CP12/23 - Review of Solvency II: Adapting to the UK insurance market

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Responses are requested by Friday 1 September 2023 for the proposals in Chapters 2 to 10, and by Monday 31 July 2023 for the proposals in Chapter 11. For further information, please see the ‘Responses and next steps’ section in Chapter 1 - Overview.

The PRA prefers all responses to be sent by email to: CP12_23@bankofengland.co.uk.

Alternatively, please address any comments or enquiries to:

Insurance Policy Division
Prudential Policy Directorate
Prudential Regulation Authority
20 Moorgate
London
EC2R 6DA

1. Overview

1.1 This consultation paper (CP) marks a significant milestone towards adapting the Solvency II framework to the UK insurance market. It sets out the Prudential Regulation Authority’s (PRA) proposals to deliver significant reforms for Solvency II, which the PRA considers will lead to a more competitive and dynamic insurance sector in the UK, while maintaining high standards of policyholder protection.^{footnote [1]}

1.2 This consultation paper should be read in conjunction with the Government’s response to its Solvency II review consultation. That response outlined the areas of the reform package that will be delivered through a combination of changes in PRA rules and legislation to achieve the objectives for the Solvency II review: a competitive insurance sector; investment to support growth; and policyholder protection. The PRA has worked closely with HM Treasury (HMT) on the review.

1.3 Using the new powers proposed in the Financial Services and Markets Bill 2022 (FSM Bill),^{footnote [2]footnote [3]} the Government has confirmed that it plans to legislate directly to implement certain parts of the Solvency II reform package. For all other reforms, it also intends to legislate to enable the PRA to make the necessary changes to rules and other policy material, including by repealing the relevant areas of retained EU law. This approach is set out in HMT’s draft Statutory Instruments (SIs) on reforms to Solvency II. The material in this CP has been prepared on the assumption that the Government legislates in line with the approach that it has indicated, including by giving the PRA the necessary powers to implement these proposals.

1.4 This CP sets out the PRA’s proposals to deliver reforms in all of the areas of the Solvency II review where the Government has not chosen to legislate directly, and which are therefore for the PRA to take forward. They focus on measures to simplify some Solvency II requirements, allow improved flexibility for others, and encourage entry into the UK insurance market. The PRA considers that the proposals will allow a meaningful reduction to the existing administrative and reporting requirements for the UK insurance sector to decrease costs and complexity, while maintaining strong prudential standards. The PRA judges that the reforms in this CP will advance its primary objectives of safety and soundness and policyholder protection while also advancing its secondary competition objective and its new secondary competitiveness and growth objective arising out of the FSM Bill. The main areas of reform and the key benefits that the PRA considers would arise from them are set out below.

Chart 1: Impact of the proposals in this CP

1.6 The PRA’s reforms set out in this CP are intended to maintain a high level of prudential standards for the insurance sector, while improving the proportionality of a number of aspects of the current regime. They are also intended to allow more scope for firms and the PRA to apply judgement to ensure appropriate prudential outcomes are achieved in a proportionate manner. The PRA remains committed to the principles underlying the existing Solvency II regime, which have underpinned and well served the UK’s approach to insurance regulation since before that regime was developed within the EU. These principles are also consistent with the developing international capital standards for insurers: regulating firms as going concerns; the use of market-adjusted valuation for insurance liabilities; robust standards for capital resources; a ‘1-in-200’ 1-year value at risk measure for capital requirements; and the application of judgement-based supervision. The reforms represent priority areas where the PRA can use its new powers to tailor aspects of the regime to reflect the circumstances of the UK market where these were previously fixed in retained EU law.

Scope

1.7 This CP is relevant to UK Solvency II firms, the Society of Lloyd’s and its members and managing agents, insurance and reinsurance undertakings that have a UK branch (third-country branch undertakings), firms within the PRA’s Temporary Permissions Regime (TPR) for (re)insurers, and UK holding companies. This CP will refer to all of these collectively as ‘insurers’ or ‘firms’ unless otherwise specified.

1.8 The CP will also be of interest to non-Directive firms and anyone intending to provide insurance services operating in, or providing services into, the UK, in so far as the proposals relate to the thresholds for Solvency II to apply and a new mobilisation regime for prospective insurers intending to enter the UK insurance sector.

