Firms are reminded that on Wednesday 1 January 2020 the deferred part of the delegated regulation changes published by the European Commission on Tuesday 18 June 2019 will come into effect which may impact the calculation of the Solvency Capital Requirement (SCR).
These changes relate to the: Standard Formula component loss-absorbing capacity of deferred tax (LACDT); segmentation of non-life insurance and reinsurance obligations; standard deviations for the non-life premium and reserve risk sub-module; segmentation of Not Similar to Life Techniques (NSLT) health insurance and reinsurance obligations; and standard deviations for the NSLT health premium and reserve risk sub-module.
Among the changes made to LACDT, there will be a requirement that any increases in deferred tax assets (DTA) after a stress event shall not be included within the calculation of the tax adjustment to the SCR unless firms are able to demonstrate to the PRA’s satisfaction that it is probable that future taxable profit will be available against which that increase can be utilised (Article 207 2a in the revised delegated regulations – as linked to above).
We note that as well as firms who use the Standard Formula for the whole of the SCR, the change to LACDT regulations will also be relevant for firms who use a Partial Internal Model for the SCR, where LACDT is not included within the scope of that model.
We would advise any firm that wishes to include increases in DTA in their LACDT calculation (including where the firm expects to have net deferred tax liabilities (DTL) post-stress, but the DTA component of the net DTL has increased) to speak to their usual supervisory contact at the PRA about how to demonstrate that the inclusion is appropriate.