The PRA consults on reforms to the Matching Adjustment as part of a package of measures on Solvency II

29 September 2023

The PRA is consulting today on a significant package of reforms to the Matching Adjustment (MA). This aims to improve the flexibility for life insurers to make more productive, long term investments in the UK economy while supporting safety and soundness and policyholder protection.

The proposals cover reforms to MA regulations relating to greater investment flexibility and revised eligibility rules and more flexibility in MA processes, along with risk management enhancements, a greater role for senior manager responsibility including through attestations, and certain changes to MA calculation and reporting. These proposals fit in with the wider reforms announced by the Government in November 2022, and give clarity on the PRA’s intended approach.

The proposed reforms improve insurers’ investment flexibility by enabling broader and quicker investments by insurers in their MA investment portfolios, while supporting the PRA in holding insurers to account for managing the additional risks involved, through a range of proportionate supervisory measures. The reforms, working with upcoming legislation, will facilitate greater investment freedom by insurers to increase their investments in productive finance, from 2024 onwards.

Sam Woods the Deputy Governor for prudential regulation said:

‘We propose to adjust regulations to reflect the decisions made by the Government about the level of financial resilience that should be required of insurance companies. These proposals aim to promote policyholder protection while enabling the annuity sector to meet its commitments to the Government to increase investment in the UK economy.’

The reforms to the rules on long term insurance products like annuities are designed to:

• improve business flexibility by widening the range of investments and insurance products that can benefit from the advantages of applying the MA. For example, this will allow firms to get an MA benefit by investing in a greater range of UK infrastructure;
• be more responsive to the level of risk by streamlining the PRA’s processes for simpler and lower risk investments and making more proportionate the consequences of accidental breaches of the MA rules, and by increasing the sensitivity of the rules to levels of credit risk (“rating notches”); and
• enhance insurance firms’ responsibility for risk management through high level controls such as an attestation from senior management that they understand and are taking appropriate account of the risks in their investments and the level of MA benefit they are applying.

To help inform these proposals the PRA convened a number of industry expert groups earlier in the year to gather a broad range of information and explore options for implementing the reforms. The PRA is grateful for the input received to date and looks forward to further constructive engagement and feedback during the consultation period.

The MA reforms are expected to be finalised and implemented by 30 June 2024, subject to consultation responses and the Government’s legislative timetable.

FCA

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