PRA Finalizes A Policy Related to Own Funds Calculation in Solvency II
PRA published the policy statement PS7/20 that sets out the final policy on the PRA expectation that insurers would deduct, from their own funds, the maximum tax charge before the set-off of any prior-year losses generated on conversion of a restricted Tier 1 (rT1) capital. PS7/20 contains the updated supervisory statement SS3/15 (Appendix 2) on the quality of capital instruments. PS7/20 also provides feedback to responses to the consultation paper CP26/19 on adjusting for the reduction of loss absorbency where own fund instruments are taxed on conversion. PS7/20 takes effect on March 16, 2020.
The final policy presented in PS7/20 takes into account responses received to the consultation of proposals in CP26/19. PRA had received six responses to CP26/19. Respondents made requests for clarification on the tax opinion process, made technical observations on how the maximum tax impact was to be calculated, and suggested alternative means for PRA to achieve its policy objective. After considering the responses, PRA made minor changes to its proposals. PS7/20 also updates SS3/15, which covers the prohibition on redemption of instruments within five years of the date of issue; liability management and capital reduction; principal loss-absorbency mechanism for tier 1 instruments subject to limitation; and additional considerations for instruments intended to contribute to group own funds.
PS7/20 is relevant to the UK insurance firms within the scope of Solvency II, the Society of Lloyd’s, and the firms that are part of a Solvency II group that will determine and classify capital instruments under the Solvency II own funds regime, along with their advisers. The expectations introduced by PS7/20 only relate to firms that have ordinary share capital. That being the case, PRA is of the opinion that no mutuals will be impacted by this policy statement. The impact of the policy statement is the same for all firms that have ordinary shares, regardless of the form of their ultimate holding company.
The policy set out in PS7/20 has been designed in the context of the withdrawal of UK from EU and entry into the transition period, during which time the UK remains subject to European law. PRA will keep the policy under review to assess whether any changes would be required due to changes in the UK regulatory framework at the end of the transition period, including those arising once any new arrangements with the European Union take effect. PRA has assessed that the policy would not need to be amended under the EU (Withdrawal) Act 2018 or EUWA.
Related Links
Effective Date: March 16, 2020
Keywords: Europe, UK, Insurance, Solvency II, Own Funds, SS3/15, PS7/20, CP26/19, Restricted Tier 1, Regulatory Capital, PRA
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Nick Jessop
Scenario modeling expert; risk management specialist; quantitative financial modeler
Related Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.