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    PRA Proposes Guidance Related to Matching Adjustment under Solvency II

    July 30, 2020

    PRA published the consultation paper CP11/20 that sets out its expectations and guidance related to auditors’ work on the matching adjustment under Solvency II. The guidance includes clarifications and enhanced transparency on the existing position regarding external audit of the matching adjustment. The consultation closes on October 30, 2020. The proposals in CP11/20 would result in changes to the supervisory statement SS11/16 on the external audit of, and responsibilities of the governing body in relation to, the public disclosure requirement with reference to Solvency II. The draft changes to SS11/16 have been proposed to take effect from December 31, 2020.

    These proposals build on the existing Solvency and Financial Condition Report (SFCR) audit requirements that have been set out in the External Audit Part. They also complement the guidance that already exists in relation to the matching adjustment and audit of the SFCR. The main matching adjustment requirements can broadly be divided into those that affect the scale of the benefit calculated, those that affect eligibility, and those that affect the way that the matching adjustment is applied. The first of these, the impact of the matching adjustment on technical provisions, falls within the "relevant elements" that are taken into account as part of the external audit of the SFCR. In addition, the matching adjustment has a direct impact on technical provisions that are part of the relevant elements subject to audit. In addition to the above clarifications, PRA proposed the following new expectations of auditors in relation to the matching adjustment:

    • If an auditor becomes aware, through the course of its work, that a firm may not be compliant with matching adjustment requirements, then PRA would expect the auditor to inform the firm in the first instance. Auditors may also choose to remind the firm of the requirement in Technical Provisions for the firm to inform PRA if it is not able to comply with the conditions specified and to take the necessary measures to restore compliance as soon as possible. Sharing such information with PRA may help to make best use of information known by auditors to further supervisory objectives
    • If a firm materially changes its approach to calculating the matching adjustment, then PRA would usually expect this to be discussed by the firm with the supervisory team. However, if the auditor is aware that PRA has not been informed of such a change then it would be expected to pass this information to PRA. This sharing of information would allow PRA to consider whether it wishes to review the new calculation methodology or the scale of the matching adjustment. This may also help PRA to consider whether the firm continues to meet the requirements and any expectations that are set out in its supervisory statements.

    The proposals would be expected to bring increased clarity and transparency to how matching adjustment should be considered as part of the external audit of SFCR. The proposals are intended to ensure clarity for SFCR users about the extent to which auditors have taken account of the matching adjustment in their audit opinions and for the auditor on how it should incorporate information about the matching adjustment into its overall SFCR opinion. CP11/20 is relevant to UK Solvency II firms (including mutuals) that have approval to make use of the matching adjustment, especially those that are subject to an audit requirement in respect of their SFCR. It is also relevant for the auditors of such organizations and the users of these SFCRs. PRA aims to clarify the requirements and expectations for auditors that form a view on the matching adjustment as part of their audit of the SFCR. PRA has assessed that the proposals would not need to be amended under the EU (Withdrawal) Act 2018.

     

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    Comment Due Date: October 30, 2020

    Keywords: Europe, UK, Insurance, Solvency II, Matching Adjustment, Technical Provisions, CP11/20, SFCR, External Audit, PRA

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