Solvency II: Income producing real estate loans and internal credit assessments for illiquid, unrated assets

Policy Statement 9/20 | Consultation Paper 23/19

Published on 02 April 2020

Solvency II: Income producing real estate loans and internal credit assessment for illiquid, unrated assets - PS9/20

Overview

This Prudential Regulation Authority (PRA) Policy Statement (PS) provides feedback to responses to Consultation Paper (CP) 23/19 ‘Solvency II: Income producing real estate loans and internal credit assessment for illiquid, unrated assets’ (page 2 of 2). It also contains the PRA’s final Supervisory Statement (SS) 3/17, ‘Solvency II: Illiquid unrated assets’ (see Appendix).

The PS is relevant to UK insurance and reinsurance companies holding or intending to hold income producing real estate (IPRE) loans. It is also relevant to firms investing in illiquid, unrated assets within their Solvency II matching adjustment (MA) portfolios.

Summary of responses

The PRA received six responses to the CP. Respondents generally welcomed the PRA’s proposals but made a number of observations and requests for clarification which are set out in Chapter 2. 

Having considered the feedback received, the PRA has decided to maintain the expectations set out in CP23/19, but has revised the wording of the SS to clarify some of these expectations. These changes are described in full in Chapter 2 of this PS.

The PRA considers that these changes make the final policy clearer and do not result in any additional requirement 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.

Implementation

The expectations set out in the attached SS will come into effect with the publication of the PS on Thursday 2 April 2020. The PRA reminds firms of its ‘Approach to Insurance supervision’, in particular the focus ’on those issues and those firms that, in our judgement, pose the greatest risk to the stability of the UK financial system and, in the case of insurers, to policyholder protection.’ It also refers firms to the published measures aimed at alleviating operational burdens on PRA-regulated insurers in the wake of the Covid-19 outbreak. 

The policy set out in this PS has been designed in the context of the UK’s withdrawal from the European Union and entry into the transition period, during which time the UK remains subject to European law. The PRA will keep the policy under review to assess whether any changes would be required due to changes in the UK regulatory framework at the end of the transition period, including those arising once any new arrangements with the European Union take effect.

The PRA has assessed that the policy would not need to be amended under the EU (Withdrawal) Act 2018 (EUWA). Please see PS5/19 ‘The Bank of England’s amendments to financial services legislation under the European Union (Withdrawal) Act 2018’ for further details.

PDFPolicy Statement 9/20

Appendix


Published on 27 September 2019

Solvency II: Income producing real estate loans and internal credit assessment for illiquid, unrated assets - CP23/19

Overview

This consultation paper (CP) set outs the Prudential Regulation Authority’s (PRA) proposed expectations of firms in respect of their modelling of income producing real estate (IPRE) loans within their Solvency II internal models. It also proposes amendments to its expectations in respect of the use of internal credit assessments for assigning fundamental spreads for illiquid, unrated assets.

The proposals in this CP would result in changes to Supervisory Statement (SS) 3/17, ‘Solvency II: Matching adjustment - illiquid unrated assets and equity release mortgages’ (see Appendix).

The CP is relevant to UK insurance and reinsurance companies holding or intending to hold IPRE loans. It is also relevant to firms investing in illiquid, unrated assets within their Solvency II matching adjustment (MA) portfolios.

Responses and next steps

This consultation closed on Friday 27 December 2019. Please address any comments or enquiries to CP23_19@bankofengland.co.uk.

The proposals set out in this CP have 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.

In the event that the UK leaves the EU with no implementation period in place, the PRA has assessed that the proposals would not need to be amended under the EU (Withdrawal) Act 2018 (EUWA). Please see PS5/19 ‘The Bank of England’s amendments to financial services legislation under the European Union (Withdrawal) Act 2018’ for further details.

The proposed implementation date for the proposals in this CP is Tuesday 31 March 2020. 

PDFConsultation Paper 23/19

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