Solvency II: Remuneration Requirements (CP13/16)
Solvency II: Remuneration Requirements: Article 258(1)(l) of the Commission Delegated Regulation (EU) 2015/35 (‘the Solvency II Regulation’) requires firms to adopt a written remuneration policy (‘the policy’).
The policy should comply with all of the principles outlined in Article 275 of the Solvency II regulation.
As the Solvency II Regulation came into force on 1 January 2016, the remuneration requirements became directly applicable to all Solvency II firms. The Prudential Regulation Authority (PRA) intends to monitor compliance with these requirements.
The PRA has published CP13/16 – Solvency II: Remuneration Requirements. The paper requests feedback on a draft supervisory statement which sets out the PRAs expectation for firms complying with Article 275. The statement will provide guidance so that a broadly consistent approach to the implementation of Article 275 can be applied.
The statement sets out its minimum expectations for firms to comply with Article 275. These minimum expectations will only apply to Category 1 and 2 PRA regulated firms. The PRA has taken the view that applying the expectations on smaller firms would have a disproportionate cost impact. The PRA still expects smaller firms to give proper consideration to Article 275 when setting their remuneration policies.
A short summary of the minimum expectations for Category 1 and 2 firms is:
Identification of individuals subject to the remuneration requirements. These are:
- Board members
- Executive Committee members
- Senior Insurance Manager Function (SIMF) holders
- Significant Influence Functions (SIF) holders
- Key Function (KF) holders (in particular risk management, compliance, actuarial and audit but this list is not exhaustive)
- Material risk takers (MRTs) (identify individuals able to take material risks or influence material risk taking)
40% represents a minimum ‘substantial portion of any variable remuneration component’ included in a remuneration scheme (bonuses, incentive plans…) which must be deferred for a period not less than three years (as required by Article 275). The actual period chosen should be aligned to the nature of the business, its risks and the activities of employees in question.
Firms should be able to reduce the value of deferred variable remuneration to take account of any risk management failures.
Firms should include non-financial criteria within incentive plans such as the extent of employee’s adherence to effective risk management and compliance with regulatory requirements. Termination payments should be based on performance over the whole period of activity and should be fair and proportionate relative to prior performance.
SDA llp welcomes the minimum expectations exclusion clause for smaller firms outlined in the consultation paper and agrees with the PRA on the disproportionate cost impact. The Solvency II Regulation and the draft supervisory statement still require smaller firms to draft a remuneration policy which accords to Article 275. In particular, the deferral period for the ‘substantial portion’ of any variable remuneration component of identified individuals in the policy must not be less than three years. The period chosen should be aligned with the business, risks and employee activities. Smaller firms will need to assess the impact of this inflexibility. The policy should be designed so that it takes into account the internal organisation of the insurance and the nature, scale and complexity of risks inherent in its business.
Bonus or long term incentive plans should be based on a balanced scorecard comprising both financial and non-financial criteria. Practices in the current banking sector are used as an example.
Firms should be able to demonstrate how short and long term risks and the cost of capital are taken into account when determining variable remuneration.
The proposals are not yet final but any Solvency II firms who have yet to start drafting their remuneration policy should consider doing so soon.