By John Hoskin, Partner and Insurance & Longevity Consulting Actuary at Barnett Waddingham
Much of PS15/24 simply removes any references to EU legislation by expanding the PRA Rulebook to (largely) replicate relevant EU materials although there are some key changes. Some of these changes may affect only a small number of firms while other elements will affect all firms – and the effort required to address them should not be understated!
Most of the changes came into effect on 31 December 2024, so if you haven’t started looking at the implications, now is the time.
Major updates introduced by PS15/24
From our perspective, the most important updates for insurers are as follows:
The Quantitative Reporting Templates (QRTs) and National Specific Templates undergo material changes into a revised, consolidated set of UK QRTs, with narrative requirements for quarterly internal model changes also introduced.
The process to apply for permissions (e.g. for use of an internal model, or matching adjustment permissions) will change. Firms will be required to use the new 's138BA form'.
Where firms were previously required to justify their approaches “to the regulator’s satisfaction”, they will now need to obtain a PRA waiver.
Firms will also need a waiver to allow them to use future profits to justify the Loss Absorbing Capacity of Deferred Taxes (LACDT).
The waiver requirement is not effective until 31 December 2025, but firms that currently use future profits in this way had to inform the PRA by 31 December 2024 if they are to maintain their approach at 31 December 2024. Furthermore, firms must ensure they have documentation that demonstrates compliance with the requirements for using future profits to justify the LACDT.
A formal definition of a ring-fenced fund has now been introduced.
In our opinion, for many firms, the greatest burden will be adapting to the revised suite of QRTs and updating all references in documents to use the appropriate UK reference. How many times does 'Directive Article X' or 'Delegated Regulation Article Y' occur in your valuation report, SFCR, ORSA and internal policies? We’re guessing more than a handful, and all of these will need to be amended.
In a surprise move not included in CP5/24 (the relevant consultation preceding PS15/24), the PRA originally amended the regulations via PS15/24 so that the 70% mass lapse stress would apply to certain unit-linked pension policies. This was signalled by the PRA as addressing a historical error rather than a change in approach, but it would have had a material impact on certain firms, with only six weeks’ notice of the change being given.
However, following industry challenge, the PRA issued a correction notice on 20 December 2024 such that the 70% mass continues only to apply to pension fund management business written as Class VII insurance. The PRA has to be applauded for admitting to having made a mistake and the correction notice certainly brought some Christmas cheer to affected firms.
Minor or obscure changes to note
There were also several minor or perhaps more obscure changes introduced in the new regulation which include:
The absolute floor of the Minimum Capital Requirement (MCR), along with other monetary amounts, will be defined in pounds sterling (rather than Euro amounts converted into sterling).
There is no longer a requirement to state the expected profit in future premiums within the SFCR.
For solo firms, quarterly reporting deadlines have changed from five weeks to 30 business days and annual deadlines have changed from 14 weeks to 70 business days. For group reporting, quarterly deadlines move from 11 weeks to 55 business days and annual deadlines from 20 weeks to 100 business days.
A transitional treatment for paid-up preference shares issued before January 2015.
Clarification that material contingent liabilities should be recognised on the Solvency II balance sheet irrespective of accounting treatment.
The approach to reporting investments in securitisations no longer needs to meet risk retention and qualitative requirements.
Within PS15/24, the PRA confirmed that, until further notice, firms should continue to refer to the solvency regime in the UK as 'Solvency II'. It expects to consult on a name change, to 'Solvency UK', in the future.
In summary, 31 December 2024 marked a new dawn for the UK’s insurance solvency regime. Longer term, the changes are likely to relieve some of the burden on firms, but additional work needs to be done to address the changes in the interim. Our advice is don’t leave it too late.
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