The new Insurance and Reinsurance Undertakings (Prudential Requirements) Regulations 2023 were published on legislation.gov.uk, the official UK website for publicizing legal documents. The regulations are a second set of changes in relation to Solvency II in an effort to eliminate retained EU legislation (REUL) and to make necessary adjustments to Solvency II to adapt to UK market needs.
These new regulations now stipulate certain requirements currently provided for in the Solvency 2 Regulations 2015 (SI 2015/575) and the Retained Commission Delegated Regulation (EU) 2015/35 (SI 2015/35) under Solvency II so that related provisions in these regulations can be repealed as stated in the Financial Services and Markets Act 2023.
Specifically, the new regulations
– mandate that the Prudential Regulation Authority (PRA) release technical data (fundamental spread) used for computing the matching adjustment that may be applied by insurance companies upon approval of the PRA to determine their solvency capital requirements (currently provided for in regulation 4B of the Solvency 2 Regulations).
– define how the matching adjustment and the fundamental spread are to be calculated, thereby drawing from Article 53 and Article 54 of the above noted Delegated Regulation with some modifications. Specifically, the new calculation methodology for the fundamental spread allows for a more granular assessment of the default risk of an asset, leading to better matching adjustments and an increase in the spread as provided for in the PRA rules.
– outline the PRA’s procedures for evaluating applications for the use of the matching adjustment, thereby replacing regulation 42 of the Solvency 2 regulations with some modifications. Specifically, (re)insurance undertakings may now also apply for the use of the matching adjustment for portfolios that do not have fixed cash flows assets in them, e.g. where the cash flows of the assigned portfolio of assets are linked to inflation.
– empower the PRA to
– set out additional criteria for qualifying for the matching adjustment;
– restrict the use of the matching adjustment and / or increase the fundamental spread leading to a reduction in the matching adjustment in cases where the conditions for the application of the adjustment are no longer met;
– allow insurance firms to increase the fundamental spread on their own initiative, if they believe such increase is necessary to ensure coverage of all retained risks.
– mandates the HM Treasury to regularly review the provisions of these regulations. Such review must take place – at the minimum – every five years.
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As the above summary only presents the key provisions of the regulations, please refer to the enclosed legal document for more detailed, comprehensive information.