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    PRA Finalizes Policy on Prudent Person Principle Under Solvency II

    May 27, 2020

    PRA published the policy statement PS14/20, which contains the supervisory statement SS1/20 and the feedback to responses to the consultation paper CP22/19 on expectations for investment by firms in accordance with the Prudent Person Principle, or PPP, as set out in Chapters 2 to 5 of the Investments Part of the PRA Rulebook. SS1/20 sets out the final expectations from firms in accordance with the requirements under the Prudent Person Principle under the Solvency II Directive. The final policy becomes effective from the day of its publication and is relevant to all UK Solvency II firms (including in the context of provisions relating to Solvency II groups), mutuals, third-country branches, and the Society of Lloyd’s and its managing agents.

    The requirements under the supervisory statement on Prudent Person Principle relate to the development and maintenance of an investment strategy, the management of risks arising from investments and internal governance within the investment function, and the investment in assets not admitted to trading on a regulated market and intragroup loans and participation. After considering the responses, PRA has made some changes to the draft policy. The most significant amendments involve clarification of objective standards, the extent of risk management and outsourcing expectations, and the distinction between valuation uncertainty at a point in time and uncertainty over the realizable value of an asset under stress. PRA also made a number of minor editorial amendments and typographical changes to improve the clarity and readability of the supervisory statement. The expectations set out in SS1/20 will come into effect on publication of the policy statement on May 27, 2020.

    In its supervisory statement, PRA notes that the Prudent Person Principle sets objective standards for prudent investment. These include standards in relation to portfolio diversification, the use of financial derivatives, exposure to nonregulated markets, risk concentration, asset-liability matching, and the security, quality, and profitability of the whole investment portfolio. Compliance with these standards must be assessed on an objective basis, from the standpoint of the hypothetical prudent person in similar circumstances (taking into account all relevant factors case-by-case), rather than a firm’s subjective view about the prudence of its investment standards. This does not mean that a firm’s own views about the prudence of its investments are irrelevant or would be disregarded. Indeed, firms are required to make their own judgments about the prudence of the way they manage their business for the purposes of the risk management requirements in Solvency II.

    The policy set out in PS14/20 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 EU take effect. PRA has assessed that the policy would need to be amended under the EU (Withdrawal) Act 2018 (EUWA). 

     

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    Effective Date: May 27, 2020

    Keywords: Europe, UK, Insurance, Solvency II, Prudent Person Principle, PRA Rulebook, PS14/20, SS1/20, CP22/19, Governance, Concentration Risk, Credit Risk, PRA

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