Solvency II: Equity release mortgages – Part 2

Published on 27 September 2019

Solvency II: Equity release mortgages – Part 2 PS19/19


This Prudential Regulation Authority (PRA) Policy Statement (PS) provides feedback to responses to Consultation Paper (CP) 7/19 ‘Solvency II: Equity release mortgages – Part 2’ (page 2 of 2). It also contains the PRA’s final Supervisory Statement (SS) 3/17 ‘Solvency II: Matching adjustment – illiquid unrated assets and equity release mortgages’ (see Appendix). 

This PS is relevant to insurance and reinsurance companies holding equity release mortgages (ERMs).

Summary of responses

The PRA received 12 responses to the CP. The responses were generally supportive in several areas but asked for some clarifications and opposed some of the proposals. In particular most respondents sought additional transparency about the PRA’s approach to reviewing the EVT parameters.

The details of the responses and the PRA’s feedback and final decisions are set out in Chapter 2. 

Changes to draft policy

The PRA has made some changes to the draft SS after considering responses to the consultation and further analysis. The changes are as follows:

(i) Amended paragraph 3.13A to note that in some circumstances, it may be appropriate for firms to reach agreement with their supervisors on how to value certain assets other than ERMs for the purpose of the EVT.

(ii) Amended paragraph 3.20A(iv) to note that there is no expectation for firms to allow for the impact on existing lending from discretionary future lending that is not part of a pre agreed facility.

(iii) Amended paragraph 3.21A to give more information on the inputs to the PRA’s analysis of real interest rates, to clarify that the movement in the minimum deferment rate of at least 0.5 percentage points applies in general but not necessarily in all circumstances, and to state that the PRA will publish a rationale for the parameters as a matter of course. 

(iv) Amended paragraph 3.30 to clarify the PRA’s expectations on the scenarios that firms are expected to consider when using the EVT in stress as a validation technique.

The PRA has made some further changes to the draft SS on its own initiative. The changes are as follows:

(i) Amended paragraph 3.25 to clarify how the PRA expects the results of the EVT to be reported.

(ii) Minor typographical corrections and clarifications to internal cross-references.

Details of the changes are included in Chapter 2. The PRA considers that changes to the SS outlined in paragraph 1.6 and paragraph 1.7(ii) of this PS make the final policy clearer and do not result in any additional burden on firms compared to the original proposals. As a result the PRA has not updated the cost benefit analysis or assessment of the impact on mutuals from the CP in respect of the changes outlined in paragraph 1.6 and paragraph 1.7(ii).

The PRA has performed a cost benefit analysis in respect of the amendment to paragraph 3.25 of the draft SS relating to communication of EVT results, outlined in paragraph 1.7(i) of this PS. The PRA considers that this amendment will lead to benefits, both in the form of improved assessment of the EVT result on a consistent basis across firms, and in facilitating discussions about the EVT results between firms and their supervisors. The cost of communicating the EVT results in the form expected by paragraph 3.25 is expected to be low, because the information requested is aligned to the calculation of the EVT. The PRA considers that the impact of this amendment on mutuals is expected to be no different from the impact on other firms.


The expectations set out in the updated SS3/17 will come into effect on Tuesday 31 December 2019, and will supersede the version of SS3/17 published in December 2018 that was due to come into effect on the same date.

The policy set out in this PS 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. 

The final SS attached to this PS should be read in conjunction with SS1/19 ‘Non-binding PRA materials: The PRA’s approach after the UK’s withdrawal from the EU’.

PDFPS19/19 ‘Solvency II: Equity release mortgages – Part 2

Published 3 April 2019

Solvency II: Equity release mortgages – Part 2 CP7/19


In this consultation paper (CP), the Prudential Regulation Authority (PRA) proposes amendments to its expectations in respect of firms investing in equity release mortgage (ERM) portfolios, as set out in Chapter 3 of Supervisory Statement (SS) 3/17 ‘Solvency II: Matching adjustment – illiquid unrated assets and equity release mortgages’.

This CP is relevant to insurance and reinsurance companies holding ERMs.


SS3/17 sets out a test (the Effective Value Test or ‘the EVT’) to help the PRA determine whether firms appear to be taking inappropriately large matching adjustment (MA) benefit from restructured ERMs held within MA portfolios. 

The PRA revised SS3/17 in December 2018 to clarify its expectations in respect of how firms could carry out the EVT, with the policy to take effect from 31 December 2019. 

Policy Statement (PS) 31/18 issued alongside the revised SS3/17 noted that the PRA would consult in 2019 on additional proposals as follows:

(i) When and how the PRA would periodically review and publish updated values for the property volatility and deferment rate parameters to be used in the EVT. In particular, the PRA is now consulting on proposals to adjust the deferment rate following a material change in real interest rates, in part with the aim of reducing the sensitivity of the EVT to changes in nominal risk-free rates.

(ii) Where firms include assets other than ERMs in the special purpose vehicle (SPV) used to restructure ERM loans, how those other assets should be allowed for in the EVT.

(iii) The frequency with which the PRA would expect firms to assess the EVT.

(iv) Principles for how the PRA would assess the approaches firms could use to model the risks associated with ERMs in their internal models against the Solvency II tests and standards, including whether and how the PRA would expect firms to apply the EVT in stress, taking account of the PRA’s proposals for how it would vary the deferment rate.

This CP sets out those proposals. The PRA is also consulting on principles to clarify how the loan value plus accrued interest input to the EVT (denoted K in paragraph 3.20 of SS3/17) would reflect circumstances (such as drawdown contracts) where the ultimate amount due at exit is uncertain.

Responses and next steps

This consultation closed on Wednesday 3 July 2019. The PRA invites feedback on the proposals set out in this consultation. Please address any comments or enquiries to

The proposed implementation date for the proposals in this CP is Tuesday 31 December 2019. 

PDFConsultation Paper 7/19