Prudential Regulation Authority Rulebook

1.1

This supervisory statement is of interest to all UK insurance firms within the scope of Solvency II and to the Society of Lloyd’s. The Prudential Regulation Authority (PRA) expects firms to read this statement alongside all relevant European legislation and relevant Parts of the PRA Rulebook.

1.2

The PRA is publishing this statement to set out expectations of firms in relation to how participations in insurance and reinsurance undertakings are treated when the solvency capital requirement (SCR) is determined at the solo level using an approved internal model. The PRA expects benefits from the maintenance of the levels of policyholder protection envisaged by Solvency II requirements, by clarifying its expectation that capital requirements should reflect the economic reality of exposure to the risks associated with such participations. Some firms may see their SCR increase compared to what they had been expecting if they were contemplating a different approach. The PRA does not regard these costs as incremental compared to Solvency II requirements (which are set out below). The PRA regards the benefits of this statement as proportionate to the costs. It also expects to facilitate effective competition by ensuring that firms are held to a common standard for policyholder protection.

1.3

The statement sets out issues that the PRA expects firms to have considered when calibrating their internal models to ensure that they adequately address the risks posed by those participations.

1.4

This statement expands on the PRA’s general approach as set out in its insurance approach document.^[1] By clearly and consistently explaining its expectations of firms in relation to the particular areas addressed, the PRA seeks to advance its statutory objectives of ensuring the safety and soundness of the firms it regulates, and contributing to securing an appropriate degree of protection for policyholders. The PRA has considered matters to which it is required to have regard, and it considers that this statement is compatible with the Regulatory Principles and relevant provisions of the Legislative and Regulatory Reform Act 2006.

1.5

This statement has been subject to public consultation^[2] and reflects the feedback that was received by the PRA.

1.6

The proposals in this supervisory statement do not have any direct or indirect discriminatory impact under existing UK law.