Featured Product

    PRA Reviews Solvency II Effective Value Test Parameters

    September 30, 2020

    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%.


    Related Links

    Keywords: Europe, UK, Insurance, Solvency II, Effective Value Test, Minimum Deferment Rate, Volatility Parameter, Equity Release Mortgage, Matching Adjustment, PRA

    Featured Experts
    Related Articles

    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.

    January 31, 2023 WebPage Regulatory News

    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.

    January 17, 2023 WebPage Regulatory News

    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.

    January 04, 2023 WebPage Regulatory News

    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.

    January 01, 2023 WebPage Regulatory News

    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.

    December 30, 2022 WebPage Regulatory News

    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.

    December 29, 2022 WebPage Regulatory News

    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.

    December 29, 2022 WebPage Regulatory News

    HKMA Publications Address Sustainability Issues in Financial Sector

    The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.

    December 23, 2022 WebPage Regulatory News

    EBA Updates Address Basel and NPL Requirements for Banks

    The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.

    December 22, 2022 WebPage Regulatory News

    ESMA Publishes 2022 ESEF XBRL Taxonomy and Conformance Suite

    The General Board of the European Systemic Risk Board (ESRB), at its December meeting, issued an updated risk assessment via the quarterly risk dashboard and held discussions on key policy priorities to address the systemic risks in the European Union.

    December 22, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8699