The PRA’s overall consultation plans for the Solvency II review

1.9 The PRA intends to consult on its approach to adapting Solvency II for the UK market in two tranches:

• this first CP, which sets out the majority of the PRA’s reform proposals, focuses on simplification, improving flexibility and encouraging entry – to achieve a meaningful reduction to the existing administrative and reporting requirements for UK insurance firms,^{footnote [5]} which will reduce costs for firms;
• a second CP planned for September 2023, which will cover reform proposals for life insurers relating to investment flexibility and the matching adjustment (MA), including to eligibility rules, new attestation requirements and certain changes to its calculation, and reporting.

1.10 The overall scope of reform areas covered by these two tranches is consistent with those areas originally covered by the Solvency II review, and outcomes as set out in the Government’s response to its Solvency II review consultation.

1.11 Through these two consultations in 2023, and the PRA’s intention (subject to feedback) to publish final policy following this CP around the end of this year, the PRA considers that firms will have a good sense of how the PRA expects the new regime to operate by that point, and so can begin to prepare for implementation and adapt their plans as they wish.

1.12 HMT published on Thursday 22 June 2023 details of the draft SIs needed to enable the Solvency II reforms to take effect, along with details of the expected timetable for bringing these into force. Consistent with HMT’s statement, the PRA envisages that there will be a phased implementation of the reforms between the risk margin (RM), MA, and other areas. Regarding the RM, the PRA is taking the necessary steps to align the PRA Rulebook with the implementation of HMT’s RM reforms by 31 December 2023. Subsequently, the PRA is planning to have final policy in place on the MA to enable implementation of HMT’s MA provisions by the end of June 2024, with all other changes taking effect on 31 December 2024. Implementation of the MA provisions in June would mean that life insurance firms will be able to take advantage of these specific investment-related reforms in advance of 31 December 2024. 

1.13 The PRA also intends to consult in early 2024 on transferring the remaining firm-facing Solvency II requirements from retained EU law into the PRA Rulebook and other policy materials. The PRA does not currently expect to make substantive changes to requirements that apply to firms as part of this later consultation.

1.14 The phasing of these three consultation papers has been designed to allow the PRA to publish material for consultation and give clarity for firms over final policy as soon as possible, while also giving adequate time to develop detailed proposals and seek input on implementation options for more complex areas of reform.^{footnote [6]}

1.15 The proposed implementation date for the majority of the reforms in this CP is 31 December 2024.^{footnote [7]} The PRA considers that this implementation date allows sufficient time for:

• Firms to modify their systems and reporting processes, where necessary;
• The transfer of remaining firm-facing requirements from retained EU law into the PRA Rulebook and other policy materials, as per the additional CP in early 2024. This will ensure the reforms take effect within a coherent and complete Solvency UK regime in the PRA’s Rulebook. It will also avoid the complications of moving and amending firm-facing requirements from retained EU law in separate tranches, resulting in less clarity around the extent to which different Rulebook and legislative provisions are applicable at different points in time.

1.16 For this CP, the PRA is setting a two-month consultation period for the proposals in Chapters 2 to 10, and a one-month consultation period for the proposals in Chapter 11. This approach is designed to support the implementation plans outlined above. Further details are set out below in the ‘Responses and next steps’ section of this chapter.

Chart 2: Timeline of the reforms

Background to the Solvency II review

1.17 The Solvency II regime, which governs the prudential regulation of insurance firms in the UK, came into force in the UK on Friday 1 January 2016. In June 2020, the Government announced a review of Solvency II to ensure the prudential regime properly reflects the unique structural features of the UK insurance sector.^{footnote [8]} The PRA worked closely with HMT on the potential reform options. The Government set three objectives to underpin the review:

• to spur a vibrant, innovative, and internationally competitive insurance sector
• to protect policyholders and ensure the safety and soundness of firms
• to support insurance firms to provide long-term capital to support growth

1.18 In October 2020, HMT launched a Call for Evidence that set out the areas in scope for the review. HMT published its response to the Call for Evidence in 2021, which summarised the responses as being generally supportive of reforms to the areas covered in this CP. The information provided by respondents was subsequently shared with the PRA and fed into the development of its proposed reforms. Following several HMT and PRA requests for input and feedback, significant stakeholder discussions, and HMT’s consultation on the Solvency II review, HMT published its response on the Solvency II review consultation in November 2022. In that document, HMT confirmed that the PRA would take forward a number of reforms, including those covered in this CP.

