Transitional Measures

1.1

Unless otherwise stated, this Part applies to:

1. (1) a UK Solvency II firm;
2. (2) the Society, in accordance with General Application 3;
3. (3) managing agents, in accordance with General Application 3; and
4. (4) (in respect of 3.8 only) a UK ISPV.

1.2

In this Part, the following definitions shall apply:

admissible insurance and reinsurance obligations

has the meaning set out in regulation 53(2) of the Solvency 2 Regulations 2015, where reference to rules implementing Article 20 of Directive 2002/83/EC until 1st January 2016 means INSPRU 1.1.16 R of the PRA Handbook as at 31 December 2015.

[Note: Art. 308c(3) of the Solvency II Directive]

capital resources gearing rules

has the meaning set out in in the PRA Handbook Glossary as at 31 December 2015.

core tier one capital

means an item of capital that is stated in stage A (Core tier one capital) of the capital resources table at GENPRU 2 Annex 1 of the PRA Handbook as at 31 December 2015 to be core tier one capital.

directive reorganisation measures

has the same meaning as in the Insurers (Reorganisation & Winding Up) Regulations 2004 (2004/353).

innovative tier one capital

means an item of capital that is stated in GENPRU 2.2 of the PRA Handbook as at 31 December 2015 to be innovative tier one capital.

lower tier two capital

means an item of capital that is stated in stage H (Lower tier two capital) of the capital resources table at GENPRU 2 Annex 1 of the PRA Handbook as at 31 December 2015 to be lower tier two capital.

perpetual non-cumulative preference share

means an item of capital that is stated in stage B (Perpetual non-cumulative preference shares) of the capital resources table at GENPRU 2 Annex 1 of the PRA Handbook as at 31 December 2015 to be perpetual non-cumulative preference shares.

phasing-in plan

means the phasing-in plan required to be submitted by the firm to the PRA under 12.1.

pre-Solvency II GCRR

means the requirement to maintain group capital resources that applied to a UK Solvency II firm under PRA rules as at 31 December 2015.

Solvency II rules

means the PRA rules in the Valuation, Technical Provisions, Own Funds, Solvency Capital Requirement – General Provisions, Solvency Capital Requirement – Standard Formula, Solvency Capital Requirement – Internal Models, Minimum Capital Requirement, Undertakings in Difficulty, Investments, Composites, Conditions Governing Business, Insurance Special Purpose Vehicles, Group Supervision, Reporting, Surplus Funds, With-Profits, Insurance – Conduct Standards, Insurance – Senior Insurance Management Functions, Insurance – Allocation of Responsibilities and Insurance – Fitness and Propriety Parts of the PRA Rulebook.

upper tier two capital

means an item of capital that is stated in stage G (Upper tier two capital) of the capital resources table at GENPRU 2 Annex 1 of the PRA Handbook as at 31 December 2015 to be upper tier two capital

2.1

This Chapter does not apply to a firm referred to in Insurance General Application 2.1(2).

2.2

Without prejudice to the exclusion that applies to pure reinsurers referred to in Insurance General Application 2.2(7) and subject to 2.3, if a firm has on the Solvency II implementation date ceased to conduct new insurance business and does not have a Part 4A permission to effect contracts of insurance the Solvency II rules shall not apply to it until:

1. (1) unless (2) applies, the earlier of:
1. (a) 1 January 2019, where the firm has demonstrated to the PRA that it will terminate its activity before 1 January 2019; or
2. (b) the date upon which the PRA notifies the firm that the firm has not demonstrated to the PRA that sufficient progress has been made towards terminating the firm’s activity; or
2. (2) where the firm is subject to directive reorganisation measures and an administrator has been appointed, the earlier of:
1. (a) 1 January 2021; or
2. (b) the date upon which the PRA notifies the firm that the firm has not demonstrated to the PRA that sufficient progress has been made towards terminating the firm’s activity.

