Matching adjustment [UK]
Background
The UK government carried out a review of the Solvency II regime between October 2020 and November 2022[1]. One of the aims of the review was to make changes to the existing matching adjustment requirements which would give insurers more investment flexibility. The Prudential Regulation Authority (PRA) published in April 2022 a Discussion Paper (DP2/22) - Potential Reforms to Risk Margin and Matching Adjustment within Solvency II, which considered the options for reforming the design and calibration of the Risk Margin (RM) and Matching Adjustment (MA) . This was followed by a Feedback Statement (FS1/22) in November 2022. Finally, in September 2023, the PRA published its proposals for reforming the MA (CP19/23 – Review of Solvency II: Reform of the Matching Adjustment). Final policy and rules for the PRA Rulebook were published in a Policy Statement (PS10/24 – Reform of Solvency II: Reform of the Matching Adjustment) on 6 June 2024. The rules came into force on 30 June 2024.
Legislation
To implement the proposed changes it was necessary for the government to bring in new legislation. The Insurance and Reinsurance Undertakings (Prudential Requirements) Regulations 2023 (S.I. 1347) (the Regulations) came in to force on 30 June 2024. The Regulations:
- Gives the PRA a duty to publish quarterly technical information for the purpose of calculating a firm’s technical provisions and the solvency capital requirement on the basis of the standard formula (Regulation 3);
- Requires the PRA to grant approval to apply the MA where the firm complies with the specified conditions (Regulation 4);
- Specify how the MA and fundamental spread are to be calculated (additional provisions are set out in the PRA rules) (Regulations 5 and 6).
- Give the PRA powers to make rules relating to the MA (Regulation 7);
- Amends the Financial Services and Markets Act 2000 t ensure the PRA has power to secure compliance with Regulations 5 and 6.
- Require HM Treasury to review the operation of the Regulations and report within 5 years (by 1 April 2029) (Regulation 9).
PRA materials covering matching adjustment
PRA Rulebook: Matching Adjustment
PRA Guidance:
Supervisory Statement 7/18 Solvency II: Matching Adjustment. Sets out the PRA’s expectations of firms in respect of the application of the MA. Covers the assessment of eligibility for assets and liabilities, demonstrating compliance with matching conditions, calculation of MA benefit, ongoing management and compliance of MA portfolios, applications for MA approval and subsequent changes to the MA portfolio, and implications of changes to the MA portfolio that are outside the scope of the existing MA approval.
Supervisory Statement 8/18 Solvency II: Internal models – modelling of the matching adjustment. Sets out the PRA’s expectations of firms regarding the application of the Solvency II MA within the calculation of the Solvency Capital Requirement.
Supervisory Statement 3/17 Solvency II: Illiquid unrated assets – Sets out the PRA’s expectations in respect of firms investing in illiquid, unrated assets within their Solvency II matching adjustment (MA) portfolios. It is relevant to life insurance and reinsurance companies holding or intending to hold unrated assets (including restructured equity release mortgages) in an MA portfolio.
This statement should be read in conjunction with Chapters 6 and 7 of the Technical Provisions Part of the PRA Rulebook.
Supervisory Statement 1/20 Solvency II: Prudent Person Principle. Sets out the PRA’s expectations under the Investments Part of the PRA Rulebook regarding a firm’s development and maintenance of an investment strategy, management of risks arising from investments and internal governance within the investment function and investment in assets not admitted to trading on a regulated market and intragroup loans and participations. The MA eligibility conditions require compliance with the PPP at the level of both the asset and portfolio.
Supervisory Statement 11/16 Solvency II: External audit of, and responsibilities of the governing body in relation to, the public disclosure requirement.
Statement of Policy: Matching adjustment permissions. Sets out the PRA’s approach to granting MA permissions, variations to those permissions and the circumstances in which the PRA may decide to revoke a firm’s MA permission. It also sets out how the PRA will assess the ongoing performance of the MA permissions framework. See also the PRA webpage for Solvency II approvals and MA rule permission application forms.
Statement of policy: PRA’s approach to the publication of Solvency II technical information. Sets out how the PRA will comply with the obligation imposed by the Regulations to publish technical information appropriate for the valuation of insurance liabilities. Note: New amendments to this Statement of Policy are subject to consultation under CP 5/24: Review of Solvency II: Restatement of assimilated law (Appendix 4).
Revoked legislation
Regulation 4B (Duty to publish technical information) Solvency 2 Regulations 2015/575.
Regulation 42 (Matching Adjustment) Solvency 2 Regulations 2015/575.
Revoked assimilated EU law
Articles 53 (calculation of the matching adjustment) and 54 (calculation of the fundamental spread) of the Commission Delegated Regulation (EU) 2015/35.
Latest developments
In a speech delivered by Shoib Khan, Director of Insurance Supervision at the PRA on 26 September 2024, he stated that the PRA is considering how to take forward an ‘Accelerator’ initiative to facilitate the future expansion of MA eligibility, including the possibility of allowing some degree of self-certification of new investments within the existing eligibility rules.
[1] The government published its Call for Evidence in October 2020 and it’s response in July 2021. This was followed by the government’s consultation in April 2022 and it’s response in November 2022.