PRA published a statement on the review of Solvency II Effective Value Test (EVT) parameters applicable from September 30, 2020. PRA has set the minimum deferment rate used in the EVT at 0.5% per annum while the volatility parameter to be used in the EVT remains at 13% per annum. Firms that have elected to use a minimum deferment rate of 0% to conduct the EVT prior to December 31, 2021 may continue to do so, notwithstanding the minimum deferment rate published in the statement. However, when conducting the EVT, all firms should use the published volatility parameter mentioned in the statement, regardless of the minimum deferment rate they are using.
PRA has set out the EVT in the supervisory statement (SS3/17) on illiquid unrated assets under Solvency II. PRA expects that firms will use the EVT as a diagnostic tool to monitor compliance with Solvency II requirements related to the calculation of the matching adjustment benefit where liabilities are matched by restructured equity release mortgages, recognizing the risks arising from the no negative equity guarantee feature. The minimum deferment rate parameter is an annual discount rate that applies to the current value of a property to give a price that would be agreed and settled today to take ownership of the property at some point in the future.
The minimum deferment rate in the policy statement (PS31/18) on equity release mortgages, as of December 2018, was 1% per annum, which was reduced to 0.5% per annum in September 2019 following a review of movements in long-term real interest rates. For the review in September 2020, PRA has again examined long-term real interest rates, measured using a range of swaps-based data sources, at a range of long-term tenors from 10 to 30 years. The PRA’s judgment, informed by this analysis, is to retain the minimum deferment rate used in the EVT at 0.5% per annum. PRA will keep the minimum deferment rate under review.
The volatility parameter is used in modeling the extent to which property prices could vary in the future. PRA has analyzed house price indices from Nationwide and the Office for National Statistics up to first quarter of 2020. A time series model was fitted to quarterly log-returns from each of these indices to derive values for long-term index volatility. These values were then adjusted to incorporate the effect of idiosyncratic behavior of individual properties (using data from the Land Registry). As a result of this analysis, PRA has decided to retain a value for the volatility parameter to be used in the EVT at 13%.
Keywords: Europe, UK, Insurance, Solvency II, Effective Value Test, Minimum Deferment Rate, Volatility Parameter, Equity Release Mortgage, Matching Adjustment, PRA
Previous ArticleNBB Maintains Countercyclical Capital Buffer at 0%
BIS published the September issue of the Quarterly Review, which contains special features that analyze the rapid rise in equity funding for financial technology firms, the effectiveness of policy measures in response to pandemic, and the evolution of international banking.
The Basel Committee for Banking Supervision (BCBS) met in September 2021 and reviewed climate-related financial risks, discussed impact of digitalization, and welcomed efforts by the International Financial Reporting Standards (IFRS) Foundation to develop a common set of sustainability reporting standards
The Office of the Comptroller of the Currency (OCC) issued a Cease and Desist Order against MUFG Union Bank for deficiencies in technology and operational risk governance.
The European Commission (EC) published the Delegated Regulation 2021/1527 with regard to the regulatory technical standards for the contractual recognition of write down and conversion powers.
In a response to the questions posed by a member of the European Parliament, the President Christine Lagarde highlighted the commitment of the European Central Bank (ECB) to an ambitious climate-related action plan along with a roadmap, which was published in July 2021.
The Single Resolution Board (SRB) published a Communication on the application of regulatory technical standard provisions on prior permission for reducing eligible liabilities instruments as of January 01, 2022.
The Australian Prudential Regulation Authority (APRA) published a new set of frequently asked questions (FAQs) to provide guidance to authorized deposit-taking institutions on the interpretation of APS 120, the prudential standard on securitization.
The French Prudential Control and Resolution Authority (ACPR) published the corrective version of the RUBA taxonomy Version 1.0.1, which will come into force from the decree of January 31, 2022.
The European Commission (EC) announced that Nordea Bank has signed a guarantee agreement with the European Investment Bank (EIB) Group to support the sustainable transformation of businesses in the Nordics.
The Australian Prudential Regulation Authority (APRA) published a new set of frequently asked questions (FAQs) to clarify the regulatory capital treatment of investments in the overseas deposit-taking and insurance subsidiaries.