[Note: Art. 308b (1), (2) of the Solvency II Directive]

2.3

2.2 only applies:

1. (1) if the firm is not part of a group, unless all undertakings that are part of the group have ceased to conduct new insurance business;
2. (2) if the firm provides the PRA with an annual report setting out what progress has been made in terminating its activity; and
3. (3) after the firm has notified the PRA that it satisfies the requirements set out in 2.2.

[Note: Art. 308b (3) of the Solvency II Directive]

3.1

A firm must submit under Reporting 2.1 and 2.2 the regular supervisory report and annual quantitative templates required to be submitted in accordance with the Solvency II Regulations and the annual national specific templates under Reporting 2.6 and 2.8(1) by no later than:

1. (1) 20 weeks after the firm’s financial year end in relation to its financial year ending on or after 30 June 2016 before 1 January 2017;
2. (2) 18 weeks after the firm’s financial year end in relation to its financial year ending on or after 1 January 2017 but before 1 January 2018;
3. (3) 16 weeks after the firm’s financial year end in relation to its financial year ending on or after 1 January 2018 but before 1 January 2019;
4. (4) 14 weeks after the firm’s financial year end in relation to its financial year ending on or after 1 January 2019 but before 1 January 2020.

[Note: Art. 308b (5) of the Solvency II Directive]

3.2

A firm must disclose its SFCR under Reporting 3.1 by no later than:

1. (1) 20 weeks after the firm’s financial year end in relation to its financial year ending on or after 30 June 2016 but before 1 January 2017;
2. (2) 18 weeks after the firm’s financial year end in relation to its financial year ending on or after 1 January 2017 but before 1 January 2018;
3. (3) 16 weeks after the firm’s financial year end in relation to its financial year ending on or after 1 January 2018 but before 1 January 2019;
4. (4) 14 weeks after the firm’s financial year end in relation to its financial year ending on or after 1 January 2019 but before 1 January 2020.

[Note: Art. 308b (6) of the Solvency II Directive]

3.3

A firm must submit under Reporting 2.1 and 2.2 the quarterly quantitative templates required to be submitted in accordance with the Solvency II Regulations and the quarterly national specific templates under Reporting 2.8(2) by no later than:

1. (1) 8 weeks related to any quarter ending on or after 1 January 2016 but before 1 January 2017;
2. (2) 7 weeks related to any quarter ending on or after 1 January 2017 but before 1 January 2018;
3. (3) 6 weeks related to any quarter ending on or after 1 January 2018 but before 1 January 2019;
4. (4) 5 weeks related to any quarter ending on or after 1 January 2019 but before 1 January 2020.

[Note: Art. 308b (7) of the Solvency II Directive]

3.4

Where Group Supervision 2.1(1) or (2) applies, the submission under Group Supervision 17.3 of the group regular supervisory report and annual quantitative templates required to be submitted in accordance with the Solvency II Regulations must be made by no later than:

1. (1) 26 weeks after the financial year end of the participating Solvency II undertaking, ultimate insurance holding company or ultimate mixed financial holding company in relation to its financial year ending on or after 30 June 2016 but before 1 January 2017;
2. (2) 24 weeks after the financial year end of the participating Solvency II undertaking, ultimate insurance holding company or ultimate mixed financial holding company in relation to its financial year ending on or after 1 January 2017 but before 1 January 2018;
3. (3) 22 weeks after the financial year end of the participating Solvency II undertaking, ultimate insurance holding company or ultimate mixed financial holding company in relation to its financial year ending on or after 1 January 2018 but before 1 January 2019;
4. (4) 20 weeks after the financial year end of the participating Solvency II undertaking, ultimate insurance holding company or ultimate mixed financial holding company in relation to its financial year ending on or after 1 January 2019 but before 1 January 2020.

