PRA Proposes Guidance Related to Matching Adjustment under Solvency II
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.
Related Links
Comment Due Date: October 30, 2020
Keywords: Europe, UK, Insurance, Solvency II, Matching Adjustment, Technical Provisions, CP11/20, SFCR, External Audit, PRA
Featured Experts

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

Cassandra Hannibal
Life insurance actuary; risk management and economic capital specialist

Jerome Ogrodzki
Insurance asset and liabilities modeling specialist; stochastic modeling expert
Previous Article
MAS Issues Guidance on Dividend Distributions by BanksRelated Articles
BIS Surveys Centrals Banks on Issuance of Digital Currencies
BIS published a report that presents the results of a survey among more than 60 central banks in late 2020 about their engagement in central bank digital currency (CBDC) work, their motivations, and their intentions regarding CBDC issuance.
OSFI Outlines Capital Treatment for COVID-19 Loan Guarantee Program
OSFI issued a letter to federally regulated deposit-taking institutions on the capital treatment of new loans to businesses through the Highly Affected Sectors Credit Availability Program (HASCAP).
BCBS Proposes to Amend Rules on Minimum Haircut Floors for SFTs
BCBS is consulting on two technical amendments to the rules on minimum haircut floors for securities financing transactions, or SFTs.
EC Consults on Crisis Management and Deposit Insurance Framework
EC launched a targeted consultation on the review of crisis management and deposit insurance framework in EU.
EIOPA Sets Out Principles for Liquidity Stress Test for Insurers
EIOPA published a paper that sets out the methodological principles of insurance stress testing with a focus on the liquidity component.
BIS Launches Euro Green Bond Fund for Central Banks
BIS launched a EUR-denominated, open-ended fund for green bond investments by central banks and official institutions, following the launch of the first BIS green bond fund denominated in USD in September 2019.
EBA Announces Stress Test Timeline; ECB Sets Up Climate Change Center
EBA announced that it will launch the 2021 EU-wide stress test exercise, with the publication of the macroeconomic scenarios on January 29, 2021.
BoE Discontinues Form CX on Capital Expenditure and Finance Leasing
BoE announced that the reporting entities are no longer required to report Form CX after the fourth quarter of 2020 reference period, with the last collection on January 29, 2021.
PRA Updates Q&A on Branch Return, Announces End Date of COVID Facility
PRA published Version 3 of the questions and answers (Q&A) on the Branch Return form, with this version superseding the version published in October 2020.
IAIS Consults on Application Paper on Supervision of Control Functions
IAIS is consulting on a draft application paper on the supervision of control functions.