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December 10, 2018

PRA published a policy statement (PS31/18) providing feedback to the responses to a consultation paper (CP13/18) on equity release mortgages (ERMs). PS31/18 also contains the final supervisory statement (SS3/17) that sets out PRA expectations from firms investing in illiquid, unrated assets within Solvency II matching adjustment. The expectations set out in the updated SS3/17 will come into effect on December 31, 2019. PRA also published a letter from David Rule, its Executive Director of Insurance Supervision, which highlights key points related to the consultation and the responses to the consultation.

PS31/18 is relevant to insurance and reinsurance companies holding ERMs. PRA received 27 responses to the CP13/18. Chapter 2 contains the details of responses received, the PRA feedback, and the final decisions. Post consultation, PRA introduced the following key changes to the draft supervisory statement:

  • Removed proposals on the transitional measure on technical provisions, or TMTP (paragraphs 3.9A, 3.24 and 3.25)
  • Changed the effective date for the policy from December 31, 2018 to December 31, 2019
  • Clarified that the phasing-in period referred to in paragraph 3.21 of SS3/17 is available without supervisory approval to all firms and that the phasing-in period will end on December 31, 2021, being in essence three years from finalization of the policy as set out in the PS31/18, rather than three years from the new effective date of December 31, 2019
  • Removed the best view of the deferment rate parameter, as this is not required for the intended purpose of the Effective Value Test (EVT) as a diagnostic test
  • Introduced additional minor changes to the text to improve clarity

PRA also intends to consult early in 2019 on the following proposals:

  • When and how PRA will periodically review and publish updated values for the property volatility and deferment rate parameters to be used in the EVT. In particular, PRA will consult on proposals to adjust the deferment rate following a material change in real interest rates, in part with the aim of reducing the sensitivity of the EVT to changes in nominal risk-free rates
  • Where firms include assets other than ERMs in the special purpose vehicle used to restructure ERM loans and how those other assets should be allowed for in the EVT
  • The frequency with which PRA would expect firms to assess the EVT
  • Principles for how PRA would assess the approaches firms could use to model the risks associated with ERMs in their internal models against the Solvency II tests and standards, including whether and how PRA would expect firms to apply the EVT in stress, taking account of PRA’s proposals for how it would vary the deferment rate

 

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Effective Date: December 31, 2019

Keywords: Europe, UK, Insurance, Solvency II, Equity Release Mortgage, SS3/17, PS31/18, Matching Adjustment, PRA

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