Solvency II: Matching adjustment

Consultation Paper 21/17
Published on 25 October 2017

Overview

In this consultation paper (CP) the Prudential Regulation Authority (PRA) sets out its proposed expectations of firms in respect of the application of the matching adjustment (MA). The MA allows firms to adjust the relevant risk-free interest rate term structure for the calculation of a best estimate of a portfolio of eligible insurance obligations.

This CP has been developed by the PRA as part of its work on adjustments to the insurance prudential framework in the light of experience following the UK introduction of Solvency II, including in areas recommended for reform by the Association of British Insurers and discussed with the Treasury Committee (see News release in related links). 

In addition to the adjustments mentioned above, this CP proposes to consolidate and update material previously set out in Directors’ letters, Executive Director’s letters and feedback statements (‘Directors’ letters’) published in the period 1 April 2013 to 15 February 2016 in a new supervisory statement (SS). This CP will allow firms to provide feedback to the earlier published material and new guidance, provide greater clarity on the PRA’s expectations in relation to the MA, and help firms realise the intended benefits of MA. 

This consultation is relevant to all UK Solvency II firms and to the Society of Lloyd’s and its managing agents where they are applying or have applied to use the MA.

Summary of proposals

The proposed expectations in the draft SS cover two areas: i) incorporation of existing Director’s letters, and ii) the introduction of updated guidance in relation to aspects of the MA.

The PRA proposes additional guidance in the following areas (with references to the relevant chapter in the draft SS): 

  • asset eligibility – demonstrating cash flow fixity (Chapter 2);
  • criteria for assessing ‘sufficient compensation’ (Chapter 2);
  • restructuring asset cash flows using special purpose vehicles (SPVs) (Chapter 2);
  • trading in the MA portfolio (Chapter 7);
  • consequences of breaches of MA requirements (Chapter 8); and
  • changes to MA portfolio  approval (Chapter 9). 

Responses and next steps

This consultation closes on Wednesday 31 January 2018. The PRA invites feedback on the proposals set out in this consultation. Please address any comments or enquiries to CP21_17@bankofengland.co.uk.

PDF Consultation Paper 21/17

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