Technical information for Solvency II firms

Risk-free rates (RFR)

From 11pm on 31 December 2020 onward, UK insurance firms are required to use technical information published by the PRA to calculate the technical provisions required by Solvency II. The European Insurance and Occupational Pensions Authority (EIOPA) publishes similar information for use by EU insurance firms, including EU subsidiaries of UK insurance groups.   

Our technical information consists of schedules of risk-free interest rates in nine currencies.  Firms use these rates to calculate the present value of the expected future costs of honouring their obligations to policyholders.  

We publish technical information monthly (on or before the eighth working day of the month) and include the following information for each currency:

• Basic risk-free rate curves;
• Fundamental spreads (FS), used by insurers to calculate the risk-free curve for liabilities within a matching adjustment portfolio; 
• Risk-free rate curves for liabilities where the insurers are permitted to use a volatility adjustment (VA).

For the publication of technical information, we rely on data obtained from established third-party providers. However, it may be necessary for us to amend, from time to time, technical information after it has been published if data errors are subsequently identified. 

RFR updates due to Libor transitions

For technical information published with a reference date from and including Saturday 31 July 2021, the RFRs for GBP will be based on Sterling Overnight Index Average (SONIA) overnight index swap rates, with zero Credit Risk Adjustment. 

From Saturday 1 January 2022, the RFRs for JPY will be based on Japanese government bonds, with zero Credit Risk Adjustment (CRA). From the same date, the CRA for EUR RFRs will be based on Euro Ibor (Euribor) and Euro short-term rate (€STR) data (instead of the Euro Over Night Index Average (EONIA) which will cease publication).

Further details can be found in Policy Statement (PS) 12/21 ‘Solvency II: Deep, liquid and transparent assessments, and GBP transition to SONIA’. 

Deep, liquid, and transparent (DLT) assessments

The RFRs published by us must be based on financial instruments traded in a deep, liquid, and transparent (DLT) financial market. A DLT assessment of each relevant market must be carried out to determine for which maturities of instrument that market is DLT; rates for those maturities are then used as inputs to the RFR curve. For 2021, we have retained the results of EIOPA’s DLT assessments for each PRA relevant currency. We will publish updated DLT assessments on an annual basis to be applied in future years. We will also update a DLT assessment (outside the annual assessment) when a Libor-based RFR transitions to an alternative reference instrument. 

DLT assessments for January 2022 implementation

On Friday 1 October 2021, the PRA published the outcomes of its DLT assessments which will apply from Saturday 1 January 2022.

DLT assessments for implementation in 2021

The PRA initially retained the results of EIOPA’s DLT assessments to apply for each PRA relevant currency in 2021. On Thursday 3 June 2021 we published a report setting out the results and analysis for our first DLT assessment of the SONIA OIS market. The report was produced to support the transition of the GBP RFR to reference SONIA OIS (instead of Libor swaps) from July 2021 onwards. 

Volatility adjustment (VA) reference portfolios

The VA is an adjustment to the basic risk-free rate that reflects a proportion of the additional return that an insurer may expect to earn from investing in government and corporate bonds, rather than risk-free equivalents. We determine the VA by calculating the additional return on reference portfolios that are typical of UK insurance firms’ asset holdings in different currencies. We update the reference portfolios in our calculations on 31 March each year.  

The reference portfolios for the year from and including 31 March 2021 are now available. Prior to 31 March 2021, we will use the reference portfolios published by EIOPA.

• VA reference portfolios from and including 31 March 2021 (XLSX)

Symmetric adjustment to the equity capital charge (SAECC)

Insurance firms calculate a solvency capital requirement (SCR) which is the amount of money they should hold in addition to their liabilities to provide a cushion against unexpected events. The Standard Formula SCR calculation includes a test of the impact on firms’ assets and liabilities of a fall in equity prices. We publish one key input to this calculation – the SAECC – every month. The SAECC is based on movements in four major equity indices over the preceding 36 months.

As a temporary measure, UK insurers were asked to use the EIOPA SAECC for valuations from 31 December 2020 to 30 March 2021. However, from 31 March 2021 firms should use the following spreadsheet which shows the SAECC based on UK insurers exposures.  The spreadsheet also shows historical levels of the SAECC as if they had been calculated using the methodology that applies from 31 March 2021. 

• Symmetric Adjustment Equity Capital Charge (xlsx)

Monthly RFR releases

The published risk-free rates are available below, sorted by reference date. We publish the rates for each month on or before the eighth working day of the following month.

Indicative SONIA-based technical information

As noted in PS12/21 ‘Solvency II: Deep, liquid and transparent assessments, and GBP transition to SONIA’, we have published indicative GBP technical information (TI) packages based on SONIA OIS with a reference date of 31 May 2021 (for the May 2021 package) and 30 June 2021 (for the June 2021 package). The publication of this information is intended to assist firms in analysing differences arising from our transition to SONIA-based TI. For the avoidance of doubt, firms should not use this indicative GBP TI for the purposes of complying with their Solvency II requirements, and firms’ mid-year Solvency II balance sheets will be based on GBP Libor.  The applicable GBP TI (for all relevant reference dates) can be found as usual, in the ‘Monthly RFR releases’ section above. We have published indicative GBP TI based on SONIA OIS for May 2021 and June 2021, but will not be publishing further indicative rates as SONIA OIS will be the default basis from July 2021 onwards.

Background to the SONIA-based TI can be found in this additional information pack.