On 12 December 2013, the PRA published a Supervisory Statement ‘Solvency II: applying EIOPA’s preparatory guidelines to PRA-authorised firms’ (the “Statement”). “The purpose of the Statement is to set out the [PRA’s] expectations of firms during the preparatory phase for Solvency II in relation to [EIOPA’s] Guidelines for the preparation of Solvency II” (the “Guidelines” are available here). The Statement will apply when the Guidelines come into effect (expected: 1 January 2014), but it’s likely to be withdrawn the day before Solvency II begins to apply to firms (expected: 1 January 2016).
EIOPA published its Preparatory Guidelines on 27 September 2013 (Chris Finney’s blog on this is here). The PRA published its draft Supervisory Statement for consultation in October 2013, and received 18 consultation responses. The introductory text to the Statement includes the PRA’s brief (and rather curious) response:
- Securities Instruments: “the PRA acknowledges the industry’s concern that EIOPA’s guideline (GL30) on securitised instruments is not sufficiently clear to enable firms to work towards preparing for compliance”; and it will tell EIOPA that the guideline is “difficult to interpret”. But that’s as far it will go: the PRA considers that firms will be able to meet the guideline’s intended outcomes, if they read it in the context of Solvency II’s risk management and prudent person principles.
- eXtensible Business Reporting Language (XBRL): Some consultation respondents queried the practicality of submitting information to the PRA using XBRL, given the risk that the templates and taxonomy may be late or incomplete. The PRA seems to accept this, and commits itself to carrying out a review of the reporting timetable in the event of delays … but (subject to that) it will still expect firms to submit data using XBLR from June 2015.
Like EIOPA’s Guidelines, the Statement is in four parts:
The System of Governance: During the preparatory phase, firms will be expected to:
1. “explain what governance changes they need to make to satisfy the guidelines, how they plan to make those changes, what progress there has been to date and any particular difficulties they face”;
2. “ensure that people with the appropriate skills and experience will be in place for the specific roles of the key function holders”;
3. review their existing policies for assessing the fitness and propriety of Board members and other key function holders, and whether it needs updating in advance of Solvency II;
4. “ensure that their [risk management] framework remains suited to their business needs across all areas, including suitable mechanisms and methodology for connecting to their ORSAs and for carrying out regular stress and scenario tests”; and
5. “consider how to manage the transition to the new [prudent person principle] regime and to assess the impact of on existing asset portfolios of Solvency II requirements. This need not necessarily mean that changes have to be made to firms’ investment strategies or portfolios but firms are encouraged to work on an incremental basis towards demonstrating that they meet the requirements of the [prudent person principle]”.
Forward-looking assessment of own risks (based on the ORSA principles): The PRA will not be prescribing the format or content of the ORSA, but it will be reviewing assessments on a proportionate basis and giving feedback where appropriate. The PRA expects (i) firms to use the preparatory period to develop the design, and trial the compilation of these assessments; and (ii) Boards to play an active role in these activities, which should then be documented for review by the PRA. Firms will be expected to undertake two assessments during the preparatory period, with the second assessment expected to be to a higher standard than the first.
Submission of Information: “The PRA considers its approach to be compatible with the PRA’s general powers to receive information under s.165” of the Financial Services and Markets Act 2000 (a strange choice of words – section 165 actually gives the PRA the power to require firms to provide information). “The PRA expects firms to make progress towards establishing systems and structures to deliver high quality information for supervisory purposes and to submit information to allow the PRA to review and evaluate the quality of the information and the progress made”. This will include using XBRL to submit quantitative information, conducting data validation checks and submitting narrative reports. EIOPA has applied a threshold for the submission of reports during the preparatory period, and in January 2014, supervisors will send notification to the groups falling within these thresholds (about 80% of the UK market). Solvency II based reporting will be expected from these firms 6 months before the implementation date. “Any national specific templates for reporting under Solvency II which are developed … by the PRA will be subject to the PRA’s usual consultation process, including ... as to whether it may be appropriate for firms to complete these templates during the preparatory period”.
Pre-application for internal models: The PRA expects firms engaged in the pre-application process to take steps to put into practice the relevant provisions of the Guidelines as part of their preparation to submit an application to use an internal model for the calculation of the SCR. Where models are developed and then become stable, the PRA expects firms to begin to demonstrate their use, and to continue to test and refine their models with the benefit of experience. However, the PRA warns that the pre-application process is not a pre-approval of the internal model, and firms should be prepared for the eventuality that their internal model may not be approved.
In an accompanying video Julian Adams, Executive Director of Insurance at the Bank of England, explains what a PRA supervisory statement is, why it is important, and what insurers need to do to be ready for implementation. In his video, Mr Adams urges firms to (1) read the Supervisory Statement in conjunction with the Guidelines; (2) stay apprised of policy materials; (3) continue to comply with existing requirements; and (4) be ready for Solvency II implementation.
The Supervisory Statement can be found here and the speech by Julian Adams is here.