The Prudential Regulation Authority (PRA) has published a consultation (CP15/16) on a draft supervisory statement that sets out the PRA’s expectations for the recalculation of the transitional measure on technical provisions (TMTP). The draft Supervisory Statement will be of particular interest to firms that have been granted approval to use (or are considering using) the TMTP.
Solvency II allows firms to seek permission from their supervisor for approval to use the TMTP. A recalculation is permitted, at the initiation of either the PRA or the firm: every 24 months; or, more frequently where the risk profile of the firm has changed materially.
The aim of the Supervisory Statement which is the subject of the consultation is to provide greater clarity on the PRA’s expectation for, and process applicable to, recalculations of this transitional measure and assessing a firm’s application for a recalculation on the basis of a material change in risk profile.
The Supervisory Statement sets out the PRA’s expectations in relation to the following issues:
- Recalculation every two years – The Solvency II Directive allows for a recalculation of the transitional measure every 24 months either on request by the firm or at the initiative of the Supervisory Authority. The PRA states that it will expect firms to carry out this recalculation at the end of every 24 months, starting from 1 January 2016. Accordingly, firms will be expected to recalculate the measure as at the first working day of 2018, 2020, 2022, etc.
- Earlier recalculation arising from a change in risk profile – The PRA may request that firms undertake a recalculation where the firm’s risk profile has changed since the approval was initially granted. Where a firm wishes to carry out such a recalculation it should present sufficient evidence to the PRA of a change in risk profile.
The PRA provides examples of situations that give rise to a material change in risk profile. The examples are not exhaustive and recalculations will be judged on a case-by-case basis. The examples include:
- A disposal of business priced and written before 1 January 2016;
- Material changes to the reinsurance programme for business priced and written before 1 January 2016;
- Unexpected changes to the run-off pattern of the insurance obligations in scope of the transitional measure;
- A change in the firm’s use of either the matching adjustment or the volatility adjustment; and
- Changes in operational conditions, including in interest rates or market prices or other financial assets leading to revised market risk exposures, or crystallisation of an insurance risk exposure (e.g. a change on projected mortality experience).
The PRA will examine external market-wide events and consider if such changes are likely to have created a material change in risk profile. Where the PRA believes that market conditions have changed it will invite firms to make an application for a recalculation.
The consultation closes on 13 May 2016.
