PRA Further Clarifies Position on IFRS9 and Loan Covenant Requirements
PRA has issued a follow-up note for PRA-regulated insurers with regard to the PRA letter on its position regarding IFRS 9, capital requirements for firms, and loan covenants. On March 26, 2020, Sam Woods of PRA issued this letter to Chief Executive Officers of UK banks. Since then, some insurance firms have sought clarification on how the points in that letter should be interpreted in context of their internal assessments of loan creditworthiness and treatment of unrated assets.
The note highlights that the expectations of PRA for insurers' use of unrated assets have been set out in the supervisory statement (SS3/17) on Illiquid, unrated assets under Solvency II, which was updated on April 02, 2020. Paragraphs 2.8A to 2.8L of the SS3/17 set out relevant expectations regarding risk identification and application of judgments and methodologies. The accompanying policy statement (PS9/20) on income-producing real estate loans and internal credit assessments for illiquid, unrated assets further refers to the published measures to alleviate operational burdens arising due to the COVID-19 outbreak. In this context, while Sam Woods’ letter does not address insurers’ internal credit ratings, some points in the letter can be considered to have applicability beyond the insurers that are using IFRS 9 to account for financial instruments.
Insurers are advised to read the letter in its entirety. Paragraph 5 of the Annex to the letter includes further examples of considerations that insurance firms may find helpful when forming their judgments on the impact of COVID-19 outbreak on their internal credit assessments. Similarly, regarding breaches to loan covenants arising directly as a result of COVID-19, the letter further noted that in the current uncertain environment such breaches may not necessarily be reflective of long-term credit risk. Nevertheless, it should be noted that firms will need to use their judgment to determine which covenant breaches do reflect increased credit risk and which do not. As set out in the letter, it remains important that firms’ assessments of covenant breaches fully take into account the differences between normal covenant breaches and those that might occur directly because of the COVID-19 pandemic.
Related Links
Kewywords: Europe, UK, Insurance, COVID-19, IFRS 9, Capital Requirements, Solvency II, Credit Risk, Loan Convenant, Credit Ratings, Financial Instruments, PRA
Featured Experts

Metin Epözdemir
Metin Epözdemir helps European and African banks with design and implementation of credit risk, stress testing, capital management, and credit loss accounting solutions.

Adam Koursaris
Asset and liability management expert; capable modeler; risk and capital specialist

Masha Muzyka
CECL, IFRS 9, and IFRS 17 expert; credit risk and insurance risk specialist; strategic planning and credit analytics solutions consultant
Previous Article
HKMA Publishes Results of Survey on Interest Rate Benchmark ReformsRelated Articles
EU Agencies Update LCR Rule and Macro-Prudential Policy Recommendation
The European Commission (EC) published the Delegated Regulation 2022/786 with regard to the liquidity coverage requirements for credit institutions under the Capital Requirements Regulation (CRR).
EBA Publishes Regulatory Standards to Identify Shadow Banking Entities
The European Banking Authority (EBA) published the final draft regulatory technical standards specifying the criteria to identify shadow banking entities for the purposes of reporting large exposures.
OSFI Discusses Benchmark Rate Transition, Sets Out Work Priorities
The Office of the Superintendent of Financial Institutions (OSFI) published the strategic plan for 2022-2025 and the departmental plan for 2022-23.
EBA Proposes Standards to Support Secondary NPL Markets
The European Banking Authority (EBA) is consulting, until August 31, 2022, on the draft implementing technical standards specifying requirements for the information that sellers of non-performing loans (NPLs) shall provide to prospective buyers.
EU Confirms Agreement on Rules on Cybersecurity and Banking Resolution
The European Council and the Parliament reached an agreement on the revised Directive on security of network and information systems (NIS2 Directive).
EBA Issues Standards for Crowdfunding Service Providers Under ECSPR
The European Banking Authority (EBA) published the final draft regulatory technical standards specifying information that crowdfunding service providers shall provide to investors on the calculation of credit scores and prices of crowdfunding offers.
EU to Amend Credit Risk Adjustment Rules; ESAs Submit Queries on SFDR
The European Council published a draft Commission Delegated Regulation to amend the regulatory technical standards on specification of the calculation of specific and general credit risk adjustments.
EU Confirms Agreement on Rules on Cybersecurity and Banking Resolution
The European Securities and Markets Authority (ESMA) published a paper that examines the systemic risk posed by increasing use of cloud services, along with the potential policy options to mitigate this risk.
MAS Amends Notice 635 and Issues Second Proposal on Green Taxonomy
The Monetary Authority of Singapore (MAS) published amendments to Notice 635, which sets out requirements that a bank in Singapore has to comply with when granting an unsecured non-card credit facility to individuals.
EC Consults on PSD2 and Open Finance; EU Reaches Agreement on DORA
The European Commission (EC) published a public consultation on the review of revised payment services directive (PSD2) and open finance.