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UK will not 'gold plate' Solvency II capital requirements for insurers, says PRA


The UK insurers will not be subject to capital requirements that go beyond those set out in the new EU-wide regulatory regime which is due to come into force next year, the acting head of the regulator has said.

Speaking at an event in London Paul Fisher, acting executive director for insurance supervision at the Prudential Regulation Authority (PRA), told insurers that the regulator did not intend to use the incoming Solvency II regime as "an opportunity to raise capital requirements across the board".

"The PRA believes the UK industry is in a good position, having had the UK risk-based ICAS regime for around 10 years," he said.

"We … recognise and respect that Solvency II is a maximum-harmonising Directive with a key objective of promoting supervisory co-operation. The PRA is committed to upholding this valued objective and will implement the Directive as intended. We can't, and won't, gold-plate," he said.

The new Solvency II regime comes into force across the EU on 1 January 2016 and must be fully transposed into national laws by the end of March. The new rules set out broader risk management requirements for European insurers and dictate how much capital firms must hold in relation to their liabilities.

In his speech, Paul Fisher said that the purpose behind the new regime was to allow insurers to take "informed decisions" by promoting a better understanding of different types of risk. Rather than "fix[ing] firms' business models to be identical" or "restrict[ing] the level of innovation across the market", the new rules would instead give managers the opportunity to "decide upon their chosen risk appetite and the precise details of their risk models", he said.

"What matters to the PRA is that firms hold capital commensurate to such risk exposures, in line with the Directive," he said.

Larger firms will likely choose to use their own 'internal' models to estimate capital requirements, rather than use a 'standard' model which will likely mean higher charges. Internal models must cover "all material risks" to which firms are exposed, and will have to be submitted to the PRA for approval. Applications can be submitted from 1 April, Fisher said.

The PRA's latest consultation paper on Solvency II transitional measures was published last week (26-page / 351KB PDF), and firms can submit feedback until 20 February. It sets out the PRA's approach to the directive's transitional rules on risk-free rates and technical provisions, both of which firms will only be able to use if they apply to the PRA in advance. The consultation also includes two draft supervisory statements: one on the PRA's expectations regarding the transitional measures, and one on the internal model treatment of participations in insurance and reinsurance firms.

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