First published on 25 May 2016
Recalculation of the ‘transitional measure on technical provisions’ under Solvency II
The Solvency II Directive allows for a recalculation of the transitional measure on technical provisions (TMTP) every 24 months, or more frequently where the risk profile of the firm has materially changed. These Directive provisions have been transposed by HM Treasury’s Solvency 2 Regulations 2015 (2015/575) (see Regulation 54). The purpose of this supervisory statement is to provide clarity with respect to the PRA’s expectations, and proposed process, for recalculations of the TMTP.
This statement is of interest to all UK insurance firms within the scope of Solvency II and to the Society of Lloyd’s. It is particularly relevant to firms that have been granted approval to use the TMTP, or those that have been considering applying to use this transitional measure.
In particular, this statement sets out the PRA’s expectations and proposed process for
- requesting that a firm carry out a recalculation of the transitional measure; and
- assessing a firm’s application for a recalculation on the basis of a material change in risk profile.
This statement expands on the PRA’s general approach as set out in its insurance approach document.
In Consultation Paper 15/16 (see related links) the PRA consulted on a draft supervisory statement that set out the PRA’s expectations for the recalculation of the TMTP. The PRA received a number of responses to this CP from firms and industry bodies who welcomed the PRA’s work to provide clarity on this area of policy. Respondents focused on the proposed materiality tests and requested further clarity on the PRA’s expectations for the methodology to recalculate TMTPs.
The PRA has considered the feedback to the CP and has amended the final statement accordingly, in particular:
- the PRA expects firms to update the calculation of TMTPs as at the last working day in December of every 24 months rather than the first working day in January;
- with respect to the PRA’s assessment of the materiality of a change in risk profile resulting from a change in operating conditions, the final statement explains what sustained means; and
- the final statement sets out the proportionate approach that the PRA will take with respect to firms’ recalculations of TMTPs and encourages them to discuss their proposed methodology with their supervisory contacts.