Prudential Regulation Authority Rulebook

3.1

Pillar 2 insurance liabilities are the starting point for the calculation of the TMTP. Firms are reminded that as set out in condition 1^[6] the total amount of the TMTP applied to the Solvency II technical provisions may not exceed the maximum TMTP defined as the difference between Solvency II technical provisions and Solvency I Pillar 2 technical provisions (calculated in accordance with INSPRU 7^[7]) with respect to the Homogenous Risk Groups (HRGs) to which TMTP will be applied. The PRA is aware that firms may inadvertently breach condition 1 through allowances being made for the changes in deferred tax liabilities. Firms are therefore reminded that the comparison required by condition 3^[8] (the financial resource requirement (‘FRR') test) should be applied after allowing for the impacts of any change in deferred tax and its loss-absorbing capacity, but the application of any limit to the TMTP in order to meet condition 3 should not result in condition 1 ceasing to be met.

3.2

The underlying assumptions of both Solvency I Pillar 2 and Solvency II technical provisions are on a best estimate basis. Both Solvency II and the INSPRU 7 rules and guidance as at 31 December 2015 include provision for the best estimate basis to be based on up-to-date and credible information, and to reflect current operating experience. Firms are expected to review the best estimate assumptions at regular intervals, and when it is appropriate, to make changes that reflect changes in operating experience and the firm’s risk profile. The distinction between a methodology and assumption change may rely on judgement. Firms are expected to make the most appropriate determination and to discuss the decision with their usual supervisory contact. The PRA previously communicated that in carrying out the initial TMTP calculation, the PRA expects firms to use consistent best estimate assumptions for both Solvency I Pillar 2 and Solvency II, which reflect the expected operating experience of the business^[9].

3.3A

In calculating Solvency I technical provisions for the purpose of the TMTP, firms should apply the methodologies that they were using as at Thursday 31 December 2015. The PRA does not expect firms to make any further retrospective changes to these Solvency I methodologies (apart from specific changes that the firm has previously discussed and agreed with the PRA). This will be the applicable methodology (for calculating the Solvency I technical provisions when determining the maximum amount of TMTP as set out in Condition 1 of Regulation 54 of the Solvency 2 Regulations 2015 (2015/575). For the avoidance of doubt, this does not preclude firms agreeing further simplification changes to their TMTP simplification changes to their TMTP methodology as set out in 4.18A – 4.18E below, provided that compliance with Regulation 54 can be demonstrated. Firms should discuss with their usual supervisory contact any query regarding how the Solvency I basis should be calculated to allow for post Thursday 31 December 2015 changes which could impact the TMTP calculation, for example investment in new asset classes, implementation of with-profits estate distribution or management actions in respect of business written before the introduction of Solvency II. The PRA expects the Solvency I approach to the evaluation of new risks will be identical to the Solvency II basis for the purposes of the TMTP calculation unless the firm can sufficiently demonstrate that the risk was addressed in a different way in methodologies used as at Thursday 31 December 2015.

3.3

Where changes are made to best estimate assumptions which are inputs to both the Solvency I and Solvency II bases, and these changes have a material impact on the level of technical provisions, the PRA expects that the assumption changes should be made consistently within the Solvency I Pillar 2 (and Pillar 1 where the FRR test applies or is at risk of applying) and Solvency II best estimate bases. The PRA’s view is that the impact of such an assumption change should not be included within the TMTP benefit as the change reflects changes in operating conditions or the firm’s risk profile, rather than being introduced by Solvency II requirements themselves. The need to maintain consistency is an ongoing requirement, and applies both in the initial calculation of TMTP and in any subsequent recalculation.

3.4

It should not be assumed that maintaining consistency between Solvency I and Solvency II requires the equalisation of all assumptions. In particular, the review of a firm’s Solvency I Individual Capital Assessment (ICA), and determination of Individual Capital Guidance (ICG), will have considered the aggregate strength of the valuation basis. Hence it may not be appropriate to equalise individual Solvency I assumptions to the equivalent assumptions made in the Solvency II valuation basis without assessing the impact on the aggregate ICA valuation. Firms should document how changes to the Solvency II best estimate basis have been reflected in the Solvency I basis(es) and make this available to the PRA upon request.

3.5

The PRA has previously given guidance^[10] that it does not generally expect to revisit or reassess ICG as part of the process of approving a firm’s application for TMTP relief, but that a firm may request, and the PRA will consider conducting, a proportionate review of ICG if it believes that the assumptions underlying its most recent ICA review and ICG are out-of-date and that this is having a material impact on the TMTP. For example, where the PRA’s view and understanding of the risks that a firm is exposed to has changed, or following a Part VII transfer, it may be necessary to consider the appropriateness of a firm’s ICA basis. The PRA will also consider initiating a proportionate review of a firm’s ICG if the PRA believes that the ICA basis has not been maintained consistently with the Solvency II basis and may be resulting in an inappropriate calculation of TMTP.