Out-Law News 2 min. read

PRA consults on what it will expect of insurers as they prepare for Solvency II regulatory regime


The Prudential Regulation Authority (PRA) is seeking views on what it will expect of the insurers that it regulates as they prepare for the planned implementation of the Solvency II regulatory regime.

Its consultation sets out how it plans to implement and interpret preparatory guidelines finalised by the European Insurance and Occupational Pensions Authority (EIOPA) in September. The guidelines should be applied from 1 January 2014. The Solvency II regime itself has been subject to a number of delays, but is currently expected to come into force from 2016.

The PRA intends to adopt the guidelines in the form of a supervisory statement, and is consulting on the framework until 15 November.

"Many of the guidelines represent good practice in conformity with existing rules and should not present an additional burden for firms," the regulator said. "As it did when developing ICAS+, the PRA will consider ways that firms may be able to use their preparatory Solvency II work to meet existing regulatory requirements."

EIOPA's guidelines cover four areas which the EU supervisory authority considers fundamental to ensure effective preparation for, and a smooth transition to, the new regime. These are systems of governance; forward-looking assessment of the insurer's own risks; submission of information to national regulators; and pre-application for 'internal models', giving the national regulator time to approve firms' own compliance mechanisms before the changes come into force.

The implementation date of Solvency II will be set by the draft Omnibus II Directive (155-page / 3.7MB PDF). Solvency II sets out stronger risk management requirements for European insurers and dictates how much capital firms must hold in relation to their liabilities. Once approved, the directive will set the scope of technical standards including capital and supervision requirements, which will be prepared by EIOPA.

Approval of the legislation, which was originally scheduled to come into force last year, has undergone multiple delays leading to considerable confusion from the insurance industry and national regulators. Earlier this month the European Commission put forward a draft directive formally postponing the implementation date until 2016 for approval by the European Parliament and member states.

In its consultation, the PRA said that it would seek to achieve the outcomes intended by EIOPA's guidelines in a way that was consistent with its existing rules where possible, rather than draft new rules or set "substantially new expectations" of firms. It intends to implement the guidelines in a proportionate way, reflecting the size and complexity of individual firms, and will allow firms to make preparations "incrementally", bearing in mind the preparatory nature of the guidance.

"The PRA supports EIOPA's proportionate and pragmatic approach in preparation for the implementation of Solvency II," the consultation said. "The guidelines and this statement are designed to work towards a consistent and convergent approach in preparations for Solvency II and not its early implementation."

"Firms will be expected to apply the guidelines in a way that it appropriate to the nature, scale and complexity of their business. The PRA will review firms' preparations in a proportionate and risk-based manner to achieve supervisory outcomes, consistent with the PRA's overall approach to insurance supervision," it said.

The Association of British Insurers (ABI) welcomed clarification of the PRA's interim approach to the new regime, but warned that insurers would still need "sufficient lead-in time between finalisation of the full Solvency II rulebook and implementation".

"The application of the interim measures should be proportionate, reflecting the large amount of money already spent by the industry in preparing for Solvency II," said Hugh Savill, the ABI's director of prudential regulation.

"We want to work closely and constructively with the regulator during the interim period, especially as further details on the final rules are needed before insurers are able to fully prepare," he said.

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