Published on 27 May 2020
Solvency II: Prudent Person Principle – PS14/20
Overview
This Prudential Regulation Authority (PRA) Policy Statement (PS) provides feedback to responses to Consultation Paper (CP) 22/19 ‘Solvency II: Prudent Person Principle’ (page 2 of 2), which consulted on the PRA’s proposed expectations for investment by firms in accordance with the Prudent Person Principle (PPP) as set out in Chapters 2 to 5 of the Investments Part of the PRA Rulebook (which transpose Article 132 of the Solvency II Directive (2009/138/EC) (Solvency II)). It also contains the PRA’s final policy in Supervisory Statement (SS) 1/20 ‘Solvency II: Prudent Person Principle’ (see Appendix).
This PS is relevant to all UK Solvency II firms (including in the context of provisions relating to Solvency II groups), mutuals, third-country branches, the Society of Lloyd’s and its managing agents.
Summary of responses
The PRA received seven responses to the CP. Respondents generally welcomed the PRA’s proposals and made a number of observations and requests for clarification. Some proposals were challenged by respondents. The PRA’s feedback to these responses is set out in Chapter 2.
After considering the responses, the PRA has made some changes to the draft policy. The most significant amendments involve clarification of:
- objective standards;
- the extent of risk management and outsourcing expectations; and
- the distinction between valuation uncertainty at a point in time and uncertainty over the realisable value of an asset under stress.
The PRA has also made a number of minor editorial amendments and typographical changes to improve the clarity and readability of the SS.
Following supervisory conversations with firms, the PRA has also clarified in the SS that the PPP applies to reinsurance arrangements.
Implementation
The expectations set out in the attached SS1/20 will come into effect upon publication of the PS on 27 May 2020. The PRA reminds firms of its ‘Approach to Insurance Supervision’; in particular, the focus on ‘those issues and those firms that, in our judgement, pose the greatest risk to the stability of the UK financial system and, in the case of insurers, to policyholder protection’. It also refers firms to the published measures alleviating operational burdens on PRA-regulated insurers in the wake of the Covid-19 outbreak.
The policy set out in this PS has been designed in the context of the UK’s withdrawal from the European Union and entry into the transition period, during which time the UK remains subject to European law. The PRA will keep the policy under review to assess whether any changes would be required due to changes in the UK regulatory framework at the end of the transition period, including those arising once any new arrangements with the European Union take effect.
The PRA has assessed that the policy would need to be amended under the EU (Withdrawal) Act 2018 (EUWA). Please see PS5/19 ‘The Bank of England’s amendments to financial services legislation under the European Union (Withdrawal) Act 2018’ for further details.
The final SS attached to this PS should be read in conjunction with SS1/19 ‘Non-binding PRA materials: The PRA’s approach after the UK’s withdrawal from the EU’ and the joint Bank and PRA Statement of Policy (SoP) ‘Interpretation of EU Guidelines and Recommendations: Bank of England and PRA approach after the UK’s withdrawal from the EU’.
Policy Statement 14/20Appendix
Published 18 September 2019
Solvency II: Prudent Person Principle – CP22/19
Overview
In this consultation paper (CP), the Prudential Regulation Authority (PRA) sets out its proposed expectations for investment by firms in accordance with the Prudent Person Principle (PPP) as set out in Chapters 2 to 5 of the Investments Part of the PRA Rulebook (which transpose Article 132 of the Solvency II Directive (2009/138/EC) (‘Solvency II’)).
In accordance with Solvency II, the PRA rules require that ‘as regards investment risk, a firm must demonstrate that it complies with the Investments Part of the PRA Rulebook.’ In the scope of the Solvency II supervisory review process, the PRA’s supervision of firms includes reviewing and evaluating firms’ compliance with (among other matters) the PRA rules transposing the Solvency II prudent person investment requirements. The draft Supervisory Statement (SS) (see appendix) sets out the PRA’s proposed expectations of firms relating to the PPP as set out in Investments Chapters 2 to 5 of the PRA Rulebook.
The proposals are relevant to all UK Solvency II firms (including in the context of provisions relating to Solvency II groups), mutuals, third-country branches, the Society of Lloyd’s (the Society) and its managing agents (collectively, ‘firms’).
Responses and next steps
This consultation closes on Wednesday 18 December 2019. The PRA invites feedback on the proposals set out in this consultation. Please address any comments or enquiries to CP22_19@bankofengland.co.uk.
The proposals set out in this CP have been designed in the context of the current UK and EU regulatory framework. The PRA has assessed that the proposals will be affected in the event that the UK leaves the EU with no implementation period in place. The draft SS attached to this CP should be read in conjunction with SS1/19 ‘Non-binding PRA materials: The PRA’s approach after the UK’s withdrawal from the EU’.
Implementation
The PRA proposes that the expectations in the draft SS would apply from the date of final publication.