Structure of the reformed Solvency II regime

1.19 In December 2022, HMT published a policy statement (PS) on its implementation plan to deliver a new regulatory framework for financial services regulation in the UK. The legislative changes needed to enable the new regulatory framework are being brought in by the FSM Bill.

1.20 Under the FSM Bill, HMT will have the power to revoke retained EU law relating to financial services. Financial services regulators will generally take responsibility for setting the direct regulatory requirements that were previously contained within that retained EU law, acting within a framework set by government and Parliament. This means that detailed regulatory requirements that currently sit within EU law, and can currently only be amended by primary or secondary legislation, can move into the regulators’ rules, in line with the UK’s model of operationally independent regulators and where they will be easier and less time-consuming to update.

1.21 In line with this new framework, the reforms under the Solvency II review will be delivered through a combination of the FSM Bill (including the deletion of retained EU law), HMT’s SIs, and changes to the PRA’s rules and policy. The material in this CP has been prepared on the assumption that the Government legislates in line with the approach that it has indicated via HMT’s draft SIs, and amendments to the materials consulted on may be required to reflect the final version of HMT’s SIs.

1.22 This CP sets out the PRA’s proposed changes to the PRA’s rules and policy to deliver a large part of the reforms. This generally involves starting with retained EU law that HMT plans to revoke using its powers under the FSM Bill and:

• not transferring requirements into PRA policy where the PRA considers they are no longer required; or
• amending requirements at the point of transfer to reflect proposed policy changes; or
• reproducing requirements in PRA policy without change, but signalling in the PRA’s policy that relevant rules can be waived or modified in individual cases where appropriate.

1.23 This CP does not address the entirety of the Solvency II retained EU law; the remainder will be covered by future CPs, as outlined above, or (for example in the case of the RM and some elements of the MA) by provisions in HMT’s SIs.

1.24 The new UK prudential regime for insurers will eventually be known as ‘Solvency UK’. However, since the reforms are being consulted on and implemented in stages, for clarity and internal consistency of the PRA’s policy materials, the PRA will continue to refer to the regime as Solvency II until such time as all references to Solvency II can be changed across all relevant materials.

Reforms to the risk margin

1.25 The Government’s November 2022 reform package for Solvency II announced that it will legislate to reduce the risk margin, an important component of firms’ insurance liabilities, by around 65% for long-term life insurance business and 30% for non-life business, and to enable a modified cost of capital approach to its calculation.^{footnote [9]} To enable timely implementation of these changes, HMT has since confirmed its intention to effect them initially through transitional amendments to the existing onshored Commission Delegated Regulation (EU) 2015/35 (SII CDR).

1.26 To understand and prepare for these changes, firms should look to the provisions in HMT’s SIs for details of the revised formula and parameters, as well as the implementation timeline. The PRA considers that implementation of the changes to the RM as set out by the Government is likely to be a material change to a firm’s risk profile such that firms should apply to recalculate TMTP, as per the expectations of the PRA’s Supervisory Statement 6/16.

1.27 In view of HMT bringing forward these reforms in advance of YE24, the PRA considers that some minor consequential amendments to the PRA Rulebook are necessary in order to maintain its clarity and coherence. The proposed amendments would also provide firms with legal certainty as to the interaction between HMT’s SIs and PRA rules. These proposed amendments are set out in Chapter 11 – Administrative amendments.

1.28 Alongside its proposed changes to the RM calculation, the Government will legislate to amend Article 54 of the Solvency 2 Regulations 2015 such that firms’ TMTP approvals will be unaffected by the reduction in Solvency II financial resource requirements (FRR) arising from the RM reforms.

1.29 HMT’s SIs specify that the amended RM provisions within the SII CDR will later be revoked, with certain parts including the formula and parameters being restated within secondary legislation. Those parts not restated in legislation are intended ultimately to be transferred into PRA rules and other policy material.

Accountability framework

1.30 The PRA has a statutory duty to consult when introducing new rules and changing existing rules (s138J of the Financial Services and Markets Act (FSMA) 2000), or new standards instruments (FSMA s138S). When not making rules, the PRA has a public law duty to consult widely where it would be fair to do so. 