[Note: Art. 308b (8) of the Solvency II Directive]

3.5

A participating Solvency II undertaking that is a firm or, if there are none, the relevant insurance group undertakings must disclose the solvency and financial condition at the level of the group under Group Supervision 18.1 by no later than:

1. (1) 26 weeks after the financial year end of the participating Solvency II undertaking, ultimate insurance holding company or ultimate mixed financial holding company in relation to its financial year ending on or after 30 June 2016 but before 1 January 2017;
2. (2) 24 weeks after the financial year end of the participating Solvency II undertaking, ultimate insurance holding company or ultimate mixed financial holding company in relation to its financial year ending on or after 1 January 2017 but before 1 January 2018;
3. (3) 22 weeks after the financial year end of the participating Solvency II undertaking, ultimate insurance holding company or ultimate mixed financial holding company in relation to its financial year ending on or after 1 January 2018 but before 1 January 2019;
4. (4) 20 weeks after the financial year end of the participating Solvency II undertaking, ultimate insurance holding company or ultimate mixed financial holding company in relation to its financial year ending on or after 1 January 2019 but before 1 January 2020.

[Note: Art. 308b (8) of the Solvency II Directive]

3.6

Where Group Supervision 2.1(1) or (2) applies, the submission under Group Supervision 17.3 of the quarterly quantitative templates required to be submitted in accordance with the Solvency II Regulations must be made by no later than:

1. (1) 14 weeks related to any quarter ending on or after 1 January 2016 but before 1 January 2017;
2. (2) 13 weeks related to any quarter ending on or after 1 January 2017 but before 1 January 2018;
3. (3) 12 weeks related to any quarter ending on or after 1 January 2018 but before 1 January 2019;
4. (4) 11 weeks related to any quarter ending on or after 1 January 2019 but before 1 January 2020.

[Note: Art. 308b (8) of the Solvency II Directive]

3.7

A firm must comply with the rules in:

1. (1) Interim Prudential sourcebook for Friendly Societies Chapter 5; and
2. (2) Interim Prudential sourcebook for Insurers Chapters 9 and 12

of the PRA Handbook as at 31 December 2015, as they were applicable to the firm (including any waiver) at that date, in respect of financial years ending on or before 29 June 2016.

3.8

In respect of financial year ending on or before 29 June 2016, a UK ISPV must submit a copy of its annual audited financial statements within three months of its accounting reference date, but the report is only required if it was audited as a result of a statutory provision other than under FSMA.

4.1

Notwithstanding Own Funds 3.1 to 3.3, a firm with an item of basic own-funds that:

1. (1) was issued prior to 18 January 2015;
2. (2) could be used as:
1. (a) core tier one capital;
2. (b) perpetual non-cumulative preference shares;
3. (c) innovative tier one capital; or
4. (d) upper tier two capital,
3. on 31 December 2015; and
4. (3) would not otherwise be included as Tier 1 own funds or Tier 2 own funds in accordance with Own Funds 3.1 to 3.2,

must include that item in Tier 1 own funds for up to 10 years after 1 January 2016.

[Note: Art. 308b (9) of the Solvency II Directive]

4.2

Notwithstanding Own Funds 3.1 to 3.3, a firm with a basic own-fund item that:

1. (1) was issued prior to 18 January 2015;
2. (2) could be used as lower tier two capital on 31 December 2015,

must include that item in Tier 2 own funds for up to 10 years after 1 January 2016.

[Note: Art. 308b (10) of the Solvency II Directive]

4.3

For the purposes of 4.1 and 4.2, items listed at 4.1(2)(a) to (d) and 4.2(2) must not include any item that could only be used as the item specified by virtue of rule GENPRU TP 4 of the PRA Handbook as at 31 December 2015.

