Published on 03 April 2019


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

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