PRA Proposes Guidance Related to Matching Adjustment under Solvency II
PRA published the consultation paper CP11/20 that sets out its expectations and guidance related to auditors’ work on the matching adjustment under Solvency II. The guidance includes clarifications and enhanced transparency on the existing position regarding external audit of the matching adjustment. The consultation closes on October 30, 2020. The proposals in CP11/20 would result in changes to the supervisory statement SS11/16 on the external audit of, and responsibilities of the governing body in relation to, the public disclosure requirement with reference to Solvency II. The draft changes to SS11/16 have been proposed to take effect from December 31, 2020.
These proposals build on the existing Solvency and Financial Condition Report (SFCR) audit requirements that have been set out in the External Audit Part. They also complement the guidance that already exists in relation to the matching adjustment and audit of the SFCR. The main matching adjustment requirements can broadly be divided into those that affect the scale of the benefit calculated, those that affect eligibility, and those that affect the way that the matching adjustment is applied. The first of these, the impact of the matching adjustment on technical provisions, falls within the "relevant elements" that are taken into account as part of the external audit of the SFCR. In addition, the matching adjustment has a direct impact on technical provisions that are part of the relevant elements subject to audit. In addition to the above clarifications, PRA proposed the following new expectations of auditors in relation to the matching adjustment:
- If an auditor becomes aware, through the course of its work, that a firm may not be compliant with matching adjustment requirements, then PRA would expect the auditor to inform the firm in the first instance. Auditors may also choose to remind the firm of the requirement in Technical Provisions for the firm to inform PRA if it is not able to comply with the conditions specified and to take the necessary measures to restore compliance as soon as possible. Sharing such information with PRA may help to make best use of information known by auditors to further supervisory objectives
- If a firm materially changes its approach to calculating the matching adjustment, then PRA would usually expect this to be discussed by the firm with the supervisory team. However, if the auditor is aware that PRA has not been informed of such a change then it would be expected to pass this information to PRA. This sharing of information would allow PRA to consider whether it wishes to review the new calculation methodology or the scale of the matching adjustment. This may also help PRA to consider whether the firm continues to meet the requirements and any expectations that are set out in its supervisory statements.
The proposals would be expected to bring increased clarity and transparency to how matching adjustment should be considered as part of the external audit of SFCR. The proposals are intended to ensure clarity for SFCR users about the extent to which auditors have taken account of the matching adjustment in their audit opinions and for the auditor on how it should incorporate information about the matching adjustment into its overall SFCR opinion. CP11/20 is relevant to UK Solvency II firms (including mutuals) that have approval to make use of the matching adjustment, especially those that are subject to an audit requirement in respect of their SFCR. It is also relevant for the auditors of such organizations and the users of these SFCRs. PRA aims to clarify the requirements and expectations for auditors that form a view on the matching adjustment as part of their audit of the SFCR. PRA has assessed that the proposals would not need to be amended under the EU (Withdrawal) Act 2018.
Related Links
Comment Due Date: October 30, 2020
Keywords: Europe, UK, Insurance, Solvency II, Matching Adjustment, Technical Provisions, CP11/20, SFCR, External Audit, PRA
Featured Experts
Paul McCarney
Insurance product strategist; insurance domain expert; extensive experience developing risk assessment frameworks for insurers
Brian Robinson
Actuary; risk management specialist; corporate and capital modelling expert
Previous Article
MAS Issues Guidance on Dividend Distributions by BanksRelated Articles
BOE Sets Out Its Thinking on Regulatory Capital and Climate Risks
The Bank of England (BOE) published a working paper that aims to understand the climate-related disclosures of UK financial institutions.
OSFI Finalizes on Climate Risk Guideline, Issues Other Updates
The Office of the Superintendent of Financial Institutions (OSFI) is seeking comments, until May 31, 2023, on the draft guideline on culture and behavior risk, with final guideline expected by the end of 2023.
BIS Paper Examines Impact of Greenhouse Gas Emissions on Lending
BIS issued a paper that investigates the effect of the greenhouse gas, or GHG, emissions of firms on bank loans using bank–firm matched data of Japanese listed firms from 2006 to 2018.
HMT Mulls Alignment of Ring-Fencing and Resolution Regimes for Banks
The HM Treasury (HMT) is seeking evidence, until May 07, 2023, on practicalities of aligning the ring-fencing and the banking resolution regimes for banks.
BCBS Report Examines Impact of Basel III Framework for Banks
The Basel Committee on Banking Supervision (BCBS) published results of the Basel III monitoring exercise based on the June 30, 2022 data.
PRA Consults on Prudential Rules for "Simpler-Regime" Firms
Among the recent regulatory updates from UK authorities, a key development is the first-phase consultation, from the Prudential Regulation Authority (PRA), on simplifications to the prudential framework that would apply to the simpler-regime firms.
DNB Publishes Multiple Reporting Updates for Banks
DNB, the central bank of Netherlands, updated the list of additional reporting requests and published additional data quality checks and XBRL-Formula linkbase documents for the first quarter of 2023.
NBB Sets Out Climate Risk Expectations, Issues Reporting Updates
The National Bank of Belgium (NBB) published a communication on climate-related and environmental risks, issued an update on XBRL reporting
EBA Updates Address Securitization Standards and DGS Guidelines
The European Banking Authority (EBA) published the final draft of the regulatory technical standards that set out conditions for assessment of homogeneity of the underlying exposures in simple, transparent, and standardized (STS) securitizations.
FSB Publishes Letter to G20, Sets Out Work Priorities for 2023
The Financial Stability Board (FSB) published a letter intended for the G20 Finance Ministers and Central Bank Governors, highlighting the work that FSB will take forward under the Indian G20 Presidency in 2023
