PRA Updates SS18/16 on Longevity Risk Transfers Under Solvency II
PRA published the policy statement PS1/20, which contains an updated version of the supervisory statement SS18/16 on longevity risk transfers under Solvency II and provides feedback to responses to the consultation paper CP3/19 titled "Solvency II: Longevity risk transfers – simplification of pre notification expectations." PS1/20 is relevant to UK firms that fall within the scope of the Solvency II Directive and to the Society of Lloyd’s. This policy will take effect on the publication of PS1/20. From then on, firms will be expected to notify PRA about the new longevity risk transfers according to the text of the revised SS18/16.
Following the publication of PS1/20, Chapter 2 of SS18/16 was updated to reflect the view of PRA that recognizing basis risk is an important component that should be part of the risk appetite of any firm carrying out longevity risk transfers. Additionally, Chapter 3 was updated to differentiate the PRA expectations of pre-notification for transactions that are large and/or complex, with the inclusion of a reporting template to simplify the notification process for transactions that do not fall within this category.
In CP3/19, PRA had proposed to change its expectations for pre-notification of longevity risk transfers and hedge arrangements and to update the key risks arising from longevity risk transfers. PRA had received one response to this consultation paper. The respondent was welcoming of the overall proposals and intention of the consultation. The response highlighted areas where the proposed reporting template may be unclear and expressed reservation about the basis risk being singled out for specific additional focus. After considering the response, PRA has decided to make two clarifications to the draft policy:
- Amend the headings used in the reporting template, providing more clarity on how firms should complete them, including explanatory footnotes
- Change the phrasing on how firms should include basis risk in their risk assessments of longevity risk transfers
The policy set out in PS1/20 has been designed in the context of the current UK and EU regulatory framework. PRA will keep the policy under review to assess whether any changes would be required due to changes in the UK regulatory framework, including those arising once any new arrangements with the EU take effect. In the event that the UK leaves the EU with no implementation period in place, PRA has assessed that the policy would not need to be amended under the EU (Withdrawal) Act 2018.
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Effective Date: January 09, 2020
Keywords: Europe, UK, Insurance, Solvency II, Longevity Risk Transfers, PS 1/20, CP 3/19, SS 18/16, PRA
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