PRA Finalizes A Policy Related to Own Funds Calculation in Solvency II
PRA published the policy statement PS7/20 that sets out the final policy on the PRA expectation that insurers would deduct, from their own funds, the maximum tax charge before the set-off of any prior-year losses generated on conversion of a restricted Tier 1 (rT1) capital. PS7/20 contains the updated supervisory statement SS3/15 (Appendix 2) on the quality of capital instruments. PS7/20 also provides feedback to responses to the consultation paper CP26/19 on adjusting for the reduction of loss absorbency where own fund instruments are taxed on conversion. PS7/20 takes effect on March 16, 2020.
The final policy presented in PS7/20 takes into account responses received to the consultation of proposals in CP26/19. PRA had received six responses to CP26/19. Respondents made requests for clarification on the tax opinion process, made technical observations on how the maximum tax impact was to be calculated, and suggested alternative means for PRA to achieve its policy objective. After considering the responses, PRA made minor changes to its proposals. PS7/20 also updates SS3/15, which covers the prohibition on redemption of instruments within five years of the date of issue; liability management and capital reduction; principal loss-absorbency mechanism for tier 1 instruments subject to limitation; and additional considerations for instruments intended to contribute to group own funds.
PS7/20 is relevant to the UK insurance firms within the scope of Solvency II, the Society of Lloyd’s, and the firms that are part of a Solvency II group that will determine and classify capital instruments under the Solvency II own funds regime, along with their advisers. The expectations introduced by PS7/20 only relate to firms that have ordinary share capital. That being the case, PRA is of the opinion that no mutuals will be impacted by this policy statement. The impact of the policy statement is the same for all firms that have ordinary shares, regardless of the form of their ultimate holding company.
The policy set out in PS7/20 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 European Union take effect. PRA has assessed that the policy would not need to be amended under the EU (Withdrawal) Act 2018 or EUWA.
Related Links
Effective Date: March 16, 2020
Keywords: Europe, UK, Insurance, Solvency II, Own Funds, SS3/15, PS7/20, CP26/19, Restricted Tier 1, Regulatory Capital, PRA
Featured Experts

María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer

Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.

Cassandra Hannibal
Life insurance actuary; risk management and economic capital specialist
Previous Article
IMF Outlines Policy Steps to Address the Impact of COVID-19Related Articles
NGFS Seeks Public Feedback on Climate Risk Assessment Scenarios
The Network for Greening the Financial System (NGFS) launched its first user feedback survey on climate scenarios, with the feedback period ending on February 27, 2023.
EBA Launches Stress Tests for Banks, Issues Other Updates
The European Banking Authority (EBA) launched the 2023 European Union (EU)-wide stress test, published annual reports on minimum requirement for own funds and eligible liabilities (MREL) and high earners with data as of December 2021.
EBA Proposes Standards for IRRBB Reporting Under Basel Framework
The European Banking Authority (EBA) proposed implementing technical standards on the interest rate risk in the banking book (IRRBB) reporting requirements, with the comment period ending on May 02, 2023.
FED Issues Further Details on Pilot Climate Scenario Analysis Exercise
The U.S. Federal Reserve Board (FED) set out details of the pilot climate scenario analysis exercise to be conducted among the six largest U.S. bank holding companies.
US Agencies Issue Several Regulatory and Reporting Updates
The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.
ECB Issues Multiple Reports and Regulatory Updates for Banks
The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.
HKMA Keeps List of D-SIBs Unchanged, Makes Other Announcements
The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.
EU Issues FAQs on Taxonomy Regulation, Rules Under CRD, FICOD and SFDR
The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.
CBIRC Revises Measures on Corporate Governance Supervision
The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.
HKMA Publications Address Sustainability Issues in Financial Sector
The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.