Solvency UK Regulatory Reform (Separation of Solvency II) – Policy Key Takeaways

In late 2021, the UK regulators started the phased consultation process on the Solvency II regime. Since then, there has been several debates at different stages amongst politicians, regulators, market participants, civil servants and other key stakeholders which have caught the public eye (refer to our previous blog: From Debates to Implementation – Solvency UK and Solvency II). Taking us to present day, Sam Woods, the Chief Executive Officer of the PRA (Prudential Regulatory Authority), made a speech at an ABI event in February 2023 acknowledging ‘it’s about time to move to the implementation phase of the Solvency UK regulatory regime directed by Parliament.

Long awaited from the PRA, near-final policy on Solvency UK Regulatory Reform was released on 29 February 2024 and includes nearly 900 detailed comments. It is worth noting that the PRA has mostly maintained its initial proposals on the reform, including reporting and disclosure.

The reform is relevant to:

• Solvency UK firms
• The Society of Lloyd’s and its members and managing agents
• Insurance and reinsurance undertakings that have a UK branch (third-country branch undertakings)
• UK holding companies (collectively will be called “insurers” unless described otherwise in this article).

This article will review some of the key policy takeaways from PRA’s reform package, specifically the PS2/24 and PS3/24.

These policies touched on every aspect of legacy Solvency II regime, from capital calculation, risk management and oversight, asset and liability management to public disclosure and regulatory reporting. In addition, the PRA has released further statements, including:

• Four Statements of Policy in regard to capital add-on.
• Supervisory statement (SS1/24) which sets out internal model requirements.
• A policy statement around the circumstance and approach that the PRA will take to permit or modify certain rules under the new legislative power.
• The UK Insurance Taxonomy for reporting and disclosure (the final version is expected in coming months).

The implementation will be effective as of 31^st of December 2024.

Solvency UK Timeline

Increasing the Threshold of Solvency UK Regime Applicability

The PRA has proposed to increase the threshold for firms being regulated under the Solvency UK regime, benefiting smaller insurers. The threshold for gross written premium and technical provision level will be set at £25 million and £50 million respectively. For reinsurance, the threshold will be set at £2.5 million and £5 million respectively. Non-directive firms (NDF) can apply for voluntary application (VREQ) to operate within the Solvency UK regime, this will allow around 86 smaller sized insurers to use NDF status if they prefer.

For third country branches, the expectation is any firm under £500 million of insurance liabilities will be covered by the Financial Services Compensation Scheme (FSCS) and may consider subsidiarisation as an alternative where that is not the case. However, other “reasonable notification” to the PRA is expected regardless.

Capital

Increasing the flexibility in calculating group level SCR (Solvency Capital Requirement)

The PRA allows third country branches, where the third country is deemed equivalent or provisionally equivalent, to apply Method 2 calculation methodology for their UK group’s overseas sub-group SCR.

There is certain flexibility to allow SCR aggregation between different models at group SCR level, on a temporary basis.

SCR Calculation Inputs

Since the onshore regulations became effective, the PRA has taken measures to ensure parameters for SCR calculation under Solvency UK regime are measured under UK-specific methodologies. We have seen this being reflected in, for example, interest rates and other methodologies.

Third Country Branches

Greater flexibility has been given to third country branches, especially around the removal of requirements for them to calculate and report branch capital requirements and holding assets in the UK to cover branch SCR. However, there are other safeguards put in place, such as continuous monitoring, PRA notification, and deposited securities and cash equivalents. The arrangement with Switzerland will be dictated under the UK-Swiss Direct Insurance Agreement which was signed by the HM Government and Swiss Confederation on Direct Insurance.

Currency Redenomination

Currency will be redenominated in GBP and the minimum capital that is required by insurers is reset to a new GBP amount.

External Audit Requirements

External audit scope will be relatively unchanged. Specifically, it will continue to follow the supervisory statements, such as the UK’s Solvency External Audit of the Public Disclosure Requirement, and other related requirements set out by the regulatory bodies. SFCR will continue to be under scrutiny, for example, the public disclosures of investment asset balance sheet and Solvency Coverage Ratio.

Regulatory Reporting Package

The final policy on regulatory reporting package is by large the same as the initial proposal. The PRA has made a reduction and simplification in a number of templates, however finer details are reformed to tailor UK’s market needs. This will include introducing new asset classification, improving the reporting of credit rating and sectors, modification of rules for reporting fields, sourcing new data points, and validation rule changes.

The PRA will publish a new Bank of England authored taxonomy covering all insurance reporting submitted and aligned to final policy in due course. Insurers therefore need to start preparing the necessary system, data and possibly process change to meet implementation deadlines. For groups with operations in both the UK and EU, there will be complexity in terms of managing separate regulatory regimes and increasingly divergent reporting requirements.

PRA’s Further Review

The PRA intends to consult in Q2 2024 on remaining Solvency II requirements in the PRA rulebook and other policy and supervisory statements. The effective date will be the same as implementation of other final policies, which is 31 December 2024.

Solvency UK Reporting Phase 3: Liquidity Management

Some recent events have resulted in market stress, such as LDI/Gilts stress on UK Gilts markets and insurer’s balance sheet in 2022, as well as the sharp increase of interest rates over the past 18 months. Both examples have led to liquidity strains for some insurers and highlights the importance of liquidity management, supervision, and reporting framework. It is understood by our Clearwater SME that the PRA will consult the industry on this in 2024 to ensure any gaps identified can be addressed through a consistent and systematic approach as part of Solvency UK Phase 3 Review on Regulatory Reporting.

Clearwater plans on attending the PRA/Industry meeting and will report back any relevant changes.

Where Can Clearwater Analytics Help?

By utilising Clearwater’s solutions, firms can enhance their regulatory calculation and reporting processes.

• Data aggregation and calculation: Clearwater’s sophisticated data aggregation capabilities can streamline the process of gathering necessary investment data, making it simpler to calculate and report on Solvency regulations.
• Standardised reporting: Clearwater offers standardised reporting solutions that can help firms simplify and comply with regulatory requirements for both EU and UK reporting. This ensures consistency and accuracy in reporting, reducing operational risk.
• Scalable solutions: As Solvency reporting requirements continue to evolve, companies need a solution that can adapt and scale. Clearwater’s flexible and scalable solution can accommodate changing regulatory standards and developments, ensuring ongoing compliance.
• Expert support: Clearwater provides expert support to guide firms through the complexities of Solvency reporting. With extensive knowledge of the regulatory requirements, changes, and best practices.