Other approvals
Title of the event – (Arial 28pt bold)
Sid
Malikfor event – (Arial 28pt)
Subtitle
Date (Arial
Head
of16pt)
Department, Life and Pensions Risk Department
Objectives of session
•
Discussion of the timeline for Solvency II approvals between now and
implementation
•
Key information from CP23/14 Solvency II: applying for Solvency II
approvals
•
Information for matching adjustment applications
•
Feedback from the PRA’s review of the matching adjustment trial
submissions
•
Key discussion points on group approvals
•
What firms need to do now to prepare
2
Timeline
Q4
2014
Q1
2015
Q2
2015
Q3
2015
Paul Fisher’s
letter on MA
Additional CP to
be published on
further approval
applications
MA preapplication opens
1 December
MA preapplication
closes 6 January
Firms start to
apply for
approvals
2016
Implementation
1 January 2016
Transposition
31 March 2015
CP23/14
published 15
October on other
approvals
applications
Q4
2015
Approvals granted or declined by
the PRA
Two supervisory
statements
published in
March following
consultations
Ongoing evaluation
of approvals
Outcome provided in writing to
firms
Simultaneous
firm specific
information on
MA in March
Balance sheet reviews
PRA communication to firms
PRA decision/activity
Firm activity
3
CP 23/14 Draft supervisory statement on Solvency II:
applying for Solvency II approvals
Q4 2014
•
CP23/14
published 15
October on other
approvals
applications
Paul Fisher
letter on MA
Additional CP to
be published on
further approval
applications
MA preapplication opens
1 December
CP 23/14 includes information on:
•
Internal model
•
Matching adjustment
•
Undertaking specific parameters
•
Ancillary own funds
•
Exclusion of entity from scope of group
supervision
•
Single group ORSA
•
SFCR dispensation
•
Calculation method for group capital
•
Draft application checklists
•
Paul Fisher’s letter gives further information for
firms intending to apply for the matching
adjustment
4
Q4 2014 further information on other approvals
Q4 2014
CP23/14
published 15
October on other
approvals
applications
Further information on approvals is expected to
cover:
•
Transitional measure for technical provisions
•
Transitional measure for the risk-free rate
Paul Fisher
letter on MA
Additional CP to
be published on
further approval
applications
MA preapplication opens
1 December
5
Matching adjustment pre-application (1)
Q4 2014
CP23/14
published 15
October on other
approvals
applications
•
The PRA intends to conduct a pre-application
for matching adjustment
•
Firms can submit their applications between 1
December 2014 and 6 January 2015
•
Firms should submit pre-applications based on
the Directive, draft Delegated Act and draft
Implementing Technical Standards (ITS)
•
The PRA will contact firms if more information
is required but otherwise will not discuss the
application in great detail
Paul Fisher
letter on MA
Additional CP to
be published on
further approval
applications
MA preapplication opens
1 December
6
Matching adjustment pre-application (2)
Q1 2015
•
By 31 March 2015 the PRA will provide
simultaneous feedback to all firms that
submitted a matching adjustment pre-application
by the deadline of 6 January 2015
•
This feedback will be firm-specific
MA preapplication
closes 6 January
Two supervisory
statements
published in
March following
consultations
Simultaneous
firm specific
information on
MA in March
7
Introduction to matching adjustment
MA is an adjustment to the risk free discount rate used to value liabilities
under Solvency II
•
It is similar in concept to the illiquidity premium that firms take credit for
under ICAS, but there are some important marked differences
•
Firms that want to use MA need to get supervisory approval; approval can
only be given if ALL of the eligibility criteria in the Directive are met
•
The approval process will present challenges for both firms and the PRA
•
So, the PRA invited firms to take part in a ‘trial ITS submission exercise’
•
Firms put a lot of thought and effort into their submissions, as has the PRA
in its review of the submissions. The PRA has provided feedback via Paul
Fisher’s letter of 15 October
8
Three reasons for Paul Fisher’s letter
1. Provide feedback to firms from the PRA’s review of the trial submissions
2. Answer questions from firms about the PRA’s interpretation of the requirements
3. To help firms prepare high quality pre-application submissions
9
Main themes of Paul Fisher’s letter
1. Submissions focused mainly on asset and liability eligibility
Asset eligibility
• Partial recognition of an asset’s cash-flows
• Make-whole clauses
• Equity Release mortgages
Liability eligibility
• Surrender options
Other eligibility
• Least developed thinking in the liquidity plan
10
Main themes of Paul Fisher’s letter
2.
