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PRA issues supervisory statement on EIOPA Solvency II guidelines

The Prudential Regulation Authority (PRA) has issued a supervisory statement confirming that it expects PRA-authorised firms to follow European Insurance and Occupational Pensions Authority's (EIOPA) guidelines under the Solvency II directive, but that there is some flexibility for firms not to follow the guidelines where it would be disproportionate for them.27 Apr 2015

The directive sets out EU-wide requirements on capital adequacy and risk management for insurers. Firms covered by the directive must implement the new rules by 1 January 2016.

EIOPA, the European supervisory authority in the field of insurance and occupational pensions, published its guidelines on the directive in December 2014 and issued them in the official languages of the EU on 2 February.

The PRA then published a consultation paper, proposing that it intended to comply with the guidelines and including a draft statement laying out how it expected PRA-authorised firms to follow the guidelines.

Insurance expert Rabbani Choudhury of Pinsent Masons, the law firm behind Out-Law.com, said that the new supervisory statement expands on the general approach that the PRA set out in June 2014 in a document called the PRA's Approach to Insurance Supervision.

"The PRA says that it intends to comply with all the EIOPA guidelines, and will take account of them in its on-going supervision of firms; and that it expects firms to comply with all the guidelines that apply to them," Choudhury said.

There is some scope for different approaches, in that the guidelines are not set in stone, Choudhury said.

"Firms are expected to adhere to the guidelines, but on a case-by-case basis, if the provisions of the supervisory statement places a disproportionate burden on a firm and there is a different way to meet the expectations, then firms can explain that to the regulator. So the guidelines are not a fixed requirement, but firms should still comply unless they can give good reason," he said.

The PRA has also provided commentary on the guidelines in specific areas, including ancillary own-funds; classification of own-funds; ring-fenced funds; treatment of related undertakings, including participations; loss-absorbing capacity of technical provisions and deferred taxes; and group solvency calculation, Choudhury said.