1.31 In carrying out its policymaking functions, the PRA is required to comply with several legal obligations. Appendix 1 lists the statutory obligations applicable to the PRA’s policy development process. Further, the FSM Bill, when enacted, will add specific obligations for the PRA to engage with Parliament via the relevant parliamentary committees. The PRA will comply with these obligations for this consultation and future policymaking activity.

1.32 The PRA considers that the proposals in this CP would continue to advance its primary objectives to promote the safety and soundness of the firms that it regulates and secure an appropriate degree of policyholder protection. The proposals focus on areas where the PRA considers that existing requirements can be simplified and streamlined without compromising safety and soundness and policyholder protection. Where necessary, the proposals include some new requirements which the PRA considers will be sufficient to address any additional risks to safety and soundness and policyholder protection which might otherwise occur. At the same time, the PRA considers that the proposals would also advance its secondary competition objective and forthcoming secondary competitiveness and growth objective by tailoring rules to UK circumstances. This is because the proposals would result in a less burdensome regime and streamline existing processes thus facilitating entry and expansion of new firms and branches. They would also provide firms with greater flexibility when applying for IMs and calculating the group solvency capital requirement (SCR). The proposed changes to regulatory reporting requirements would also reduce the burden for firms and branches while enhancing the relevance of information collected where an exposure is considered material. More detailed analysis of the proposals against the PRA’s objectives is set out in the individual chapters that follow.  

Cost benefit analysis 

1.33 In developing the proposals set out in this CP, the PRA has had regard to its objectives and a range of factors that contribute to the cost benefit analysis (CBA). The baseline for the CBA is the current Solvency II rules and legislation (unless stated otherwise). Each individual policy chapter contains analysis of the expected costs and benefits of the specific proposals. A summary of key benefits and costs is outlined below.

Benefits

1.34 The proposals set out in this CP would lead to a reduction in both compliance costs to firms and supervision costs to the PRA, which is a benefit, through:

• offering firms greater flexibility to meet regulatory requirements (eg IM, groups);
• making regulatory requirements more appropriate for the risks posed to the PRA’s objectives (eg thresholds, mobilisation, branches);
• simplifying compliance with certain regulatory requirements (eg TMTP, reporting and disclosure, currency redenomination, IM).

1.35 In addition, the proposals could give rise to capital compliance benefits through:

• proposed removal of the FRR test for the TMTP calculation;
• allowing the group SCR calculation to recognise some of the diversification benefits between Method 2 entities.

1.36 As a result, the proposals could facilitate effective competition, international competitiveness, and growth through:

• reduced costs for insurers, together with increased flexibility, making it more attractive to locate or expand in the UK (IM, reporting, TMTP, groups);
• facilitating entry/expansion of new firms and branches (mobilisation, thresholds).

Costs

1.37 The proposals could give rise to some implementation compliance costs; however, the PRA expects that there would be an ongoing saving in costs in the longer term. In addition, in many cases (eg TMTP, thresholds, mobilisation), firms have the option to continue existing practices.

1.38 The PRA has also considered whether the use of residual model limitation capital add-ons (RML CAOs) would result in materially higher levels of capital requirements. This is not expected because the proposed reforms would not change the ‘1-in-200’ calibration standard for IM firms, but rather introduce flexibility for an IM firm to meet its requirement either directly with its model calibration, or to allow residual limitations to be addressed through the combination of model and RML CAO.

1.39 In summary, the proposals in this CP would continue to advance an appropriate level of protection for policyholders, and the safety and soundness of insurers, while facilitating effective competition, international competitiveness, and growth.

‘Have regards’ analysis 

1.40 In developing the proposals in this CP, the PRA has had regard to the FSMA regulatory principles, and the aspects of the Government’s economic policy set out in the HMT recommendation letter from December 2022. The FSM Bill includes a measure to amend the FSMA regulatory principles. If this measure comes into force, it would add a regulatory principle relating to the UK’s net zero emissions target. The PRA has had regard to this matter.

1.41 The FSMA regulatory principles that are considered most significant to the proposals in this CP are those relating to proportionality, efficient use of the PRA’s resources, and transparency. The PRA considers that the proposals would increase the proportionality of the regime, and would streamline regulatory requirements. In particular, they would result in a simpler IM application process, a reduction in reporting costs for firms, and a more proportionate regime for smaller insurers via increased thresholds. The PRA would also expect to see an overall increase in its efficiency as a result of the proposed changes to reduce the existing set of IM tests and standards, introduce a more consistent approach to the TMTP calculation, and remove branch capital and branch risk margin requirements on an ongoing basis for third-country branches. 

