HM Treasury has also issued a short consultation intended to complete the consultation process on how the government should implement the Solvency II Directive. The Treasury published a consultation in November 2011 but has been unable to proceed before now due to the delay in adopting the Omnibus II Directive.
The consultation seeks views on two policy issues related to Solvency II transposition:
The use by undertakings of the volatility adjustment and whether it should be subject to prior approval by the PRA
The volatility adjustment is one of the long-term guarantees (LTG) package measures, introduced to cover those insurance products which would not be eligible for the matching adjustment. The detail on how the volatility adjustment is to be calculated and applied will be set out in the implementing measures. The volatility adjustment raises prudential issues, however, and it is the government’s view that the measure may be less appropriate for liquid or volatile liability types, such as products with significant surrender risk meaning a firm could be undercapitalised relative to the true risks it faces. To help avoid inappropriate use of the volatility adjustment, a safeguard was introduced which would allow the PRA to approve the use of the volatility adjustment on a firm by firm basis.
The government is seeking comments on whether the use of the volatility adjustment should be automatic, or whether approval from the PRA should be required before a firm could apply the volatility adjustment. Should the government decide that PRA approval is required, decisions on approval will be communicated within 6 months of application and the process would be transparent, proportionate and timely.
The approach to be adopted in removing business permissions where an undertaking fails to meet the Minimum Capital Requirement
The second issue the government is consulting on arises out of the obligation on the PRA to withdraw authorisation where an undertaking does not comply with the Minimum Capital Requirement. In the UK, the problem of insurance firms in financial difficulties has often been addressed by run-off over a course of time. The government considers that Article 144 of the Solvency II Directive would require a firm to be closed to new business but would permit the firm, where appropriate, to continue to manage existing insurance contracts, subject to on-going supervision by the PRA. Respondents are asked whether they agree with the government’s approach to the de-authorisation of insurance firms and, alternatively, what the consequences would be, particularly for policyholders, if firms were not permitted to enter into run-off.
The consultation closes on September 19, 2014. HM Treasury will issue a further consultation later this year to include feedback on this and the previous Solvency II consultation, an updated impact assessment and final statutory instrument to be submitted for Parliamentary approval.