This Prudential Regulation Authority (PRA) supervisory statement is relevant to firms with an internal model approval under Solvency II. It may also be of interest to UK Solvency II firms seeking approval to use an internal model in the future and also to UK Solvency II firms that are part of EEA or non-EEA groups with a group internal model.
This supervisory statement sets out the PRA’s expectations in respect of firms applying for approval for a major change to their approved internal models (either an individual major change or major change triggered by an accumulation of minor changes) or an extension of scope to an approved internal model (eg to cover new business units or risks). This supervisory statement also sets outs the PRA’s expectations in respect of firms applying to alter their approved internal model change policy. Where the firm is part of an EEA or non-EEA group the college of supervisors may need to coordinate and agree the overall process for approving a major change application, which may differ to that set out in the supervisory statement.
In particular the supervisory statement covers the:
- interaction with the PRA before and during a model change application;
- quality of a model change application; and
- the information to be provided with a model change application.
Response to feedback to Consultation Paper (CP) 19/16
In CP19/16 (see related links) the PRA consulted on a draft supervisory statement that set out the PRA’s expectations for changes to internal models used by UK insurance firms and the Society of Lloyd’s. The PRA received a number of responses to this CP from firms and industry bodies who welcomed the PRA’s work to provide clarity in this area. Respondents focused on the proposed documentation and process and requested further clarity on the treatment of minor changes.
The PRA has considered the feedback to the CP and has amended the final statement accordingly, in particular to:
- clarify a number of points about the PRA’s approach in relation to minor changes, including that, where a minor change causes the model to no longer meet the Solvency II tests and standards, firms must address this issue;
- clarify comments relating to the accumulation of minor changes, particularly that minor change accumulations will be reset at the point of receiving a major change application, unless otherwise agreed with the PRA;
- clarify the PRA’s expectation that firms will be expected to base their Solvency II reporting on the model approval that is in place on or before the last day of a reporting period; and
- limit duplication with previously published requirements and guidance.
The PRA considers that the changes made from the draft SS will not result in the impact on mutuals differing to the impact on other firms. Nor do they represent material changes resulting in the need for further cost benefit analysis.
The policy contained in this supervisory statement has been designed in the context of the current UK and EU regulatory framework. The PRA will keep the policy under review to assess whether any changes would be required due to changes in the UK regulatory framework, including those arising once any new arrangements with the European Union take effect.
At the time of writing, the PRA also issued Consultation Paper 32/16 ‘Dealing with a market turning event in the general insurance sector’. Readers, particularly UK general insurance firms, may find it helpful to refer to the CP to consider the PRA’s proposals about how such firms might prepare for, and respond to, a major general insurance loss event which might affect their solvency and future business plans. The final policy will be linked to from the CP32/16 webpage when published.
Supervisory Statement 12/16