1.42 The PRA considers that the proposals are in line with the principle of transparency since the policy materials the PRA proposes to amend or introduce are intended to give increased clarity to firms over the PRA’s intended approach and its expectations of firms.

1.43 The HMT recommendation letter (December 2022) focuses on competitiveness and growth in the interests of consumers and businesses. The PRA considers that its proposals would support both the competitiveness of the UK and (particularly by increasing competition and reducing costs) would also support growth and benefit consumers. By revoking EU law and replacing it with rules designed for the UK, and streamlining requirements on firms, the proposals in this CP are aligned with the Government's desire to swiftly implement the outcomes of its Future Regulatory Framework review (FRF) (supporting competitiveness), and its aim to deliver smart regulatory reform (supporting growth).

1.44 The ‘have regards’ that gave rise to particularly significant issues for consideration in relation to the proposals in this CP are set out in the individual chapters. Where analysis has not been provided against a ‘have regard’ for a proposal, it is because the PRA considers that ‘have regard’ to not be a significant factor for that proposal.

Impact on mutuals

1.45 The PRA has a statutory obligation to consider the impact of its proposals on mutual societies (s138K FSMA), referred to as ‘mutuals’. The PRA considers that the impact of the proposals in this CP on mutuals is expected to be no different from the impact on other firms, with the exception of the proposal to increase the threshold at which firms are required to enter the Solvency II regime, which is aimed at simplifying regulatory requirements for small firms. Given more than half of small firms operating near the thresholds are mutuals, the PRA considers they are more likely to benefit from the proposed changes, as explained in Chapter 9 – Thresholds.

Equality and diversity

1.46 In making its rules and carrying out its policies, services, and functions, the PRA is required by the Equality Act 2010 to have due regard to the need to eliminate discrimination, to promote equality of opportunity, and to foster good relations between persons who share a protected characteristic and those who do not. In line with its responsibility under the Equality Act, the PRA has performed an assessment and considered the equality implications in formulating its proposals. The PRA considers that the proposals in this CP do not give rise to equality and diversity implications. The PRA will continue to consider the equality and diversity implications of the proposals during the consultation period, and in relation to further consultation concerning future operative proposals.

Structure of the CP

1.47 The proposals in this CP are structured into the following chapters. The draft rules and related policy materials are included in the relevant appendices.

• Chapter 2 – Transitional measures on technical provisions and the risk-free interest rate – sets out the PRA’s proposals to introduce a new simplified method for calculating TMTP.
• Chapter 3 – Internal models – sets out the PRA’s proposals on changes to the IM framework, including streamlining the requirements that firms (and groups) must meet for permission to use an IM, and the PRA’s use of safeguards to support model permissions.
• Chapter 4 – Capital add-ons – sets out the PRA’s proposed approach to the use of capital add-ons, which complements and supports the proposals set out in Chapter 3 – Internal models.
• Chapter 5 – Flexibility in calculating the Group SCR – sets out the PRA’s proposals to provide greater flexibility in the calculation of the group solvency capital requirement.
• Chapter 6 – Third-country branches – sets out the PRA’s proposals to remove the rules that require third-country branch undertakings to calculate branch capital requirements and a branch risk margin.
• Chapter 7 – Reporting and disclosure – sets out the PRA’s proposals to streamline and update reporting requirements.
• Chapter 8 – Mobilisation – sets out the PRA’s proposals to introduce an optional mobilisation stage for new insurers.
• Chapter 9 – Thresholds – sets out the PRA’s proposals to increase the thresholds that determine whether a firm is regulated under Solvency II.
• Chapter 10 – Currency redenomination – sets out the PRA’s proposals to redenominate monetary values within the Solvency II Firms Sector of the PRA Rulebook from euros (EUR) to pounds sterling (GBP).
• Chapter 11 – Administrative amendments – sets out the PRA's proposals to make minor amendments to PRA rules as a consequence of HMT's proposed reforms to the Solvency II risk margin.

1.48 Within this CP, to increase the readability of each chapter, a number of abbreviations have been defined in full upon first usage in each chapter.

