The Prudential Regulatory Authority (PRA) has published a consultation paper on further measures for the implementation of Solvency II. With only a few months left before the official application of the new regime in the UK and across the EU, the regulator proposes new compliance rules on three critical aspects of the transposition of the Solvency II Directive, namely the appointment of actuaries, operation schemes and the reporting of national specific templates (NSTs). In addition, it provides some further guidance and clarification, on:

• regulatory reporting exemptions, mainly for PRA category 4 or 5 firms;
• regulatory reporting, internal model outputs;
• ORSA and the ultimate time horizon — non-life firms;
• the quality of capital instruments; and
• the treatment of pension scheme risk.

The complete documentation set is available for download on the Bank of England website.

Here is a brief summary of PRA’s key propositions.

Appointment of actuaries

As Solvency II obliges all insurers to have an actuarial function, the PRA has proposed new rules requiring firms to appoint an external actuary in case that the firm is unable to provide the actuarial function internally. In accordance with the general objectives of the regime, these rules aim to ensure that all Solvency II firms have ample access to actuarial resources and guidance for valuing liabilities to policyholders and exercising discretion and independent judgment in their decisions affecting the interests of with-profits policyholders in order to harmonise the market.

Schemes of operations

Sometimes, the PRA needs to monitor a firm more strictly than it usually would, in order to fulfil its obligations to promote the safety of firms and provide an appropriate degree of protection to policyholders.

In this regard, PRA has proposed changes to terminology to comply with the directive’s requirements related to run-off operations for Solvency II firms, providing clarity on the previously recommended rules on disclosure and transparency of schemes of operations for the Society of Lloyd’s, UK Solvency II firms in difficulty and third country branches, in particular.

Reporting of national specific templates (NSTs): The Society of Lloyd’s specific requirements

Taking into account the specific circumstances of the Society of Lloyd’s, the PRA has also proposed to introduce two additional NSTs particularly relevant for the Society. The proposed templates will help the PRA receive essential quantitative data needed for the effective regulation and monitoring of participants in the Lloyd’s market following the transition to Solvency II.

These templates will need to be reported to the regulator on a regular basis (annually or quarterly) and include both qualitative and quantitative information, on:

• the firm’s system of governance;
• the business pursued by the firm;
• the valuation principles applied by the firm for solvency purposes;
• the risks faced by the firm;
• the risk management systems of the firm; and
• the capital structure, capital needs and capital management of the firm.

The Society will also be expected to report the Lloyd’s specific templates to the PRA in electronic format and for each managing agent on behalf of each respective syndicate that the managing agent manages at the same time it submits its national specific templates.

Besides proposals for new compliance rules, the PRA has also provided greater direction and clarity on the scope of quarterly reporting exemption under Solvency II. The legislation gives national regulators some discretion to reduce the frequency of reporting in the case that ‘submission of the information would be overly burdensome in relation to the nature, scale and complexity of the risks inherent in the business of insurance firms’. However, this exemption is only available to firms that cumulatively represent less than 20% of a Member State’s life and non-life insurance and reinsurance market shares respectively. In this respect, the UK supervisor has determined that firms identified as category four and five, both solo and part of a group, may qualify for the exemption from quarterly reporting.

Any applications for quarterly reporting exemptions intended to apply for the 2016 reporting year should be submitted by Tuesday 1 September 2015.

As we progressively enter into the final stages of the Solvency II transposition, we see an increasing number of insurers shifting their efforts in preparing for the Solvency II Pillar 1 and 2 requirements to collating data and building reporting processes to comply with the 3rd Pillar of the directive, the Solvency II Regulatory Reporting and Transparency obligations.