PRA published a policy statement (PS19/19) that contains the final supervisory statement (SS3/17) on matching adjustment under Solvency II. PS19/19 also provides feedback to the responses to the consultation paper CP7/19 that proposed amendments to PRA expectations from firms investing in equity release mortgage portfolios. The expectations set out in the updated SS3/17 will come into effect on December 31, 2019. The updated SS3/17 will supersede the version of SS3/17 that was published in December 2018 and was due to come into effect on the same date—that is, December 31, 2019. PRA also released parameters to be used in the Solvency II Effective Value Test (EVT), along with the rationale for parameters, which apply from December 31, 2019.
PS19/19 is relevant to insurance and reinsurance companies holding equity release mortgages. PRA received 12 responses to the consultation on the equity release mortgages. The responses were generally supportive in several areas, but asked for some clarifications and opposed some of the proposals. Most respondents sought additional transparency about the PRA approach to reviewing the EVT parameters. PRA has amended the draft supervisory statement after further analysis and after considering responses to the consultation. The key changes are as follows:
- Amended paragraph 3.13A to note that in some circumstances, it may be appropriate for firms to reach agreement with their supervisors on how to value certain assets other than equity release mortgages for the purpose of the EVT.
- Amended paragraph 3.20A(iv) to note that there is no expectation for firms to allow for the impact on existing lending from discretionary future lending that is not part of a pre-agreed facility.
- Amended paragraph 3.21A to give more information on inputs to the PRA analysis of real interest rates, to clarify that the movement in the minimum deferment rate of at least 0.5 percentage points applies in general but not necessarily in all circumstances and to state that PRA will publish a rationale for the parameters as a matter of course.
- Amended paragraph 3.30 to clarify PRA expectations on the scenarios that firms are expected to consider when using the EVT in stress as a validation technique
PRA has made some additional changes to the draft supervisory statement on its own initiative. These include amendments to paragraph 3.25 to clarify how PRA expects the results of EVT to be reported, along with the minor typographical corrections and clarifications to internal cross-references. The policy set out in PS19/19 has been designed in the context of the current 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 EU take effect.
If UK leaves EU with no implementation period in place, PRA has assessed that the policy would not need to be amended under the EU (Withdrawal) Act 2018. SS3/17 should be read in conjunction with SS1/19 on non-binding PRA materials related to PRA approach after UK’s withdrawal from EU.
Effective Date: December 31, 2019
Keywords: Europe, UK, Insurance, Solvency II, Equity Release Mortgage, PS 19/19, SS 3/17, CP 7/19, Matching Adjustment, Effective Value Test, PRA
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