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    PRA Consults on Modeling Issues Under Solvency II Internal Models

    September 27, 2019

    PRA proposed, via the consultation paper CP23/19, the expectations from firms in respect of their modeling of income-producing real estate loans within their Solvency II internal models. PRA also proposed amendments to its expectations in respect of the use of internal credit assessments for assigning fundamental spreads for illiquid, unrated assets. This consultation closes on December 27, 2019 and the proposed implementation date for the proposals is March 31, 2020.

    The finalization of these proposals would result in changes to the supervisory statement SS3/17 on matching adjustment under Solvency II. PRA also proposed to change the name of the SS3/17 to reflect the proposed expansion of its scope; the proposed name change is from "Solvency II: Matching adjustment - illiquid unrated assets and equity release mortgages" to "Solvency II: Illiquid unrated assets." CP23/19 is relevant to UK insurance and reinsurance companies holding or intending to hold income-producing real estate loans. It is also relevant to firms investing in illiquid, unrated assets within their Solvency II matching adjustment portfolios. 

    PRA is mindful that the underlying risks and modeling challenges for  income-producing real estate loans are generally similar for both insurers and banks holding such assets. Therefore, PRA has attempted to set consistent expectations between insurers and banks, where appropriate. To this end, PRA has considered the differences in the way the Solvency II regulations apply to insurers and the way models for income-producing real estate loans are supervised under the respective Capital Requirements Regulation (CRR) and Directive (CRD IV), which apply to banks. 

    The proposals set out in CP23/19 have been designed in the context of the UK and EU regulatory framework. PRA will keep the policy under review to assess whether any changes would be required due to changes in the UK regulatory framework, including those arising once any new arrangements with the EU take effect. If UK leaves EU with no implementation period in place, 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: December 27, 2019

    Effective Date: March 31, 2020 (proposed)

    Keywords: Europe, UK, Banking, Insurance, Solvency II, CRD IV, Matching Adjustment, Internal Model, CP 23/19, SS 3/17, Real Estate Loans, PRA

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