5.1

Notwithstanding Solvency Capital Requirement – General Provisions 2, 3.1, 3.3, 3.4 and Solvency Capital Requirement – Standard Formula 3.1 to 3.3, the standard parameters to be used when calculating the market risk concentrations sub-module and the spread risk sub-module in accordance with the standard formula must be adjusted as follows:

1. (1) until 31 December 2017, the standard parameters shall be the same in relation to exposures to EEA States’ central governments or central banks denominated and funded in the domestic currency of any EEA State as the ones that would be applied to such exposures denominated and funded in their domestic currency;
2. (2) from 1 January 2018 the standard parameters must be reduced by 80% in relation to exposures to EEA States’ central governments or central banks denominated and funded in the domestic currency of any other EEA State;
3. (3) from 1 January 2019 the standard parameters must be reduced by 50% in relation to exposures to EEA States’ central governments or central banks denominated and funded in the domestic currency of any other EEA State;
4. (4) from 1 January 2020 and onwards, the standard parameters must not be reduced in relation to exposures to EEA States’ central governments or central banks denominated and funded in the domestic currency of any other EEA State.

[Note: Art. 308b (12) of the Solvency II Directive]

5.2

Notwithstanding Solvency Capital Requirement – General Provisions 2, 3.1, 3.3, 3.4 and Solvency Capital Requirement – Standard Formula 3.1 to 3.3, the standard parameters to be used for equities that a firm purchased on or before 1 January 2016, when calculating the equity risk sub-module in accordance with the standard formula, must be calculated as the weighted averages of:

1. (1) the standard parameter to be used when calculating the equity risk sub-module in accordance with 5.4; and
2. (2) the standard parameter to be used when calculating the equity risk sub-module in accordance with the standard formula.

[Note: Art. 308b (13) of the Solvency II Directive]

5.3

The weight for the parameter expressed in 5.2(2) must increase at least linearly at the end of each year from 0% during 2016 to 100% from 1 January 2023.

[Note: Art. 308b (13) of the Solvency II Directive]

5.4

The equity risk sub-module for the purpose of 5.2(1) must be calibrated using a Value-at-Risk measure, over a time period, which is consistent with the typical holding period of equity investments for the firm concerned, with a confidence level providing the policyholders with a level of protection equivalent to that set out in Solvency Capital Requirement – General Provisions 3.2 to 3.5.

[Note: Art. 308b (13) of the Solvency II Directive]

6.1

If a firm complies with the pre-Solvency II MCR but during 2016 does not comply with the SCR:

1. (1) Undertakings in Difficulty 3.1(3) shall not apply;
2. (2) the firm must take the measures necessary to achieve the establishment of the level of eligible own funds covering the SCR or the reduction of its risk profile to ensure compliance with the SCR by 31 December 2017; and
3. (3) the firm must, every three months submit a progress report to the PRA setting out the measures taken and the progress made to establish the level of eligible own funds covering the SCR or to reduce the risk profile to ensure compliance with the SCR.

[Note: Art. 308b (14) of the Solvency II Directive]

6.2

6.1 shall cease to apply where a progress report submitted in accordance with 6.1(3) shows that there was no significant progress in achieving the establishment of the level of eligible own funds covering the SCR or the reduction of the risk profile to ensure compliance with the SCR between the date of the observation of non-compliance with the SCR and the date of the submission of the progress report.

[Note: Art. 308b (14) of the Solvency II Directive]

7.1

If on 31 December 2015 a firm complies with the pre-Solvency II MCR but does not hold sufficient eligible own funds to cover the MCR then:

1. (1) the firm must comply with Minimum Capital Requirement 2.1 by 31 December 2016;
2. (2) Undertakings in Difficulty 4.1 will apply from 31 December 2016; and
3. [Note: Art. 131 of the Solvency II Directive]
4. (3) until 31 December 2016 a firm must:
1. (a) inform the PRA immediately where it observes that the pre-Solvency II MCR is no longer complied with or where there is a risk of non-compliance within the next three months; and
2. (b) within one month from the observation of non-compliance with the pre-Solvency II MCR, submit, for approval by the PRA, a short-term realistic finance scheme to restore, within three months of that observation, its capital resources, at least to the level of the pre-Solvency II MCR or to reduce its risk profile to ensure compliance with the pre-Solvency II MCR.

