PRA Finalizes Certain Modeling Issues for Solvency II Internal Models

SS33/17 sets out the PRA expectations in respect of firms investing in illiquid, unrated assets within their Solvency II matching adjustment portfolios. It is relevant to life insurance and reinsurance companies holding or intending to hold unrated assets (including restructured equity release mortgages (ERMs)) in a matching adjustment portfolio. In CP23/19, PRA had proposed the expectations from firms in respect of their modeling of income-producing real estate loans within their Solvency II internal models. PRA also proposed amendments to its expectations in respect of the use of internal credit assessments for assigning fundamental spreads for illiquid, unrated assets. PRA is mindful that the underlying risks and modeling challenges for income-producing real estate loans are generally similar for both insurers and banks holding such assets. Therefore, PRA has attempted to set consistent expectations between insurers and banks, where appropriate. To this end, PRA has considered the differences in the way the Solvency II regulations apply to insurers and the way models for income-producing real estate loans are supervised under the respective Capital Requirements Regulation (CRR) and Directive (CRD IV), which apply to banks. 

PRA had received six responses to CP23/19. Respondents generally welcomed the proposals but made a number of observations and requests for clarification. After considering this feedback, PRA decided to maintain the expectations set out in CP23/19, but revised the wording of the SS3/17 to clarify some of these expectations. PRA considers that these changes make the final policy clearer and do not result in any additional requirement on firms compared to the original proposals. As a result, PRA did not update the cost-benefit analysis or assessment of the impact on mutuals from CP23/19. Some minor typographical and formatting corrections have also been made and the name of SS3/17 was changed to "Solvency II: Illiquid unrated assets," in line with the proposals in CP23/19.

The policy set out in PS9/20 has been designed in the context of the withdrawal of UK from EU and its entry into the transition period, during which time the UK remains subject to European law. PRA will keep the policy under review to assess whether any changes would be required due to changes in the UK regulatory framework at the end of the transition period, including those arising once any new arrangements with EU take effect. PRA has assessed that the policy would not need to be amended under the EU (Withdrawal) Act 2018 or EUWA. 

Related Links

• PS9/20
• SS3/17 (PDF)
• CP23/19 (PDF)

Effective Date: April 02, 2020

Keywords: Europe, UK, Banking, Insurance, Solvency II, PS9/20, CP23/19, SS3/17, Real Estate Loans, CRD IV, Internal Models, Matching Adjustment, PRA