This consultation paper seeks feedback on a draft supervisory statement which sets out the Prudential Regulation Authority’s expectations of firms in relation to treatment of sovereign debt in internal models.
The purpose of this statement is to ensure that firms using an internal model take into account material risks associated with sovereign debt. It is intended to support compliance with Solvency II regulations, thereby achieving the benefits of policyholder protection envisaged by the Directive.
Some firms may need to hold additional capital as a result, although the PRA would not regard them as incremental to those costs of complying with Solvency II.
Solvency II is a maximum-harmonising Directive, therefore the PRA has limited scope to choose an alternative approach.
This statement, however, could facilitate effective competition by ensuring that material risks associated with sovereign debt are assessed and reflected in the Solvency Capital Requirement on a consistent basis across firms using internal models.
The consultation is relevant to all UK Solvency II firms and to Lloyd’s. The consultation closes on Friday 1 May 2015.
Full consultation
© Bank of England
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