Technical Information and Relevant Currencies
On 30 June, the PRA published "Consultation Paper CP5/20 Solvency II technical information: The PRA’s proposed approach to the publication at the end of the transition period". Non-Directive firms are out of the scope of this CP.
Following the UK’s withdrawal from the EU at 11pm on Friday 31 January 2020, the UK entered the transition period (TP) agreed as part of the Withdrawal Agreement between the UK and EU. Until the end of the TP, which is expected to be at 11pm on Thursday 31 December 2020, UK insurers are required to use Solvency II technical information (TI) published by EIOPA to calculate their regulatory technical provisions under the Solvency II Directive. From the end of the TP, the PRA will be required to publish TI for each "relevant currency" - referred to as "PRA relevant currencies".
The proposals cover the following:
Based on year end 2018 data, the PRA have provided an illustrative list of relevant currencies - these are GBP UK, EUR Eurozone, USD USA, AUD Australia, CAD Canada, JPY Japan and SEK Sweden. Where UK insurers have technical provisions in a particular currency for which the PRA does not publish TI, the PRA proposes that these undertakings should approach their supervisors to discuss suitable TI to use.
The PRA’s published TI would be derived by adopting the same technical methodologies embodied within EIOPA’s TI as at the end of the transitional period, with some limited exceptions.
TI for each PRA relevant currency comprises:
- the relevant risk-free interest rate term structure used to calculate the best estimate, without any matching adjustment (MA) or volatility adjustment (VA);
- for each relevant duration, credit quality, and asset class, a fundamental spread for the calculation of the MA to the relevant risk-free interest rate term structure used to calculate the best estimate for a portfolio of life insurance or reinsurance obligations; and
- for each relevant national insurance market, a VA to the relevant risk-free interest rate term structure used to calculate the best estimate.
The PRA plan to publish the TI on the PRA website on the 8th working day of each month for all PRA relevant currencies. This would be in a similar format to EIOPA’s TI.
The exceptions in approach relate to the reference portfolio used to calculate the volatility adjustment. The PRA does not expect its proposal to have a material impact on UK firms’ regulatory balance sheets.
Sally Butters, Consultant Actuary, comments: “This paper sets out the PRA’s proposals for addressing some of the deficiencies that have been identified when the UK leaves the EU and existing EU law is transferred to UK law. OAC’s understanding is that the Solvency II Regulations will apply for the year end 2020 valuations and therefore there will be no immediate impact on UK firms.”
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