Restatement of Solvency II assimilated law: correction to standard formula mass lapse life underwriting risk rule in PS15/24

Published on 20 December 2024

Statement

On 15 November 2024, the Prudential Regulation Authority (PRA) published policy statement (PS) 15/24 – Review of Solvency II: Restatement of assimilated law. The PRA has since identified an error in rule 3B6.6(1) in the Solvency Capital Requirement – Standard Formula (SCR-SF) Part of the PRA Rulebook published in PS15/24. This statement provides an overview of the error and the PRA’s approach to rectifying the mistake. It is most relevant to UK Solvency II firms with Regulated Activities Order (RAO) Schedule 1 Part II class III (‘Linked long-term’) business and which use the SF to calculate their capital requirements for life underwriting risk.

In consultation paper (CP) 5/24, the PRA proposed to restate Commission Delegated Regulation 2015/35 (CDR) Article 142(6) within rule 3B6.6 in the SCR-SF Part of the PRA Rulebook. The CDR article requires SF firms to apply a 70% stress for mass lapse life underwriting risk to two types of long-term insurance business when calculating their SCRs, namely those set out in Solvency II Directive Articles 2(3)(b)(iii) and (iv), where additional requirements set out in the article are met. A 40% stress applies in all other cases to business that is relevant to the life underwriting risk module of the SF.

In CP5/24, the PRA proposed to replace the references to the Solvency II Directive with their transposed equivalents, as set out in the Transposition table for UK implementation of the Solvency II Directive (2009/138/EC), published in 2015. This identified business in class II (‘Marriage and birth’) and class VII (‘Pension fund management’) of Schedule 1, Part II of the RAO as within scope of a 70% stress for mass lapse life underwriting risk.

Paragraphs 6.15-6.18 in Chapter 6 (Standard Formula Proposal 1: Restatement of assimilated law of the areas covered) of PS15/24 contain the PRA’s feedback to the responses it received on its proposed restatement. When making its final policy, the PRA amended its proposed restatement to include reference to both RAO class III and class VII in rule SCR-SF 3B6.6(1) within the PRA Rulebook instrument published in PS15/24.

The PRA has reconsidered its restatement of this provision and has concluded the reference to RAO class III in rule SCR-SF 3B6.6(1) is in fact an error. The correct restatement of CDR Article 142(6)(a), in line with the original policy intent, should only require firms to apply a 70% stress for mass lapse life underwriting risk to RAO class VII(a) and class VII(b) business, where the additional requirements in the rule are met.

The PRA has published this statement to notify firms of its correction of the error via publication of PRA Rulebook: SII Firms: Solvency II Amendment (No 1) Instrument 2024. The new rule instrument appended below deletes reference to RAO Schedule 1, Part II, class III in rule SCR-SF 3B6.6(1) published in Annex O of Appendix 6 of PS15/24. This is the only change that the amending instrument makes to the rules published in PRA Rulebook: Solvency II Instrument 2024 within Appendix 6 of PS15/24. The PRA also notes that this statement supersedes the feedback previously provided in paragraphs 6.16 and 6.18 of PS15/24. For the avoidance of doubt, the PRA has not amended the text in paragraphs 6.16 and 6.18 of PS15/24.

The PRA considers that by correcting the error, the rule amendment does not alter the original policy intention of restatement of assimilated law for the rules consulted on in CP5/24, and therefore does not alter the PRA’s objectives analysis, regulatory have regards analysis, or the cost benefit analysis of the proposals set out in CP5/24 and the final policy set out in PS15/24.

The PRA considers that the impact of the final rules on mutuals following this amendment would not be significantly different to the impact of the draft rules on mutuals proposed in CP5/24 and the final rules set out in PS15/24.

The rule instrument will take effect on 31 December 2024.