The PRA published a policy statement (PS14/17) and a supervisory statement (SS3/17) on matching adjustments for illiquid unrated assets and equity release mortgages under Solvency II. PS14/17 provides feedback to the responses to the consultation paper CP48/16 titled “Solvency II: matching adjustment – illiquid unrated assets and equity release mortgages.” SS3/17 sets out the PRA’s expectations in respect of firms investing in illiquid, unrated assets within their Solvency II matching adjustment portfolios.
The policy statement and the supervisory statement are relevant to life insurance and reinsurance companies holding or intending to hold unrated assets in matching adjustment portfolio. Chapter 2 of SS3/17 clarifies the PRA’s expectations where internal credit assessments are used as part of determining the fundamental spread, including expectations that are specific to restructured assets (including equity release mortgages). Chapter 3 sets out principles to be applied when assessing the risks from guarantees embedded within equity release mortgages, for verifying the appropriateness of the fundamental spread for restructured equity release mortgage notes.
The PRA had received twelve responses to CP48/16, which were focused on the impact on equity release mortgages. In CP48/16, the PRA had proposed an approach and standards for assigning a rating to any eligible unrated asset for the purpose of determining the credit quality step that should apply in the matching adjustment calculation. It had also proposed the principles to which the PRA expects firms to adhere in valuing their holdings of equity release mortgages. The PRA made changes to the draft supervisory statement after considering responses to the consultation and further analysis. Details of the changes are included in Chapter 2 of SS3/17.
Keywords: Europe, PRA, United Kingdom, Solvency II, Insurance, Matching Adjustment
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