The PRA has recently published two policy statements to bring Solvency UK one step closer to implementation. PS2/24 - Review of Solvency II: Adapting to the UK insurance market and PS3/24 - Review of Solvency II: Reporting and disclosure phase 2 near-final | Bank of Englandboth lay out key updates to the framework and what firms can expect moving forward.
These policy statements confirm many of the proposals set out in the June 2023 consultation paper, as well as addressing the feedback received from the industry, which has been largely positive. Some changes have been made in light of the industry feedback and the supervisory statements provide more details around the how the PRA interprets the regulations that will come into effect from 31 December 2024.
Note that we have not covered the reform of Matching Adjustment in this article. We will provide our opinions on this in a separate piece.
Internal Model approval
In line with last year’s consultation paper, the PRA is moving towards a more flexible Internal Model approval framework, and the number of tests that need to be met as part of Internal Model applications is due to be reduced. The PRA has also strengthened its commitment to respond in a timely fashion to new Internal Model applications, and to communicating outcomes within six months.
In addition, it will be possible for the PRA to approve Internal Models which have residual model limitations by applying capital add-ons. The PRA has now confirmed that these capital add-ons need to be disclosed in the Solvency and Financial Condition Reports. The wording of the proposed regulations has also been updated to explicitly allow for capital add-ons that can move dynamically with changes in the business.
With the costs of approval reduced, the benefits of an Internal Model are now far more accessible than ever before. As such, we anticipate that a not insignificant number of insurers who don't currently have approved Internal Models will consider applying for approval, particularly those who already have unapproved capital models.
Solvency UK thresholds
The PRA also committed to raising the thresholds at which firms are required to comply with Solvency UK. The policy statements have amended these thresholds such that insurers will need to write £25 million of gross written premium before being subject to Solvency UK (up from EUR 5 million under Solvency II and £15 million in the consultation paper). Reinsurers will be subject to Solvency UK if either their operations exceed £2.5 million of gross written premium income (up from EUR 600,000 under Solvency II and £530, 000 in the consultation paper), or £5 million of gross technical provisions (up from EUR 2.7 million under Solvency II and £2.4 million in the consultation paper).
These threshold increases should enhance the impact of the initial proposed changes. The reason for raising the thresholds was to foster opportunities for growth for firms, allowing them to grow without suffering the administrative and financial burdens of the extensive reporting and capital regulations that Solvency UK entails. This increase should provide even more firms with the opportunities to grow and help create a more competitive market.
Group SCR
The changes made to group SCR in the initial consultation paper were designed to increase flexibility in the methods available to calculate the group SCR and address situations where the group SCR was overstated. The proposal was to give groups a two-year period, in which they're allowed to use multiple methods and combine them with a diversification allowance before they're required to use a single method. The new policy statements have introduced an additional six-month period post-acquisition during which firms can use the multiple calculation methods. During this period firms must prepare then submit a plan to the PRA, which upon approval, starts the two-year period to move to a single method.
This change will prevent firms from being in a position where they're required to create a clear plan to integrate separate internal models, without having control of or access to one of those internal models, as they haven't yet completed the acquisition.
Third-country branches
The PRA also proposed to remove third-country branch capital requirements, including the branch SCR and MCR calculations in the initial consultation paper, with the aim of making it easier for firms to set up third-country branches in the UK. The responses to this have been very positive and no significant changes have been made in the latest policy statements.
This proposal makes setting up a UK branch more attractive to international firms, helping to increase the competition within the market. It's important that firms who already have branches are aware of these changes moving forward.
Reporting
The PRA proposals in the consultation paper were to streamline the number of quantitative reporting templates (QRTs) that firms are required to produce, in order to reduce the administrative burdens on firms while ensuring that reported data remains relevant and contributes effectively to the PRA's supervisory objectives. Some new templates are being introduced, but the PRA is committed to ensuring that there's a net reduction.
The PRA proposed to move technical provision (TP) reporting from a quarterly basis to a semi-annual basis. In addition, it proposed removing the requirement for firms to submit the Regular Supervisory Report (RSR).
The main change in the new policy statements is the scrapping of the proposed move to a semi-annual technical provision reporting schedule. This followed responses to the consultation paper that stated that a quarterly calculation of the TPs is necessary for balance sheet reporting, meaning there would be little benefit to this change.
The other changes made in the new policy statements are smaller tweaks, with certain QRTs now being maintained that were planned to be scrapped, some additional QRTs that were originally being retained now being removed, and finally the streamlining of some of the new proposed templates. Overall, not much has changed from the initial consultation paper.
The changes are helpful to firms in removing some of the reporting burden without significantly adversely impacting the information available publicly and to the PRA.
Transitional Measures on Technical Provisions
The consultation paper stated that the PRA would propose a default Transitional Measures on Technical Provisions (TMTP) calculation method for firms, so as to reduce the burden on firms.
The new policy statements make some changes from the initial consultation paper, notably that firms wishing to use a legacy approach must apply by 30 June 2024, with permissions granted by 31 December 2024. In addition, the wording has been amended such that TMTP should be calculated at an overall level, but allocated across different liability groups at the firms’ discretion, with the Chief Actuary having discretion to select the methodologies used for amortisation.
Overall, we don't expect the changes to TMTP to have a material impact, and recognise that firms can use the legacy approach if they are affected. The changes in the policy statements are relatively minor and mainly focus on simplification by removing Solvency I methodology dependence and not on changing the overall principles.
Risk margin
Since the CP12/23 consultation paper released in June 2023, the changes to the risk margin calculation have come into effect as of 31 December 2023, with the cost of capital rate being reduced from 6% to 4%. This will result in significant capital being released. The reduced cost of capital will potentially make outwards reinsurance contracts look less appealing to firms.
Key milestones
This timeline describes the progress and key milestones of the implementation of Solvency UK:
![Timeline describes the progress and key milestones of the implementation of Solvency UK]()
The policy statements don't contain major changes, but they do provide greater clarity for firms as we move closer to the new Solvency UK regime ahead of the 31 December 2024 implementation. This provides firms with greater certainty on how the changes will impact them and also what planning needs to start now in order to move smoothly to the new regime.
Having an appropriate level of Solvency is critical to (re) insurers. To that end, it is essential that firms are aware of these upcoming changes and the impact they will have and what firms should do in response.
Contact Simon Sheaf, Simon Perry, Adrian Gilder and Bob Gore if you would like to discuss the implications of the latest policy statements publications for your firm. ![tracking-pixel]()
