Solvency II: update for insurance carriers

Brexit meant changes to the regulatory landscape for finance. We report on the PRA’s final statement on Solvency II, paving the way for the new Solvency UK. 

Since the UK’s formal exit from the European Union in 2020, the Government has sought to adapt the UK’s financial services regulatory framework to this new position outside the EU.

This includes secondary objectives for the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) to facilitate the growth and international competitiveness of the UK economy, including the financial services sector. There is also a renewed focus on accountability to reflect the regulators’ new responsibilities.

That has meant repealing certain legislation, which incorporated the Solvency II Directive in UK law, and replacing it with a new framework for regulating the insurance and reinsurance industry in the future.

In November, the PRA released its Review of Solvency II: Restatement of assimilated law (PS15/24), which provides feedback on responses received to CP5/24 – and implements the conclusions of CP12/23 (Review of Solvency II: Adapting to the UK insurance market).

Bear in mind, also, that the near-final rules which we have discussed in previous articles, took effect from 31 December 2024. The policy statement represents the PRA’s final explanation on the replacement of Solvency II assimilated law. It also further aligns the UK’s prudential regime for insurers, inherited from the EU, with the UK framework under the Financial Services and Markets Act 2023. This new regime will eventually be known as Solvency UK, once references to Solvency II are changed across all relevant policy materials.

What does it cover?

PS15/24 is detailed and wide-ranging. It’s presented as follows:

• Chapter 1 – Overview
• Chapter 2 – General Provisions
• Chapter 3 – Technical Provisions: Risk Margin
• Chapter 4 – Technical Provisions: Further requirements
• Chapter 5 – Own funds
• Chapter 6 – Standard Formula Proposal 1: Restatement of assimilated law for the areas covered
• Chapter 7 – Standard Formula Proposal 2: Notifications and further use of section 138BA permissions
• Chapter 8 – Standard Formula Proposal 4: Definition of the term ‘Ring-Fenced-Fund’
• Chapter 9 – Systems of governance
• Chapter 10 – Public Disclosure
• Chapter 11 – Insurance Special Purpose Vehicles
• Chapter 12 – Insurance Groups
• Chapter 13 – Other proposals in CP5/24
• Chapter 14 – General points raised by respondents
• Chapter 15 – Other minor amendments to PRA rules, reporting templates and instructions and policy material.

Who is the policy statement targeting?

Stakeholders are UK Solvency II firms and UK insurance undertakings. This includes current non-directive firms (those outside the scope of UK Solvency II), those intending to provide insurance services in the UK in the future and those who may wish to become non-directive firms from 31 December 2024.

To help these stakeholders, there are also several Appendices. These include a full set of mapping tables in Appendix 8, outlining the restatements of Solvency II assimilated law into the PRA framework.

Important proposals

As well as the restatements to assimilated law, CP5/24 set out two significant proposals. Firstly, the new time-limited transitional rule in the Own Funds part of the PRA Rulebook. This essentially classifies legacy paid-in preference shares issued before 18 January 2015 as irrelevant, for a period of 25 years. Secondly, the restatement of amounts denominated in EUR into GBP using the conversion rate set out in PS2/24.

Responses to CP5/24 were largely supportive. There was little additional cost or burden for firms, given that its primary function was the restatement of existing requirements. Where policy changes were proposed, respondents saw these as sensible and non-contentious. The proposals and mapping tables were seen as providing greater clarity to requirements placed on firms.

But there were requests for further guidance on the Standard Formula Proposals 1, 2 and 4, so these have been given individual chapters in the policy statement. 

Do the final rules differ from the consultation?

There are two cases where the final rules differ significantly from CP5/24. On the loss-absorbing capacity of deferred taxes (LACDT) under the SF, there is a new transitional rule. This delays the PRA permission requirements to recognise future taxable profits (FTP) in the LADCT calculation until 30 December 2025. So, it’s important to comply with this transitional rule to benefit from FTP in the LACDT calculation.

The other difference is on amendments to the proposed ring-fenced fund (RFF) definition so as to maintain the PRA’s current policy approach to RFFs. These amendments preserve the link to ‘restricted own funds’ and explicitly exclude MA portfolios from the definition.

In a raft of Solvency II prudential regulation releases, PS15/24 was also accompanied by:

• Supervisory statements on the calculation of technical provisions and treatment of pension scheme risks
• Policy statements on volatility adjustment permissions, approach to insurance own funds permissions, and approach to standard formula adaptations
• A further consultation paper on proposed changes to the UK Insurance Special Purpose Vehicles regulatory framework.

So, none of the information contained in PS15/24 should come as a huge surprise to UK insurers. But it does provide some welcome clarity as we head towards the 31 December 2024 reporting season, as well as a clear direction of travel.

For more information on Solvency II, please contact James Randall or Martin Watson.