Equity release mortgages

Policy Statement 14/17 | Consultation Paper 48/16 | Discussion Paper 1/16

Published on 5 July 2017

Solvency II: matching adjustment - illiquid unrated assets and equity release mortgages – PS14/17

This Policy Statement (PS) provides feedback to responses to Consultation Paper (CP) 48/16, ‘Solvency II: matching adjustment – illiquid unrated assets and equity release mortgages’  (the CP) and provides the final Supervisory Statement (SS) 3/17 ‘Solvency II: matching adjustment – illiquid unrated assets and equity release mortgages’ (see Appendix), which sets out the PRA’s expectations in respect of firms investing in illiquid, unrated assets within their Solvency II matching adjustment (MA) portfolios.

This PS is relevant to life insurance and reinsurance companies holding or intending to hold unrated assets (including restructured equity release mortgages (ERMs)) in an MA portfolio.

Feedback on consultation responses

The PRA received twelve responses to the CP. Responses focused on the impact on ERMs. The PRA has made changes to the draft SS after considering responses to the consultation and further analysis. Details of the changes are included in Chapter 2.

PDFPolicy Statement 14/17

Supervisory Statement 3/17


Published on 15 December 2016

Solvency II: Matching adjustment – illiquid unrated assets and equity release mortgages – CP48/16

In this consultation paper (CP), the Prudential Regulation Authority (PRA) sets out its proposed expectations in respect of firms investing in illiquid, unrated assets within their Solvency II matching adjustment (MA) portfolios. It also provides feedback to the responses the PRA received to Discussion Paper (DP) 1/16 ‘Equity release mortgages’.

The PRA has observed that insurance firms are increasingly including illiquid, unrated assets (including, restructured ERMs) within their Solvency II MA portfolios. These assets can be a good match for long-term annuity liabilities and increasing investment in real assets may have wider economic benefits. The PRA recognises these can be complex assets that lack observable market prices as well as external credit ratings, making it difficult to assess what an appropriate amount of MA benefit should be. The PRA seeks to support firms wishing to invest in illiquid assets by giving clarity about its expectations of appropriate practice.

Summary of proposals

The draft supervisory statement (SS) at Appendix 1 contains proposals relating to internally-rated assets that are included in MA portfolios. It also contains specific proposals relating to the valuation approach and fundamental spread (FS) mapping to be used for restructured ERMs when determining their contribution to a firm’s overall MA benefit. This CP seeks views on those proposals.

Appendix 2 to this CP includes a summary of responses from DP1/16. 

Responses

This CP is relevant to life insurance and reinsurance companies holding or intending to hold restructured illiquid assets (including equity release mortgages (ERMs)) in an MA portfolio.

This consultation closes on Tuesday 14 March 2017.

The finalisation of the industry-wide review of ERMs will build on the proposals in this CP. The proposed implementation date for the proposals in this CP is 2017 H2.

PDFConsultation Paper 48/16


Published on 31 March 2016

Equity release mortgages - DP1/16

In this discussion paper (DP), the Prudential Regulation Authority (PRA) asks for views on equity release mortgage (ERM) valuation, capital treatment, risk management and associated matters. The PRA seeks a range of views on good practice for managing the risks introduced by investing in this asset class.

The PRA previously indicated its intention to begin a review of ERMs in its 6 November 2015 Solvency II Directors’ update.

This DP is most relevant to life insurance and reinsurance companies with ERM exposure. For brevity, the term ‘insurers’ includes reinsurers in the remainder of this document. It will also be of interest to other industry stakeholders (including, without limitation, banks, building societies, other lenders, trade bodies, brokers, credit rating agencies, consultants, actuaries and auditors) and academics. By opening the discussion to a range of stakeholders, the PRA is aiming to consolidate views from across sectors.

Chapters 2 to 6 are relevant to all stakeholders. However, the discussion in Chapter 7 of restructuring ERMs in connection with the Solvency II matching adjustment (MA) is aimed at insurers and related stakeholders, rather than banks and building societies.

Discussion questions are listed in the main body of this paper and included as a list in an appendix. The PRA is seeking respondents’ own opinions rather than their understanding of market practice. Following receipt of responses, the PRA may invite some respondents to participate in further discussions (either in writing or in person) with the aim of clarifying their responses. The PRA will consult further where it considers that policy or supervisory proposals are warranted.

Responses

This discussion process closed on Friday 27 May 2016.

PDFDiscussion Paper 1/16

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