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. Following a PRA consultation in April 2024 (CP5/24: Review of Solvency II: restatement of assimilated law) the final rules for restating the risk margin provisions previously covered by assimilated law into the Rulebook was published in November 2024 (PS15/24).
Legislation
In order to implement the reforms to the risk margin so that they would take effect on 31 December 2023, the government brought in new transitional legislation - the Insurance and Reinsurance Undertakings (Prudential Requirements) (Risk Margin) Regulations 2023 (S.I.1346) (the Risk Margin Regulations) which made amendments to:
The Commission Delegated Regulation (EU) 2015/35 (CDR):
- Article 37 (calculation of the risk margin)
- Article 39 (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 CDR, the Solvency 2 Regulations and the Risk Margin Regulations were revoked. Legislative provisions relating to the calculation of the risk margin have been restated in the Insurance and Reinsurance Undertakings (Prudential Requirements) Regulations 2023 (S.I.1347) (IRUPR Regulations) (as amended by the Insurance and Reinsurance Undertakings (Prudential Requirements) (Amendment and Miscellaneous Provisions) Regulations 2024. Provisions in the Commission Delegated Regulation and Solvency 2 Regulations have been restated in the PRA Rulebook (see below).
PRA materials covering the risk margin
PRA Rulebook: Technical Provisions Part 4A and 4B: amended from 31 December 2024 to include the risk margin calculations set out in the IRUPR Regulations and to restate the provisions of Articles 37 and 38 of the CDR.
Supervisory Statement 8/24 Solvency II: Calculation of Technical Provisions – Chapter 3 restates the provisions previously set out in Articles 59 and 60 of the CDR.
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 have been restated in the Technical Provisions Part (as rule 4B.1).
Updated 2/1/2025
[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.