Solvency II: Internal models - modelling of the matching adjustment - CP24/17
This consultation paper (CP) seeks feedback on a draft supervisory statement (SS) setting out the Prudential Regulation Authority’s (PRA) proposed expectations of firms regarding the application of the Solvency II matching adjustment (MA) within the calculation of the Solvency Capital Requirement (SCR).
The CP is addressed to UK Solvency II firms and to the Society of Lloyd’s and its managing agents. It is most relevant to firms with or seeking MA approval and which use a full or partial internal model to determine the SCR, together with UK Solvency II firms when making an assessment as to the appropriateness of the standard formula for their risk profile.
Summary of proposals
The purpose of the proposals in this CP is to update and consolidate all of the PRA’s expectations regarding the modelling of the MA in internal models into a single SS in order to provide clarity.
The PRA recognises that the MA requirements were finalised later than other elements of the Solvency II Directive. This presented internal model development challenges for firms seeking to reflect the MA in their models ahead of Solvency II day 1. The PRA is aware that, as a result, a number of firms may wish to make changes to their existing modelling approaches for the MA. There are also likely to be new firms seeking to obtain approval for models that cover the MA. The PRA recognises the complexity involved in modelling the MA for the purposes of calculating the SCR but also the risk management benefits of doing so. The PRA therefore seeks to support firms wishing to develop models in this area by giving more clarity as to its expectations of appropriate practice.
The draft SS (Appendix 1) sets out the full proposals on which the PRA is consulting. As a consolidated draft SS it includes an updated Chapter 3 from SS17/16 ‘Solvency II: internal models – assessment, model change and the role of non-executive directors’; the proposed amendments to SS17/16 are shown in Appendix 2.
Responses and next steps
This consultation closes on Friday 9 March 2018. The PRA invites feedback on the proposals set out in this consultation. Please address any comments or enquiries to CP24_17@bankofengland.co.uk.