SS41/15 – Solvency II: applying EIOPA’s Set 2, System of Governance and ORSA Guidelines

1.1

This supervisory statement is addressed to all UK firms that fall within the scope of Solvency II, and the Society of Lloyd’s. It sets out the Prudential Regulation Authority’s (PRA’s) expectations of firms and its general approach to the following European Insurance and Occupational Pensions Authority’s (EIOPA’s) Guidelines (as at the end of the transition period)¹:
(i) Set 2 of the Solvency II Guidelines(‘the Guidelines’), published as final reports on 6 July 2015 and in all European Union official languages on 14 September 2015; and
(ii) the System of Governance and the Own Risk and Solvency Assessment (ORSA), published as final reports on 3 February 2015 and in all European Union official languages on 14 September 2015.²

1.2

Guidelines on supervision of branches of third-country insurance undertakings are covered in supervisory statement 44/15.³

1.3

[Deleted].

1.4

[Deleted].

1.5

[Deleted].

1.6

Firms should also refer to:

• Bank of England and PRA Statement of Policy ‘Interpretation of EU Guidelines and Recommendations: Bank of England and PRA approach after the UK’s withdrawal from the EU’;⁴
• Supervisory Statement (SS) 1/19 ‘Non-binding materials: The PRA’s approach after the UK’s withdrawal from the EU’;⁵ and
• Supervisory Statement (SS) 2/19 ‘PRA approach to interpreting reporting and disclosure requirements and regulatory transactions forms after EU withdrawal’.⁶

1.7

Any reference to any provision of direct EU legislation is a reference to it as it forms part of retained EU law.

2.1

[Deleted].

2.2

The PRA expects firms to comply with all of the Set 2, System of Governance and ORSA Guidelines (as at the end of the transition period) that apply to them, in a proportionate manner.

2.3

This supervisory statement also provides further commentary on certain Guidelines where the PRA considers that this is useful for firms. Those Guidelines on which further commentary is provided are:
(i) recognition and valuation of assets and liabilities other than technical provisions;
(ii) methods for determining the market shares for reporting;
(iii) reporting for financial stability purposes;
(iv) reporting and public disclosure; and
(v) ORSA.

3.1

The PRA expects firms to comply with each of the Guidelines in all cases unless they intend to take advantage of the derogation in Article 9 (4) of the Commission Delegated Regulation (EU) 2015/35 (‘the Delegated Regulation’) as it forms part of retained EU law.

3.2

This derogation lays down criteria which, if met, allow a firm to recognise and value an asset or liability based on the valuation method it uses in preparing its annual or consolidated financial statements.

3.3

Where firms intend to take advantage of the Article 9 (4) derogation as it forms part of retained EU law, they should still apply Guidelines 1, 2, 4, 5 and 8 to 11. They should also refer to SS38/15⁷ in which the PRA sets out its conclusions as to which financial reporting standards (FRS) are consistent with the UK’s implementation of Article 75 of the Solvency II Directive (the Directive)⁸ and therefore within the possible scope of the derogation.

6.1

In accordance with the requirement of the PRA Rulebook, Composites 4.5, composite firms are required to prepare a statement on the basis of the accounts referred to in Composites 3.2 identifying the eligible own funds covering the notional minimum capital requirements (MCRs) of the life and non–life parts of the business. Section II on Regular Supervisory Reporting (Guidelines 16-29) (as at the end of the transition period) also gives guidance on reporting issues. In order to fulfil all these requirements, as the template Own Funds (S.23.01.01) does not provide space for composite firms to report eligible own funds separately for life and non-life business, the PRA expects composite firms to submit such statements, on an annual basis, within Section E Capital Management of the Regular Supervisory Report, as described in Annex XX of the Delegated Regulation.

7.1

The PRA expects firms to assess risks on a forward-looking basis, covering business plan and strategy timelines, and reflect the specific risk profile and governance mechanisms of each entity or group.

7.2

In SS26/15 the PRA has set out its expectations for non-life firms regarding the option of demonstrating that their risks have been projected to the ultimate time horizon.⁹ Firms should ensure that they capture own capital needs and reflect business risk profiles over both the short-term and the long-term.

7.3

As part of its supervisory process, the PRA will review ORSA reports on a risk-based and proportionate basis.