Changes to PRA rules and policy materials

1.49 The proposals set out in this CP would result in changes to the following parts of the PRA Rulebook and existing policy materials:

1.50 Appendix 2 of this CP sets out the proposed draft rules in full for the proposals being consulted on in Chapters 2 to 10. Appendix 30 includes draft rules for the proposals in Chapter 11.

1.51 HMT has announced that it intends to use the power in the new section 138BA of FSMA (which will be inserted by Clause 32 of the FSM Bill) to grant the PRA flexibility to disapply or modify the application of any of its rules, by giving firms permissions where appropriate.^{footnote [10]} The PRA intends to use these permissions to replace the approvals currently in Part 4 of the Solvency 2 Regulations 2015. This CP therefore uses the language of ‘permissions’ rather than ‘approvals’ when discussing proposed new policy in these areas.

1.52 HMT has also set out its intention to ensure that any existing approvals that firms have to use measures covered by Part 4 of the Solvency 2 Regulations 2015 will continue to be valid. The PRA does not therefore expect that firms will need to reapply for permissions that have been granted under that legislation.

1.53 This CP includes proposals to use s138BA FSMA to give permissions to:

• apply the TMTP (Chapter 2);
• calculate the SCR and group SCR using an IM (Chapter 3);
• calculate the group SCR using the output of multiple IMs (Chapter 5); and
• use an IM to calculate a single sub-group SCR, where a group contains a sub-group located in a country that applies a solvency regime to insurers that is equivalent to the UK regime, and Method 2 is used to calculate the group SCR in respect of that sub-group (Chapter 5).

1.54 The PRA may also consider further aspects relating to the use of s138BA of FSMA in future. This may affect some of the operational aspects outlined in the draft SoP for granting IM permissions.

1.55 References related to the UK’s membership of the EU in the policy materials covered by this CP have been updated as part of these proposals to reflect the UK’s withdrawal from the EU. Unless otherwise stated, any remaining references to EU or EU-derived legislation refer to the version of that legislation which forms part of retained EU law.^{footnote [11]}

1.56 Where the draft rules and policy material included in this CP include references to retained EU law that is not addressed in this CP, the drafts cross refer to the retained EU law as it currently stands. When making any rules and issuing final policy material in relation to drafts included in this CP, those cross references will be updated to refer to those requirements as they have been absorbed into the PRA’s rules or other parts of the overall framework. In the draft rules included in this CP, such references have been highlighted in square brackets.

Implementation

1.57 The PRA proposes that the implementation date for the changes resulting from proposals in Chapters 2 to 10 of this CP would be 31 December 2024. Assuming that final policy in relation to this CP is able to be published around the end of this year, this implementation date is intended to give firms notice to prepare for the changes. This reflects the PRA’s understanding of the time firms have indicated they would need to update their systems and processes. Further, this approach allows sufficient time for the PRA to implement its final policy, taking into account the steps needed to transfer the remaining firm-facing requirements into the PRA Rulebook and other policy material, as outlined above in the section, ‘The PRA’s overall consultation plans for the Solvency II review’. The PRA understands that this approach is in line with HMT’s current expectation on the timetable for bringing the necessary regulations into force.

1.58 The PRA proposes that the implementation date for the changes resulting from the proposals in Chapter 11 of this CP be aligned to HMT’s timeline for implementation of its RM reforms. This will deliver consistency between the on-shored SII CDR and PRA rules at the point at which HMT’s RM reforms take effect.

Responses and next steps

1.59 This consultation closes on Friday 1 September 2023 for the proposals in Chapters 2 to 10, and closes on Monday 31 July 2023 for the proposals in Chapter 11. The PRA invites feedback on the proposals set out in this consultation, including:

• The specific reform proposals per chapter;
• The cost benefit analysis set out above and within each chapter;
• The implementation timeline set out above.

1.60 Please address any comments or enquiries to CP12_23@bankofengland.co.uk. Please indicate in your response if you believe any of the proposals in this CP are likely to impact persons who share protected characteristics under the Equality Act 2010, and if so, please explain which groups and what the impact on such groups might be. Your responses may be shared with HMT and/or the FCA. This means HMT and/or the FCA may review the responses and may also contact you to clarify aspects of your response.

