’ regime to check on equivalence.  Reporting may increase marginally.

The policy proposals included would also result in the redenomination from EUR to GBP of the absolute floor of the Minimum Capital Requirement (MCR) within the MCR Part of the PRA Rulebook. Please see below the Absolute floor for the MCR for firms with the following permissions:

• Life insurers and GI (including classes 10-15) from 4,000,000€ to £3,500,000.
• General Insurances (excluding classes 10-15) from 2,700,000€ to £2,400,000.

The PRA also considers that the proposed exchange rate (£1 = €1.13) provides clarity to firms given that it is related to the date that the EU law ceased to apply in the UK.

Responses are requested by Friday 1 September 2023 for the proposals in Chapters 2 to 10, and by Monday 31 July 2023 for the proposals in Chapter 11. SDA will be responding to the CP and would welcome comments from firms.  SDA is continuously monitoring PRA updates, and we just want to draw your attention to it. Besides, SDA is in a good position to assist firms on this consultation paper and to enhance the services we offer to our clients, so please get in touch if you would like to discuss. We are here to support you.

Another consultation paper scheduled for September 2023 is in the pipeline, focusing on proposed reforms concerning investment flexibility and the matching adjustment (MA) specifically for life insurance companies.