The UK’s Prudential Regulation Authority has given a sneak peek about its upcoming consultation on the matching adjustment, but an industry expert has queried the regulator’s intention behind the wording. 

The PRA aims to consult on the MA as part of the Solvency UK reforms “around” the end of September, according to Gareth Truran, director for prudential policy at the Bank of England.

At a lengthy speech given at the Bank of America Financials Conference on Wednesday, Truran said the consultation will cover three main areas: 

·       life insurers’ investment flexibility within the MA; 

·       the operation of the MA; and 

·       firms’ responsibility for risk management.

Anthony Plotnek, who leads WTW’s private assets and capital management team, described the publication timing as “very loose” as it is unclear whether the consultation is expected this week or whether this is an indication of a delay into October. 

Describing the PRA’s intention to improve life insurers’ investment flexibility within the MA, Truran said: “Under Solvency UK, life insurers will in future be able to include in their MA portfolios a wider range of assets, including some assets with ‘highly predictable’ cashflows. The government hopes insurers will respond to the incentives to invest more in long-term productive assets following these changes.”

On the operation of the MA, he said the regulator aimed to simplify processes to streamline parts of the approvals. 

“We will also set out how we propose to make more proportionate the current severe consequences for insurers who accidentally breach the MA requirements, and to make the regime somewhat more responsive to changes in credit risk by updating the MA calculation to use notched credit ratings,” Truran added. 

On insurers’ risk management, he explained how the authority will propose a range of supervisory measures to monitor and control potential risks arising from the use of the MA. 

Truran added: “Collectively, the reforms will enable insurers – if they choose – to obtain an MA benefit for a wider range of assets, and also for a wider range of liabilities. Combined with the forthcoming cut to the risk margin which the government is making, insurers have said this will allow them to enhance their investment in areas such as productive finance.”

But Plotnek queried the statement saying: “Do the PRA really view that this package of reforms will deliver to the purpose set out?”

The Treasury indicated in November that the fundamental spread would remain unchanged. However, Truran said in his speech the PRA would allow insurers to increase the fundamental spread risk allowance where they think it is appropriate for their portfolios.

In response to the comment, Plotnek said: “Regulatory pressure may be applied to increase the FS on private assets where there is the suggestion the existing FS (despite a clear decision from HMT this would not be changed) is not calibrated well for these assets and may require uplifting.”

Truran’s speech can be found here.