Abstract
Abstract Solvency II came into force on 1 January 2016 and included a transitional measure on technical provisions (“TMTP”) designed to help smooth in the capital impact of Solvency II over a 16-year period. The working party’s view is that the main intention of the TMTP is to mitigate the impact of the introduction of the risk margin, which significantly increases the technical provisions of firms, relative to their Solvency I Pillar 2 liabilities. The majority of firms who hold a TMTP have now had at least one recalculation approved by the Prudential Regulation Authority (PRA); or are in the process of applying for a recalculation. Despite this large number of approved recalculations, there remains significant uncertainty in the industry around the approach and triggers for recalculation. This paper considers aspects of TMTP recalculation for regulated UK life firms, for example practicalities of the calculation, asset and liability considerations, and communications/announcements. In this paper, we outline the need for pragmatism when considering the approach to recalculation of a measure originally intended to serve as the bridge between two regimes. We call for an allowance for doing what is sensible in a principles-based regime balancing what might be more theoretically correct with what is practical and possible to support effective management of the business.
Highlights
Solvency II came into force on 1 January 2016 and included a transitional measure on technical provisions (“TMTP”) designed to help smooth in the capital impact over a 16-year period
SS6/16 indicates that the Prudential Regulation Authority (PRA) expects firms to carry out a recalculation every 2 years from the date of implementation of Solvency II (1 January 2016) over the TMTP’s 16-year lifetime, irrespective of any recalculations resulting from a material change in risk profile
No mention is made to materiality for biennial calculations which is in contrast to recalculations for changes in risk profile for which the SS indicates that only if the solvency cover ratio changes by 5% or more would the PRA expect firms to apply for a recalculation
Summary
During 2016, interest rates fell and the value of the risk margin increased reflecting its sensitivity to changes in interest rates. As indicated in a number of sections in this paper, an application-based recalculation has a number of issues which the working party believes can be addressed through a more dynamic recalculation. These issues primarily relate to the timing of when the balance sheet TMTP aligns to the latent proforma TMTP that would apply following a recalculation. ∙ Capital planning and dividend payment plans Both of which should be mindful of the differences in the balance sheet and the latent TMTP;. The remainder of this section outlines how this might work in practice
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