1.61 For Chapters 2 to 10 of this CP, the PRA is setting a two-month consultation period. This reflects the PRA’s desire to give firms certainty as soon as possible about the final reforms resulting from the Solvency II review, and also recognises that many of the reform areas in this CP have already been subject to significant stakeholder discussions, including through HMT’s Call for Evidence and earlier consultations on which firms have already provided feedback, which the PRA has been able to take into account in developing these proposals. The PRA has also highlighted clearly, in previous communications, the high-level areas of reform it intends to take forward. With a shortened consultation period, and subject to responses received, the PRA would expect to be able to issue final policy in relation to the proposals in Chapters 2 to 10 of this CP at around the end of the year.

1.62 For Chapter 11 of this CP, the PRA is setting a one-month consultation period. This reflects the nature of the proposals in Chapter 11 as minor amendments that arise as a consequence of HMT’s amendments to the SII CDR to reform the Solvency II RM. Subject to responses received, the PRA would expect to be able to issue final policy in advance of HMT’s reforms to the RM taking effect.

1.63 The PRA appreciates that this is an acceleration of its usual consultation timetable, particularly given it would normally allow extra time for responses when consulting over the summer. The PRA would consider any representations from stakeholders saying that they need longer to assess any of the CP proposals.

2. Transitional measures on technical provisions and the risk-free interest rate

2.1 This chapter sets out the PRA’s proposed changes to the transitional measure on technical provisions (TMTP), designed primarily to simplify a number of aspects of its calculation and reduce costs to firms. It also contains a proposal to remove third-country branch eligibility to use the TMTP or the transitional measure on the risk-free interest rate (TMIR), as a consequence of the proposals in Chapter 6 – Third-country branches.

2.2 The PRA proposes to:

• introduce a simplified new default method for calculating TMTP (the ‘new TMTP method’);^{footnote [12]}
• permit firms for which the new TMTP method would be inappropriate to continue to use the existing calculation approach, with some modifications (the ‘legacy approach’);
• remove the financial resource requirement (FRR) test;
• require all firms to amortise TMTP so that it is expected to decrease in a consistent manner to zero by the end of the transitional period;
• introduce an expectation that firms consider risks to meeting their solvency risk appetite in the medium term due to TMTP run-off;
• allow firms to calculate TMTP at the final day of each reporting period, and remove the requirement for firms to seek the PRA’s permission for a recalculation;
• remove the expectation for TMTP calculations to have audit committee sign-off;
• introduce a more consistent approach to TMTP methodology changes where business is transferred or 100% reinsured;
• only grant any new permissions to apply TMTP in circumstances where a firm without an existing TMTP permission acquires or accepts business that already benefits from TMTP; and
• as a consequence of the policy proposals set out in Chapter 6 – Third-country branches, to remove the ability for third-country branches to use TMTP or TMIR.

2.3 The proposals in this chapter would:

• introduce a new Transitional Measure on Technical Provisions Part of the PRA Rulebook (Annex H of Appendix 2);
• amend the Glossary Part of the PRA Rulebook, the Conditions Governing Business Part of the PRA Rulebook, the Transitional Measures Part of the PRA Rulebook, and the Third Country Branches Part of the PRA Rulebook (Annexes A, J, I, and K of Appendix 2);
• amend supervisory statement (SS) 17/15 – Solvency II: transitional measures on risk-free interest rates and technical provisions (Appendix 3);
• delete SS6/16 – Maintenance of the ‘transitional measure on technical provisions’ under Solvency II; and
• introduce a new statement of policy (SoP) – Permissions for transitional measures on technical provisions and risk-free interest rates (Appendix 4).

2.4 TMTP and TMIR are intended to smooth the financial impact for firms of the transition from the previous Solvency I regime to Solvency II. They allow firms to apply temporary reductions to the amount of technical provisions for business written before 2016, and increase available capital. Their use is subject to PRA approval.

2.5 The existing TMTP requirements can result in significant resource overheads for firms and the PRA. They have also led to firms using a wide range of different calculation approaches. Further, as TMTP relief must amortise to zero by 2032, firms will need to ensure they are prepared for the end of the transitional period.

2.6 The proposals in this chapter aim to:

• reduce the resourcing overheads, for firms and the PRA, associated with calculating TMTP;
• simplify and increase consistency in how TMTP is calculated; and
• place greater focus on firms’ management of the run-off of TMTP for the remainder of the transitional period.

The charts below show how the proposals would simplify the TMTP calculation:

Chart 3: The current TMTP framework