PRA Finalizes Certain Modeling Issues for Solvency II Internal Models
PRA published a statement (PS9/20) that sets out the final policy on modeling of income-producing real estate loans and internal credit assessment for illiquid, unrated assets within the Solvency II internal models. PS9/20 contains the final supervisory statement (SS3/17) on Illiquid unrated assets and provides feedback to responses to the consultation paper CP23/19. The expectations set out in SS3/17 come into effect with the publication of the PS9/20 on April 02, 2020. PS9/20 is relevant to UK insurance and reinsurance companies holding or intending to hold income-producing real estate, or IPRE, loans. It is also relevant to firms investing in illiquid, unrated assets within their Solvency II matching adjustment portfolios.
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
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
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Adam Koursaris
Asset and liability management expert; capable modeler; risk and capital specialist
Pierre-Etienne Chabanel
Brings expertise in technology and software solutions around banking regulation, whether deployed on-premises or in the cloud.
Previous Article
DNB Revises Submission Deadlines for Reporting by Supervised BanksRelated Articles
EBA Publishes Phase 2 of Technical Package on Reporting Framework 2.10
EBA published phase 2 of the technical package on the reporting framework 2.10, providing the technical tools and specifications for implementation of EBA reporting requirements.
FASB Proposes to Delay Implementation of Insurance Contracts Standard
FASB issued a proposed Accounting Standards Update that would grant insurance companies, adversely affected by the COVID-19 pandemic, an additional year to implement the Accounting Standards Update No. 2018-12 on targeted improvements to accounting for long-duration insurance contracts, or LDTI (Topic 944).
APRA Updates Regulatory Approach to Loan Deferrals Amid COVID Crisis
APRA updated the regulatory approach for loans subject to repayment deferrals amid the COVID-19 crisis.
BCBS and FSB Set Out Recommendations for Benchmark Transition
BCBS and FSB published a report on supervisory issues associated with benchmark transition.
IAIS Sets Out Recommendations for Benchmark Transition for Insurers
IAIS published a report on supervisory issues associated with benchmark transition from an insurance perspective.
ESMA Updates Reporting Manual on European Single Electronic Format
ESMA updated the reporting manual on the European Single Electronic Format (ESEF).
EBA Calls on Resolution Authorities to Consider Impact of COVID Crisis
EBA published a statement on resolution planning in light of the COVID-19 pandemic.
BCBS Finalizes Revisions to Credit Valuation Adjustment Risk Framework
BCBS Finalizes Revisions to Credit Valuation Adjustment Risk Framework
ECB Guideline on Materiality Threshold for Credit Obligations Past Due
ECB published a guideline (2020/97), in the Official Journal of European Union, on the definition of materiality threshold for credit obligations past due for less significant institutions.
FED Temporarily Revises FR Y-14 With Respect to PPP and CARES Act
FED temporarily revised the capital assessments and stress testing reports (FR Y-14A/Q/M) to implement the changes in response to the COVID-19 pandemic.