7.2

Any finance scheme submitted under 7.1(3)(b) must at least include particulars or evidence concerning the following:

1. (1) estimates of management expenses, in particular current general expenses and commissions;
2. (2) estimates of income and expenditure in respect of direct business, reinsurance acceptances and reinsurance cessions;
3. (3) a forecast balance sheet;
4. (4) estimates of the capital resources intended to cover the pre-Solvency II MCR; and
5. (5) the firm’s overall reinsurance policy.

8.1

Notwithstanding Group Supervision 11.2, until 31 March 2022, the group SCR of a group based on consolidated data (consolidated group SCR) must be calculated on the basis of either:

1. (1) the standard formula;
2. (2) an approved internal model, in a manner consistent with the general principles contained in the SCR Rules; or
3. (3) approved internal models, where each approved internal model is applicable to a part of a group where both the Solvency II undertaking and the ultimate parent undertaking are located in the same EEA State and that part of the group forms a distinct part having a significantly different risk profile from the rest of the group.

[Note: Art. 308b (16) of the Solvency II Directive]

9.1

Where Group Supervision 2.1(1) or 2.1(2) applies, the following provisions apply (notwithstanding Group Supervision 4.1 to 4.2) with any necessary changes at the level of the group:

1. (1) 4.1 to 4.2;
2. (2) 5.1;
3. (3) 8.1; and
4. (4) 11 to 13.

[Note: Art. 308b (17) of the Solvency II Directive]

9.2

Where Group Supervision 2.1(1) or (2) applies, if a participating Solvency II undertaking that is a firm or any relevant insurance group undertaking complies with the pre-Solvency II GCRR but during 2016 does not comply with the group SCR:

1. (1) Group Supervision 4.4 shall not apply;
2. (2) the relevant insurance group undertakings must take the measures necessary to achieve the establishment of the level of eligible own funds covering the group SCR or the reduction of the risk profile to ensure compliance with the group SCR by 31 December 2017; and
3. (3) the relevant insurance group undertakings must, every three months submit a progress report to the PRA setting out the measures taken and the progress made to establish the level of eligible own funds covering the group SCR or to reduce the risk profile to ensure compliance with the group SCR.

9.3

9.2 shall cease to apply where a progress report submitted in accordance with 9.2(3) shows that there was no significant progress in achieving the establishment of the level of eligible own funds covering the group SCR or the reduction of the risk profile to ensure compliance with the group SCR between the date of the observation of non-compliance with the group SCR and the date of the submission of the progress report.

[Note: Art. 308b (17) of the Solvency II Directive]

10.1

A firm may only apply the risk-free interest rate transitional measure:

1. (1) in respect of admissible insurance and reinsurance obligations; and
2. (2) if it has received approval to do so from the PRA.

10.2

Where a firm applies the risk-free interest rate transitional measure, it must calculate the adjustment for each currency as a portion of the difference between:

1. (1) the interest rate as determined by the firm in accordance with INSPRU 3.1.28R to INSPRU 3.1.47R of the PRA Handbook as at 31 December 2015; and
2. (2) the annual effective rate, calculated as the single discount rate that, where applied to the cash-flows of the portfolio of admissible insurance and reinsurance obligations, results in a value that is equal to the value of the best estimate of the portfolio of admissible insurance and reinsurance obligations where the time value is taken into account using the relevant risk-free interest rate term structure.

[Note: Art. 308c(2) of the Solvency II Directive]

10.3

The portion referred to in 10.1 shall decrease linearly at the end of each year from 100% during 2016 to 0% during 2032.

[Note: Art. 308c(2) of the Solvency II Directive]

10.4

Where a firm applies the volatility adjustment in accordance with Technical Provisions 8, the relevant risk-free interest rate term structure referred to in 10.2(2) shall be based on the risk-free interest rates adjusted with the volatility adjustment.

