The Prudential Regulation Authority (PRA) released Consultation Paper 16/14 (CP16/14) on August 11, detailing how it intends to transpose Solvency II into its domestic rulebook. It included updated information on how the regulator will go about granting firms approval to use certain long-term guarantee measures afforded by the European directive. The details of the approval processes will be consulted on later this year. Responses to CP16/14 are required by November 7.

 

The VA and MA allow firms to change the risk-free rate used to discount certain groups of long-term liabilities to reflect the characteristics of the assets used to hedge them. Solvency II requires firms to secure supervisory approval before using the MA while deferring the decision on whether a similar approval process should be applied to the VA to the individual member states. 

 

The ABI suggests approval processes for the VA and MA be harmonised. Jonathan De Beer, head of prudential regulation at the ABI in London, says: "One of our key concerns is how the supervisory processes for the MA and VA will interact with each other. The large proportion of portfolios that people are going to want to use with the VA are those that just miss out on MA approval. There could be a process issue here where an insurer puts in an MA application, which could run for six months, at the end of which its use isn't approved, and then they have to go through another process for the VA." De Beer adds that the ABI will request the application processes be run concurrently or harmonised to prevent this scenario unfolding.

 

A spokesperson for the Bank of England says a harmonised approach is under consideration: "The PRA is aware that several of the application processes for supervisory approval that are required under Solvency II will have significant dependencies between them. "We are currently working to map these dependencies into a pre-application process so that our implementation of the relevant approval processes can take them into account where possible. This will enable proportionate and efficient supervisory practice."

 

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