The Prudential Regulation Authority has launched its first consultation on a major set of reforms to Solvency II – to be known as Solvency UK – following last week’s publication of the draft statutory instrument by the Treasury. 

The proposals include further streamlining of reporting requirements and “substantially simplifying and improving the flexibility” in the assessment of internal models, said the PRA. 

Sam Woods, chief executive of the PRA, said: “These measures will reduce bureaucracy, facilitate competition, and support UK economic growth and competitiveness without lowering prudential standards or weakening policyholder protection.”

While the insurance industry is digesting the content of the much anticipated paper, some critics have quickly summarised the findings.  

Ed Hawkins, associate director for insurance consulting and technology at consultancy WTW, explained on LinkedIn that the consultation paper can be broken down into five key themes:

1. Simplification (covering transitional measures on technical provisions simplification and reduced reporting requirements)

2. Improved flexibility (covering flexibility in calculation of group solvency capital requirement, streamlined internal model rules and threshold increases)

3. Encouraging entry (covering third country branches and a mobilisation regime)

4. Capital add-ons (covering the existing framework but with some amendments)

5. Administrative changes (covering aspects such as currency redenomination and administrative amendments to PRA rules)

Huw Evans, KPMG UK insurance partner, said: “The PRA’s proposals appear to be sensible and welcome changes to the UK Solvency II regime, taking forward proportionate reforms while still maintaining a robust risk-based capital framework consistent with our European neighbours and international best practice.”

There are two deadlines for this consultation. By 31 July, the PRA seeks comments on minor changes to the PRA Rulebook following the government’s proposed reforms to the risk margin, published last week.

By 1 September, the PRA expects to receive comments on all other areas covered in the consultation, including but not limited to TMTP, internal models, capital add-ons, flexibility in calculating SCRs and third-country branches. 

After this consultation, a separate consultation, planned for September, will cover reform proposals for life insurers relating to investment flexibility and the matching adjustment, including to eligibility rules, new attestation requirements and certain changes to its calculation, and reporting.

“The PRA’s clarity on implementation timelines is also welcome and would see the UK introducing its Solvency II reforms ahead of the parallel process in the EU,” said Evans. “For firms using internal model calculations, there will be a significant amount of implementation work ahead which should not be under-estimated by firms or regulators.”

Solvency II includes a transitional measure – TMTP  – to help smooth in the capital impact of Solvency II over a 16-year period so re/insurers can gradually phase in any increase in technical provisions based on Solvency I to a calculation based on Solvency II. 

The PRA proposed a new TMTP method that would be derived in each reporting period exclusively from figures produced under Solvency II. Specifically, firms would derive the TMTP based on the Solvency II risk margin and the best estimate liabilities relating to business written prior to 2016. 

The authority expects the new method would become the default calculation approach for firms. 

“This would remove any reliance on Solvency I models,” said the PRA. 

James Isden, KPMG UK insurance director, said the changes to the transition measures regime “look helpful”, adding: “They will make disclosures more consistent and provide more calculation options to insurance firms. However, before making their choices, insurers will need to work carefully through the implications of moving to a new default methodology as this would be a decision that cannot be reversed at a later date.”

Among the proposals in relation to internal models, the PRA put forward plans to streamline substantially the tests and standards required to be met for new IMs with additional flexibilities.  

Under the proposed new IM framework, the PRA would grant ‘permission’ to a firm to use an IM, rather than ‘approve’ an IM as it does under the existing framework.

The regulator said: “The PRA does not expect that firms whose IMs were approved before these proposed reforms took effect would need to be granted new permissions. However, firms should consider any consequential changes to their IM change policies as a result of these proposals.”

Commenting on the IM proposals, Isden said: “The proposed streamlining of requirements for internal models and the additional flexibilities will all be welcome. It also makes sense to allow firms that have substantially completed their internal model to be able to proceed subject to additional PRA requirements compared to the inflexibility of the current regime.”

The authority also proposed to require firms with IMs to complete an annual analysis of change exercise covering movements in their SCR, and submit the results of the exercise to the PRA. The AoC exercise would compare the change in their SCR as at firms’ most recent financial year-end and their SCR as at their previous financial year-end.

The AoC requirement will be an additional challenge for firms, and they will need to prepare accordingly, said Isden.

For foreign insurers operating in the UK, the authority planned to remove branch capital requirements and the branch risk margin to make the UK more attractive to new business, boost competition and bolster the UK’s reputation as a global insurance hub.

Matthew Francis, KPMG UK insurance director, said: “The changes to requirements for third-country branches will be particularly welcome for commercial lines re/insurers operating in the UK via a branch.”

For firms wanting to enter the UK insurance market, such as a startup, the PRA planned to introduce an optional mobilisation stage for up to 12 months, during which a new insurer would operate with business restrictions while it completes the final aspects of its development.

“The increased flexibility to the mobilisation regime is welcome, as are the increased thresholds for firms to be required to comply with Solvency II rules. These will help the UK’s attractiveness as an insurance centre,” said Francis.