[Note: Art. 308c(2) of the Solvency II Directive]

10.5

A firm that applies the risk-free interest rate transitional measure must:

1. (1) not include the admissible insurance and reinsurance obligations in the calculation of the volatility adjustment;
2. (2) not apply the technical provisions transitional measure; and
3. (3) as part of its SFCR publically disclose that it applies the risk-free interest rate transitional measure and the quantification of the impact of not applying the risk-free interest rate transitional measure on its financial position.

[Note: Art. 308c(4) of the Solvency II Directive]

11.1

A firm may only:

1. (1) apply a transitional deduction from its technical provisions; or
2. (2) recalculate the amount of any transitional deduction

if it has received approval to do so by the PRA.

[Note: Art. 308d(1) and (3) of the Solvency II Directive]

11.2

A firm with approval to apply the technical provisions transitional measure must:

1. (1) not apply the risk-free interest rate transitional measure; and
2. (2) as part of its SFCR publically disclose that it applies the transitional deduction and the quantification of the impact of not applying the transitional deduction on its financial position.

[Note: Art. 308d(5) of the Solvency II Directive]

12.1

A firm with approval to use the risk-free interest rate transitional measure or the technical provisions transitional measure must:

1. (1) immediately inform the PRA as soon as it observes that the SCR is no longer complied with without application of the risk-free interest rate transitional measure or the technical provisions transitional measure
2. (2) take the measures necessary to achieve compliance with the SCR by 1 January 2032
3. (3) within two months from the observation of non-compliance with the SCR without application of the risk-free interest rate transitional measure or the technical provisions transitional measure, submit a phasing-in plan to the PRA.

[Note: Art. 308e(1) and (2) of the Solvency II Directive]

12.2

A firm’s phasing-in plan must set out the planned measures to establish the level of eligible own funds covering the SCR or reduce its risk profile to ensure compliance with the SCR by 1 January 2032.

[Note: Art. 308e(2) of the Solvency II Directive]

12.3

A firm that updates its phasing-in plan must submit the updated phasing-in plan to the PRA.

[Note: Art. 308e(2) of the Solvency II Directive]

12.4

A firm with approval to use the risk-free interest rate transitional measure or the technical provisions transitional measure and that is subject to the requirement in 12.1(3) must submit annually a report to the PRA setting out the measures taken and progress made to ensure compliance with the SCR by 1 January 2032.

[Note: Art. 308d(5) and 308e(3) of the Solvency II Directive]

13.1

This Chapter applies to a disclosure of the SFCR by a firm or, as may be applicable, the report on solvency and financial condition at the level of the group by participating Solvency II undertakings or the relevant insurance group undertakings within the group, made in relation to the first two relevant financial years starting on or after the Solvency II implementation date.

13.2

In the disclosure required by Reporting 3.1, a firm may, unless required under other legal or regulatory requirements (including any Solvency II EEA implementing measure), opt not to disclose the following separately when disclosing the amount of the MCR and SCR under Reporting 3.6:

1. (1) the information referred to in Reporting 3.6(2) on any capital add-on imposed on the firm; and
2. (2) the information referred to in Reporting 3.6(3) on any undertaking specific parameters.

[Note: Art. 51(2) of the Solvency II Directive]

13.3

In the disclosure required by Reporting 3.1 as applied to a group by Group Supervision 18.1, the participating Solvency II undertakings that are firms or, if there are none, the relevant insurance group undertakings may, unless required under other legal or regulatory requirements (including any Solvency II EEA implementing measure), opt not to disclose the following separately when disclosing the amount of the group SCR under Reporting 3.6:

1. (1) the information referred to in Reporting 3.6(2) on any capital add-on imposed on the group; and
2. (2) the information referred to in Reporting 3.6(3) on any parameters specific to the group.

[Note: Art. 256(1) and 51(2) of the Solvency II Directive]