On 25 November 2016, the PRA published an update to supervisory statement SS2/14: Solvency II: recognition of deferred tax (the November update). It was updated to reflect changes consulted on in CP20/16 Solvency II: consolidation of Directors’ letters.

SS2/14 was originally published in April 2014 following CP3/14: Solvency II: recognition of deferred tax. It sets out the PRA’s expectations of firms in relation to the recognition of deferred tax in Solvency II and is relevant to all Solvency II firms whether life or general, standard formula or internal model.

The November update made the following changes to include information contained in the PRA Directors’ letter of 13 March 2015. It:

  • Provides information on the legislation and other documents that should be considered in conjunction with the information contained in SS2/14;
  • Sets out the general purpose of this statement and how this enables the PRA to meet its statutory objectives. Text relating to the pre-Solvency II environment has been deleted as it is no longer relevant;
  • Emphasises the areas and PRA expectations within the key messages that firms should note;
  • Provides a new paragraph which clarifies that the expectations in this supervisory statement apply equally to standard formula or internal model firms, except in regard to the ability to apply group relief;
  • A new paragraph has been added covering the PRA’s expectations of firms with regard to their capital resources in a post-shock environment;
  • A new paragraph has been added setting out the expectation that where a firm calculates its Solvency Capital Requirements (SCR) using an internal model and does not routinely calculate the tax effect of the shock loss across the whole probability distribution, it will document clearly how it identifies which data points to exclude;
  • Wording has been updated to clarify that the ‘margin’ that would lead to double counting if included as a source of taxable profit is ‘the risk margin’;
  • Sets out the importance of demonstrating the credibility of assumptions for assets returns after the SCR stress; and
  • Throughout the document, references to the Directive have been updated with references to the PRA Rulebook, where appropriate.

View: PRA publishes update to SS2/14 ‘Solvency II: recognition of deferred tax’