Materiality and proportionality
• Materiality and proportionality principles do not obviate eligibility
requirements; evidence required that each requirement is met
• Market standard redemption clauses – wrong to assume that as present
in vanilla assets they are automatically compatible
• Reinsurance assets are not necessarily eligible; the evidence required
should not be burdensome but has to be provided
11
Main themes of Paul Fisher’s letter
3. Evidence of future processes
• This is about plans that may not be in place by date of submission
but which need to be in place by Solvency II implementation
e.g. the processes for managing the fund and maintaining matching over
time
•
Firms need to convince the PRA not only of the end point but
demonstrate how it will be achieved
12
Evidence too burdensome?
•
MA is very technical in nature and has a large financial impact
•
Approval process is resource intensive for both industry and the PRA
•
Quality and not quantity of evidence is key
•
Solvency II has raised the bar in this area compared to ICAS
•
The eligibility criteria require firms to evidence how they will earn the
matching adjustment benefit
•
This should drive up standards of risk management
13
Q2 2015 Formal application
Q2 2015
Firms start to
submit final
applications for
approval
•
Firms will be able to submit formal applications
after transposition, from 1 April 2015.
•
Firms should consider the dependencies
between approvals now, including dependencies
for internal model, and have a contingency
plan in place in case applications are not
approved
•
Firms should not wait until Q2 2015 to develop
such plans
•
Firms are encouraged to discuss these plans
with their supervisors at the earliest
opportunity
14
Balance sheet reviews
Q4
2014
Q1
2015
Q2
2015
Q3
2015
Q4
2015
Balance sheet reviews
•
All internal model firms and some larger standard formula firms may be
asked to complete an independent review of their balance sheets.
•
The PRA has proposed a two step process to balance sheet reviews:
•
Step 1: a ‘review and recommend’ report on the firm’s
preparedness to implement the Solvency II regulatory
framework
•
Step 2: a ‘reasonable assurance’ opinion on the balance sheet,
technical provisions (excluding risk margin) and own funds that
the firm should obtain from an external audit firm
15
Choice of Group Solvency Calculation Method
•
The Directive allows the Deduction and Aggregation Method to be
applied to the calculation of the group capital requirement if the exclusive
application of the default ‘Method 1’, Consolidation, is inappropriate
•
The following issues will be considered:
•
is the related undertaking in an equivalent or provisionally equivalent
jurisdiction?
•
is there enough data available and is it of sufficient quality?
•
is the entity part of the internal model and what is the materiality of its
risks?
•
is the exclusive application of Method 1 overly burdensome?
•
are intra-group transactions substantial?
16
Single ORSA report
•
All solos conduct an ORSA report
and provide input to the group
•
The group conducts an ORSA at the
group level, then takes into account
the ORSA output from the solos
•
The group submits the single ORSA
report to all supervisory authorities –
in this case, to both the UK and
French
•
Each solo needs to be identifiable in
the report
Solo (UK)
Solo
(France)
Solo (UK)
Group
(UK)
Solo
findings
Group
findings
Single
ORSA
Report
17
Conclusion and what should firms be doing now to
prepare?
Firms have made good progress but there is still a considerable
amount of work to complete in less than six months
Read and understand the raft of material that is now available e.g.
Solvency II Directive and other text, EIOPA and PRA material to
understand which approvals would be appropriate and discuss this with
supervisors
Preparing
for Solvency
II approvals
Know the impact that a rejection of application(s) on the business, and
on other applications a firm has submitted or is intending to submit
Vital to have a contingency plan in place in case approval is not received
Firms planning for MA pre-app need to reflect on feedback, consider
their actions and put together a credible pre-app submission
The PRA has provided a significant amount of materials to help firms
prepare submissions for Solvency II approvals
18