PRA, via the consultation paper CP22/19, has set out its proposed expectations for investment by firms, in accordance with the Prudent Person Principle (PPP). The Prudent Person Principle has been set out in Chapters 2 to 5 of the Investments Part of the PRA Rulebook; these chapters transpose Article 132 of the Solvency II Directive (2009/138/EC). The proposed expectations relate to a firm’s investment strategy, investment risk management, and governance system. The consultation closes on December 18, 2019.
Appendix to CP22/19 contains the draft supervisory statement that sets out in the proposed PRA expectations on management of investment risk in accordance with Rule 3.1 of the Investments Part of the PRA Rulebook. The statement includes expectations related to the following:
- Certain key elements of an insurer’s investment governance and risk management framework
- Management of asset concentration risk
- Management of holdings of non-traded assets, including management of valuation risk
- Assets backing technical provisions
- Intra-group loans and participation
PRA proposes that the expectations in the draft supervisory statement would apply from the date of final publication. The proposals are 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 (the Society) and its managing agents. In accordance with Solvency II, PRA rules require that with regard to investment risk, a firm must demonstrate that it complies with the Investments Part of the PRA Rulebook. In the scope of the Solvency II supervisory review process, the PRA supervision of firms includes reviewing and evaluating firms’ compliance with (among other matters) the PRA rules transposing the Solvency II prudent person investment requirements.
The draft supervisory statement sets out specific areas (such as asset class concentration and intra-group investment) that PRA would expect firms to focus on to comply with the Prudent Person Principle. The draft supervisory statement also identifies circumstances under which firms may be subject to greater supervisory scrutiny. The proposals set out in CP22/19 have been designed in the context of the current UK and EU regulatory framework. PRA has assessed that the proposals will be affected in the event that UK leaves EU with no implementation period in place. The draft supervisory statement should be read in conjunction with SS1/19 on the PRA approach after the withdrawal of UK from EU.
Comment Due Date: December 18, 2019
Keywords: Europe, UK, Insurance, Solvency II, Prudent Person Principle, PRA Rulebook, Governance, CP22/19, Concentration Risk, Credit Risk, PRA
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