Prudential Regulation Authority publishes updated Solvency II statements

The Prudential Regulation Authority (PRA) has published a policy statement on ‘Solvency II: adjusting for the reduction of loss absorbency where own fund instruments are taxed on write down’, which has been updated to reflect comments made during the consultation

It also contains the PRA’s final policy on updating supervisory statement 3/15 ‘Solvency II: The quality of capital instruments’. In addition, the regulator has issued a reporting clarification on how such adjustments should be reflected in the Solvency II reporting templates.

The policy statement and supervisory statement are relevant to UK insurance firms within the scope of Solvency II, the Society of Lloyd’s, and firms that are part of a Solvency II group that will determine and classify capital instruments under the Solvency II own funds regime, together with their advisors.

The rationale for the changes was to address the prudential implications of tax changes introduced by HMRC in the Budget on 29 October 2018 pertaining to hybrid instruments.

The new policy will come into effect for all instruments issued on or after Thursday 21 February 2019.

The PRA received six responses to the consultation paper, which addressed the following areas: the interplay of the proposal with tax, deferred tax, and the solvency capital requirement (SCR) calculation;  general impacts and costs that the proposal might have on the capital structure of  insurance firms;  European Commission proposals to address the loss of own funds on taxable write down, issued November 2018 following advice from the European Insurance and Occupational  Pensions Authority (EIOPA);  entities that cannot issue share capital due to their structure;  treatment of instruments that would normally convert, but may write down instead in  some defined circumstances; and  future development of a resolution and recovery regime for insurers.

Following consideration of the responses, the PRA has added additional material to SS3/15 to clarify points raised by respondents. This, and the content consulted on (originally to be added to Chapter 4), has been inserted as a new chapter 5. The original Chapter 5 (Instruments intended to count towards group own funds) has been renumbered as Chapter 6. 

The PRA does not consider these additions to the draft policy to be significant, or that the impact is significant, or significantly different, for mutuals.

These revisions are aimed at providing readers with greater clarity on the impact of the PRA policy on internal models; and treatment of instruments that would normally convert to equity, but may write down instead in some defined circumstances.

Supervisory statement 3/15 covers the following topics: prohibition on redemption of instruments within five years of the date of issue; liability management and capital reduction; principal loss-absorbency mechanism for Tier 1 instruments subject to limitation (‘restricted Tier 1’); and additional considerations for instruments intended to contribute to group own funds.

Solvency II: Adjusting for the reduction of loss absorbency where own fund instruments are taxed on write down is here.

Solvency II: the quality of capital instruments is here.

Report by Pat Sweet

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