The Prudential Regulation Authority (PRA) is consulting today on a significant package of reforms to the Matching Adjustment (MA). This aims to improve the flexibility for life insurers to make more productive, long term investments in the UK economy while supporting safety and soundness and policyholder protection.
The proposals cover reforms to MA regulations relating to greater investment flexibility and revised eligibility rules and more flexibility in MA processes, along with risk management enhancements, a greater role for senior manager responsibility including through attestations, and certain changes to MA calculation and reporting. These proposals fit in with the wider reforms announced by the Government in November 2022, and give clarity on the PRA’s intended approach.
The proposed reforms improve insurers’ investment flexibility by enabling broader and quicker investments by insurers in their MA investment portfolios, while supporting the PRA in holding insurers to account for managing the additional risks involved, through a range of proportionate supervisory measures. The reforms, working with upcoming legislation, will facilitate greater investment freedom by insurers to increase their investments in productive finance, from 2024 onwards.
Sam Woods the Deputy Governor for prudential regulation said:
‘We propose to adjust regulations to reflect the decisions made by the Government about the level of financial resilience that should be required of insurance companies. These proposals aim to promote policyholder protection while enabling the annuity sector to meet its commitments to the Government to increase investment in the UK economy.’
The reforms to the rules on long term insurance products like annuities are designed to:
- improve business flexibility by widening the range of investments and insurance products that can benefit from the advantages of applying the MA. For example, this will allow firms to get an MA benefit by investing in a greater range of UK infrastructure;
- be more responsive to the level of risk by streamlining the PRA’s processes for simpler and lower risk investments and making more proportionate the consequences of accidental breaches of the MA rules, and by increasing the sensitivity of the rules to levels of credit risk (“rating notches”); and
- enhance insurance firms’ responsibility for risk management through high level controls such as an attestation from senior management that they understand and are taking appropriate account of the risks in their investments and the level of MA benefit they are applying.
To help inform these proposals the PRA convened a number of industry expert groups earlier in the year to gather a broad range of information and explore options for implementing the reforms. The PRA is grateful for the input received to date and looks forward to further constructive engagement and feedback during the consultation period.
The MA reforms are expected to be finalised and implemented by 30 June 2024, subject to consultation responses and the Government’s legislative timetable.
The PRA invites feedback on the proposals set out in this consultation and welcomes further evidence and data from stakeholders to help inform its final policy decisions. The consultation period closes on Friday 5 January 2024. Please address any comments or enquires to CP19_23@bankofengand.co.uk.
Notes to editors
- Consultation paper 19/23: Review of Solvency II: Reform of the Matching Adjustment. 28 September 2023
- The Solvency II reforms are dependent on secondary legislation to be laid by the Government following the passage of the Financial Services and Markets Act 2023 by Parliament. The material in this consultation paper (CP) has been prepared and is dependent upon the assumption that the Government legislates in line with the approach stated in its November 2022 consultation response. The government has confirmed its intention to legislate to ensure the PRA has the necessary powers to implement these proposals.
- HM Treasury published a draft of the necessary Statutory Instruments on 22 June 2023. HMT Draft insurance and Reinsurance Undertaking: Prudential requirements Regulations. 22 June 2023.
- The Matching Adjustment (MA) is a mechanism that allows insurance companies to recognise upfront as capital resources a proportion of the investment return that they are confident that they will earn on the assets that are held against their long term insurance liabilities. The MA provides a strong incentive for life insurance firms to closely match their asset and liability cash flows, which reduces prudential risks.
- The new attestation process will require a senior manager to attest that they have a high level of confidence of earning the returns that they are taking as matching adjustment, and that they have identified and taken full account of all the risks from their investments that the firm is exposed to.
- The proposals on MA will be part of the new UK prudential regime for insurers which will eventually be known as ‘Solvency UK’.
- Four Rs: Creating the conditions for long-term sustainable growth in the life annuity sector – speech by Charlotte Gerken, 26 May 2023.
- Solvency UK: Maintaining the momentum - speech by Gareth Truran: 20 September 2023
- Bank of England: Solvency II