Risk Margin [UK]
Background
The UK government carried out a review of the Solvency II regime between October 2020[1] and November 2022. One of the aims of the review was to reduce the risk margin which, together with reforms to the matching adjustment and fundamental spread, would give insurers more investment flexibility. The Prudential Regulation Authority (PRA) published in April 2022 a Discussion Paper (DP 2/22) - 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. Changes to the calculation of the risk margin were introduced by legislation (see below) which came into force on 31 December 2023.
Legislation
In order to implement the reforms to the risk margin to take effect on 31 December 2023, the government brought in new transitional legislation - the Insurance and Reinsurance Undertakings (Prudential Requirements) (Risk Margin) Regulations 2023 (No. 1346) (the Risk Margin Regulations) which made amendments to:
The Commission Delegated Regulation (EU) 2015/35:
- Article 37 (calculation of the risk margin)
- Article 38 (cost-of-capital)
- Article 312 (deadlines for submitting supervisory reports)
Solvency 2 Regulation 2015 – Regulation 54 (transitional measures on technical provisions).
On 31 December 2024, the government intends to revoke the whole of the Commission Delegated Regulation. At the same time, the Risk Margin Regulations will be also revoked and new regulations restating parts of the revoked legislation will come into force on 31 December 2024. From that date, the restated provisions relating to the calculation of the risk margin will be set out in the Insurance and Reinsurance Undertakings (Prudential Requirements) Regulations 2023 (as amended by the Insurance and Reinsurance Undertakings (Prudential Requirements) (Amendment and Miscellaneous Provisions) Regulations 2024 (currently in draft).
PRA materials covering the risk margin
The PRA has set out its proposals for restating those provisions relating to the risk margin previously covered by assimilated law into the Rulebook and policy material (set out in CP5/24: Review of Solvency II: restatement of assimilated law published in April 2024). The PRA is expected to publish final policy in mid-November and the new rules will come into effect on 31 December 2024.
PRA Rulebook: Technical Provisions Part: to be amended to include the risk margin calculations currently set out in the Risk Margin Regulations and to restate the provisions of Articles 37 and 38 of the Commission Delegated Regulation.
Guideline 2 (interaction of the long-term guarantee measures with the risk margin calculation) of the EIOPA Guidelines on the implementation of the long-term guarantee measures will be restated in the Technical Provisions Part (as rule 4B.1 (13)).
[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.