The UK has made its ‘Solvency 2 Regulations 2015’, and laid them before Parliament. These Regulations will come into force on 31 March 2015 (articles 1, 2, and 38 to 58) and 1 January 2016 (everything else!).

From 31 March 2015, the Regulations will enable firms to apply to the PRA for:

  • Verification that the Solvency II Directive does not apply to them;
  • Permission to apply a matching adjustment or volatility adjustment to a risk-free interest rate term structure, in order to calculate a best estimate of a portfolio of life (re)insurance obligations;
  • Permission to take an ancillary own fund item into account when determining its own funds;
  • Approval of its assessment and classification of an own fund item;
  • Approval to use undertaking specific parameters, when it calculates the life, non-life and health underwriting risk modules of the standard formula, basic-SCR;
  • Approval of a full or partial internal model (the PRA may then require the firm to run its internal model on relevant benchmark portfolios or using assumptions based on external rather than internal data); and
  • Permission to calculate the consolidated group-SCR, and the SCR for the firms in the group, in accordance with “method 1(a)”, and/or the aggregated group-SCR in accordance with “method 2(a)”.

From 1 January 2016, the Regulations will:

  • Require the PRA and FCA, when they exercise their functions under the Solvency II Directive, to:
    • take into account, in an appropriate way, a European Economic Area dimension” (a phrase that does not seem to have been defined in the Regulations, but which can be understood in the context of, and by reference to, the Solvency II Directive itself);
    • consider the potential impact of their decisions on the stability of the financial systems of other EEA States…“; and
    • in times of exceptional movements in the financial markets, take into account the potential pro-cyclical effects of their actions“;
  • Require the PRA to review every capital add-on at least once a year;
  • Impose duties on the PRA, and gives it the powers it needs, to supervise relevant (re)insurance groups in a Solvency II consistent way; and
  • Provide for circumstances where an EEA (re)insurer has an parent in a third-country that is (or is not) Solvency II equivalent.

From 1 January 2016, the Regulations will also amend the Financial Services and Markets Act 2000 so that, if a (re)insurer breaches its MCR and it: (a) fails to submit a finance scheme in accordance with the requirements of the Solvency II Directive; or (b) submits a finance scheme, but it is “manifestly inadequate“; or (c) submits an adequate finance scheme, but fails to comply with the scheme and therefore fails to re-establish compliance with the MCR within three months; the PRA will be obliged to:

  • Close the firm to new business; and
  • Stop the firm carrying out the contracts of (re)insurance it has already written if it appears to the PRA to be necessary to do so to protect the interests of the [firm’s] policyholders“.

This second obligation seems to be less than the Solvency II Directive requires. If it is, there is a risk that the European Commission will eventually take infraction proceedings against the UK for failing fully to implement Solvency II. HM Treasury and the PRA appear to be aware of this risk, but they’re prepared to run it regardless, because it seems to be in policyholders’ best interests to do so. This is ironic, to say the least: the accusation that’s most likely to be levelled against HM Treasury and the PRA in connection with Solvency II is that they’re actually, or potentially, gold-plating it. It’s a rare thing indeed for anyone to suggest that they’re under-implemening it instead. Long may it last from the perspective of a firm that cannot meet its MCR provided, of course, that the firm is still willing and able to meet its policyholders’ claims, in full and as they fall due.

The Solvency 2 Regulations have been published alongside a Solvency II Transposition Table which is available here.

Posted by Cooley