SS38/15 – Solvency II: consistency of UK generally accepted accounting principles with the Solvency II Directive

1.1

This supervisory statement is addressed to all insurance firms within the scope of Solvency II reporting under UK generally accepted accounting principles (GAAP) rather than using international accounting standards (IFRS).

1.2

The statement was subject to public consultation,¹ and reflects feedback received by the PRA. Some comments suggested altering wording and these suggestions have been accepted where clarity would be improved. There is no change in policy.

1.3

The PRA is publishing this statement to expand on its general approach as set out in its Insurance Approach document.² By clearly and consistently explaining its views in this area, the PRA seeks to advance its statutory objectives of ensuring the safety and soundness of the firms it regulates, and contributing to securing an appropriate degree of protection for policyholders.

1.4

The PRA has considered matters to which it is required to have regard, and it considers that this statement is compatible with the Regulatory Principles and relevant provisions of the Legislative and Regulatory Reform Act 2006. This statement is not expected to have any direct or indirect discriminatory impact under existing UK law.

1.5

Article 9 of the Solvency II Regulation (EU) 2015/35 (‘the Solvency II Regulation’) contains a derogation (‘the derogation’) for firms within the scope of Solvency II for which annual financial statements and consolidated financial statements (if any) are prepared under UK generally accepted accounting principles. This allows firms the option of recognising and valuing assets and liabilities under UK GAAP for Solvency II purposes if:

• UK GAAP is consistent with Article 75 of the Solvency II Directive;
• the valuation method is proportionate to the nature, scale, and complexity inherent in the business of the undertaking; and
• the process of valuing the assets and liabilities using international accounting standards would impose costs which are disproportionate with respect to the total administrative expenses of the firm.

1.6

The PRA expects that where UK GAAP and IFRS are consistent, in that they apply the same requirements as regards recognition and valuation, the derogation will not apply. In such cases firms will not incur any costs to use IFRS recognition and valuation criteria, since they will already be applying what IFRS would require when reporting under UK GAAP.

1.7

The PRA expects any firm wishing to take advantage of the derogation to provide supporting evidence regarding the second and third conditions set out in paragraph 1.5 above to its supervisor before so doing. However, rather than each firm having individually to consider and establish whether its proposed accounting treatment is consistent with Article 75 of the Solvency II Directive, and in order to promote consistency in application of the derogation, this supervisory statement lists those UK GAAP treatments which the PRA considers to be consistent with Article 75 of the Solvency II Directive, in full or in part.

1.8

The derogation relates to paragraphs 1 and 2 of Article 9 of the Solvency II Regulation, but does not affect the application of Articles 10 to 16 except to the extent that these provisions refer back to Article 9 regarding recognition or valuation. Therefore in addition to Article 9:

1.9

Any firm that relies on the derogation will still be expected to apply in full the remaining valuation requirements of the Solvency II Regulation, regardless of whether the UK GAAP provisions are consistent with Article 75 of the Solvency II Directive.

1.10

For insurance firms, most of the differences between UK GAAP and international accounting standards relate only to the level of detail which must be disclosed. Since the derogation addresses recognition and valuation of assets and liabilities rather than their disclosure, it is expected to have a limited effect in the United Kingdom.

2.1

The PRA has analysed the financial reporting standards (FRS) to consider whether these are consistent with Article 75 of the Solvency II Directive and therefore within the possible scope of the derogation. Its conclusions are set out in the table below.

2.2

Where a firm is discussing with its usual supervisor contact whether the conditions for an application of the derogation apply, the PRA expects that firm to apply this supervisory statement’s conclusions on FRS consistency with Article 75 of the Solvency II Directive as regards which provisions of UK GAAP it may use.