On August 11, the Prudential Regulation Authority (PRA) issued a consultation paper (CP16/14) setting out proposed changes to the PRA Rulebook in order to implement the Solvency II Directive, as amended by the Omnibus II Directive. This is the third consultation paper on Solvency II transposition and follows CP11/22 and CP12/13 published by the FSA in November 2011 and July 2012 respectively.

Overview

With Omnibus II now in force, the PRA is consulting on rules to transpose the amendments to Solvency II and implementation of those areas deferred from the previous two consultations. Omnibus II introduced a number of substantive changes, most significantly the long-term guarantees (LTG) package which comprises a set of measures to ensure that the new solvency regime is adequate for insurance products offering an element of guaranteed return. Draft rules consulted on in CP11/22 and CP12/13 therefore require amendments to reflect the LTG package along with the other provisions introduced by Omnibus II such as transitional arrangements and supervisory reporting.

CP16/14 consists of four sections:

• section 1 covers the proposed rule changes to implement changes introduced by Omnibus II including the matching adjustment, the volatility adjustment, risk management for LTG measures, transitional provisions, external credit rating assessments and requirements relating to groups;
• section 2 considers areas not covered in the previous two consultations or where the PRA’s approach has developed. In particular it includes new proposals on surplus funds following feedback on CP12/13. Other issues include insurance special measures, third country insurance branches and reporting;
• section 3 provides feedback on responses to two parts of CP12/13: the approach to Lloyd’s; and public disclosure of capital add-ons and undertaking specific parameters (USPs); and
• section 4 provides an economic cost benefit analysis of the LTG package.

Future consultations

Further changes to the PRA’s Rulebook are expected, along with supervisory statements in order to implement the new solvency regime. Areas include but are not limited to:

• the PRA’s expectations for approval processes (such as the volatility adjustment approval process, if implemented) planned for Q4 of 2014;
• further national specific reporting templates which the PRA may consider necessary;
• transitional measures to enable firms to adapt to the new regime in an appropriate and proportionate way; and
• further rules covering third country branches.

The PRA states that it will need to make amendments to the Approved Persons Regime to take into account the Solvency II measures relating to governance and the fitness and propriety of relevant individuals. The PRA notes its intention to align the approved persons regime more closely to the regime proposed for banks, but explains that the regimes will not be identical. Recognising that many groups contain both banks and insurers, the PRA states that operating two distinct regimes would be complex and inefficient for such firms and the regulator itself. A consultation on proposals to implement changes in the Approved Person Regime is expected later this year.

Finally, the PRA intends to consult on rules relating to with-profits business (possibly alongside a supervisory statement) later this year. The consultation is likely to have regard to the PRA’s objectives, Solvency II requirements and the interaction with the FCA’s conduct regime in respect of with-profits.

The deadline for responses on CP16/14 is November 7, 2014. The PRA is expected to publish a policy statement with feedback, finalised rules and supervisory statements in early 2015. The deadline for transposition of Solvency II is March 31, 2015.

View CP16/14 – Transposition of Solvency II: Part 3, 14 August 2014