Date (Arial 16pt) Title of the event – (Arial 28pt bold) Subtitle for event – (Arial 28pt) Other approvals Sid Malik Head of Department, Life and Pensions

Date (Arial 16pt)

Title of the event – (Arial 28pt bold)Subtitle for event – (Arial 28pt)

Other approvals

Sid Malik

Head of Department, Life and Pensions Risk Department

• 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

Objectives of session

2

Timeline

CP23/14 published 15

October on other approvals

applications

Firms start to apply for approvals

Approvals granted or declined by the PRA

Balance sheet reviews

Ongoing evaluation of approvals

Additional CP to be published on further approval

applications

MA pre-application opens

1 December

MA pre-application

closes 6 January

Simultaneous firm specific

information on MA in March

Two supervisory statements published in

March following consultations

Outcome provided in writing to firms

Paul Fisher’s letter on MA

PRA decision/activity

Firm activity

PRA communication to firms

• Q4 2014

• Q1 2015

• Q2 2015

• Q3 2015

• Q4 2015

• 2016

Transposition

31 March 2015

Implementation

1 January 2016

3

CP 23/14 Draft supervisory statement on Solvency II: applying for Solvency II approvals

• 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

Q4 2014



applications


applications


1 December

Paul Fisher

letter on MA

4

Q4 2014 further information on other approvals

Further information on approvals is expected to cover:

• Transitional measure for technical provisions

• Transitional measure for the risk-free rate



applications


applications


1 December

Paul Fisher

letter on MA

Q4 2014

5

Matching adjustment pre-application (1)

• 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

Q4 2014



applications


applications


1 December

Paul Fisher

letter on MA

6

• 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 pre-application

closes 6 January

Simultaneous firm specific

information on MA in March

Two supervisory statements published in

March following consultations

Q1 2015

Matching adjustment pre-application (2)

7

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

Introduction to matching adjustment

9

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

Three reasons for 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


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


• 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

Evidence too burdensome?

Q2 2015 Formal application

• 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

Firms start to submit final

applications for approval

Q2 2015

14


• 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

Q4 2014

Q1 2015

Q2 2015

Q3 2015

Q4 2015


15

• 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?

Choice of Group Solvency Calculation Method

16

• 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

Single ORSA report

Group

(UK)

Solo (UK)

Solo (UK)

Solo (France)

Single ORSA Report

Group

findings

Solo

findings

17

Conclusion and what should firms be doing now to prepare?

Preparing for Solvency II approvals

Vital to have a contingency plan in place in case approval is not received

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

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

The PRA has provided a significant amount of materials to help firms prepare submissions for Solvency II approvals

Firms have made good progress but there is still a considerable amount of work to complete in less than six months

Firms planning for MA pre-app need to reflect on feedback, consider their actions and put together a credible pre-app submission

18

Documents

Date (Arial 16pt) Title of the event – (Arial 28pt bold) Subtitle for event – (Arial 28pt) Other approvals Sid Malik Head of Department, Life and Pensions