The Prudential Regulation Authority (PRA) has published its statement of policy (SoP) outlining the regulator’s procedure for granting permissions for the use of Solvency II internal models (IMs) to calculate a firm’s Solvency Capital Requirement (SCR). The SoP also sets out the PRA’s supervisory approach to the ongoing review and evaluation of compliance with the requirements relating to such permissions.
In the 31-page document seen by Insurance Business, the regulator said: “When granting these permissions, the PRA would exercise its powers under s.138BA of the Financial Services and Markets Act 2000 to grant a permission that modifies the Solvency Capital Requirement – Internal Models part of the PRA Rulebook.
“Similarly, for the purposes of a major model change, the PRA would exercise the same power to vary an existing permission allowing a firm to calculate its SCR using a full or partial IM. The PRA may also, on its own initiative, exercise its power under s.138BA to vary an existing permission in order to waive or modify its rules on internal models that apply to a firm that has permission to use an IM to calculate its SCR.
“This SoP is relevant to all UK Solvency II firms, the Society of Lloyd’s, and its members and managing agents, referred to collectively as ‘firms’. It is most relevant to firms that have permission to use an IM to calculate their SCR. It will also be of interest to UK Solvency II firms seeking permission to use an IM and to UK Solvency II firms that are part of groups within the European Economic Area (EEA) or non-EEA groups with a group IM.”
Meanwhile, as part of the PRA’s policy statement (PS)2/24 – Review of Solvency II: Adapting to the UK insurance market, the regulator also published its SoP on capital add-ons. The implementation date for the SoPs is December 31, 2024.
The regulator noted: “While this PS contains the PRA’s final policy in relation to the proposed reforms in consultation paper (CP)12/23, the related rules and policy materials are considered near-final due to the potential for further changes resulting from the PRA’s phased plan for consulting on Solvency II reforms and the transfer of the remaining firm-facing Solvency II requirements from assimilated law (previously known as retained EU law) into the PRA Rulebook and other policy materials (the PRA policy framework)…
“The near-final rules and policy materials in this PS will be finalised as part of the transfer of the remaining firm-facing Solvency II requirements into the PRA policy framework later this year.”
Commenting on the development, KPMG UK insurance partner and former director general of the Association of British Insurers Huw Evans said in a statement on Wednesday: “Today’s publications by the PRA clarify important details relating to how the internal model and capital add-on regimes will work in practice. All-important final rules on reporting and the matching adjustment regime are still outstanding.
“The changes to the capital add-on regime are modest but intended to be helpful. Insurers will welcome the PRA’s commitment that it does not intend to use capital add-ons to structurally increase the capital held in the market.
“Insurers will certainly welcome a new six-month grace period to integrate internal models following an acquisition. This is a sensible adjustment to the original proposal to require alignment on day one following completion of a deal.
“Increasing the threshold for companies to enter the Solvency UK regime from £15 million premium income to £25 million is also welcome and should contribute to making the UK a more attractive place to set up an insurance business.”
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