SS9/15 – Solvency II: Group supervision

1.1

This supervisory statement is addressed to all UK Solvency II firms and to the Society of Lloyd’s, which the PRA considers to be a mixed-activity insurance holding company. It sets out the Prudential Regulation Authority’s (PRA’s) expectations in respect of the Solvency II groups provisions.

1.2

Firms should note that if the group supervisor is a supervisory authority other than the PRA, the PRA still expects UK insurers to comply with PRA rules relating to group supervision (if they are part of a group). The PRA expects firms to behave in a way that contributes to effective group supervision irrespective of which supervisory authority is acting as group supervisor.

1.3

This supervisory statement should be read in conjunction with the Group Supervision Part of the PRA Rulebook, statement of policy (SoP) – The PRA’s approach to insurance group supervision^A1, the European Insurance and Occupational Pension Authority’s (EIOPA) Guidelines on group solvency (as at IP completion day)¹, the PRA’s insurance approach document², and the relevant provisions of the Financial Services and Markets Act 2000 (FSMA).

1.4

This supervisory statement expands on the PRA’s general approach as set out in its insurance approach document. By clearly and consistently explaining its expectations of firms in relation to the particular areas addressed, the PRA seeks to advance its statutory objectives of ensuring the safety and soundness of the firms it regulates, and contributing to securing an appropriate degree of protection for policyholders. The PRA has considered matters to which it is required to have regard, and it considers that this statement is compatible with the Regulatory Principles and relevant provisions of the Legislative and Regulatory Reform Act 2006. This statement is not expected to have any direct or indirect discriminatory impact under existing UK law.

1.5

[Deleted]

1.6

Firms should also refer to:

• 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’ (December 2020);³
• PRA Supervisory Statement SS1/19 ‘Non-binding materials: The PRA's approach after the UK's withdrawal from the EU’ (December 2020);⁴ and
• PRA Supervisory Statement SS2/19 ‘PRA approach to interpreting reporting and disclosure requirements and regulatory transactions forms after EU withdrawal’ (December 2020).⁵

1A.1

Where a group for which the PRA is the group supervisor, wishes to demonstrate that a holding company is a mixed-activity insurance holding company, the group’s assets, revenue, and capital requirements derived from insurance or reinsurance undertakings, including ancillary insurance services undertakings, should be assessed by the firm as follows:

• Assets: Gross assets would be considered by the PRA in the first instance. In cases where gross figures are below the 50% threshold whereas net figures are above the 50% threshold or vice versa, firms should calculate the proportion of group assets on both gross and net basis and refer each to the 50% threshold. The PRA would apply discretion in choosing the most appropriate measure, taking into consideration a group’s specific circumstances. A Solvency II basis of valuation would be considered most appropriate. An IFRS/UK GAAP basis of valuation may be acceptable as an alternative, provided that there is a consistent basis of measurement.
• Revenues: Gross revenues would be considered by the PRA in the first instance. Gross revenue refers to total revenue; net revenue is the revenue after factoring in outward reinsurance. In cases where gross figures are below the 50% threshold whereas net figures are above the 50% threshold or vice versa, firms should calculate the proportion of group revenues on both gross and net basis and refer each to the 50% threshold. The PRA would apply discretion in choosing the most appropriate measure, taking into consideration a group’s specific circumstances. Revenues should be based on the consolidated financial statements. If none are available, the statutory accounts under IFRS/UK GAAP may be acceptable provided that there is a consistent basis of measurement.
• Capital requirements: Solvency Capital Requirements (SCR) should be based on the contribution to the consolidated group SCR⁶ or based on local solvency capital requirements if a Method 2 waiver has been granted.
• Where there are material intra-group transactions, firms should calculate assets and revenue both gross and net of intra-group transactions.

1A.2

The calculations above should be demonstrated using the latest full year reference period, or a three-year average of the past three years where there is material year-on-year volatility in the figures. Where the period under consideration does not fully reflect the normal business mix of the group, a different reference period would be used at the PRA’s discretion.

1A.3

The PRA may reassess a holding company’s classification following events that might alter a group’s structure. These could include but are not limited to: acquisitions, disposals or changes in control applications whereby the financial measures of assets, revenue and capital requirements are impacted in such a manner that it changes a holding company’s classification from a mixed-activity insurance holding company to an insurance holding company, or vice versa.

1A.4

The PRA expects firms to provide any relevant information where requested to support the PRA’s assessment on whether a holding company is an insurance holding company or a mixed-activity holding company.

1A.5

Firms wishing to apply for a waiver or modification to relevant aspects of the revised definition of an insurance holding company may do so using the usual waiver and modification process. The relevant aspects of the definition that the PRA may consider a waiver or modification in relation to include:

1. (a) the application of one or more of the three measures (assets, revenue and capital requirements); or
2. (b) the inclusion of ancillary insurance services undertakings in the insurance part of a group.

1A.6

Firms would need to make a formal application to the PRA. The PRA will assess such applications on a case-by-case basis in accordance with the usual statutory tests, taking into account the objectives of group supervision.

2.1

Where a group, for which the PRA is the group supervisor, wishes to exclude entities from the scope of group supervision, it will be expected to make a formal application to the PRA. Where that application is approved, the exclusion will be given effect by the PRA issuing a direction under section 138A of FSMA, taking into account the criteria in Group Supervision 2.3.

2.2

The PRA will assess applications to exclude entities from the scope of group supervision under Group Supervision 2.3 on a case-by-case basis.

2.3

The group should ensure that any risks that might be posed by the excluded entity are adequately identified and managed. Those risks should be reflected in the ORSA and the capital adequacy assessments of group entities that are at risk (including modelled assessments).

3.1

Where the PRA is the group supervisor the PRA may decide, after consulting other concerned supervisory authorities where relevant and the group, to apply to the group either method 2 (deduction and aggregation method) or a combination of methods 1 and 2, where the exclusive application of method 1 (accounting consolidation-based method) would not be appropriate⁷, having considered Group Supervision statement of policy 3.2-3.5.

3.1A

A group using method 1 may temporarily be allowed to use more than one calculation approach when calculating the group solvency capital requirement by adding the results of two or more calculation approaches (eg internal model and internal model; or internal model and standard formula) considering Group Supervision statement of policy 5.1-5.6. The PRA expects the group to make a formal application to the PRA for a permission under section 138BA of FSMA.

3.2

Where a group for which the PRA is the group supervisor wishes to use method 2 or a combination of methods 1 and 2, the PRA expects it to make a formal application to the PRA for a direction under section 138A of FSMA.

3.3

The PRA expects this application to articulate the way in which the firm believes that Group Supervision 3.2-3.5 should be considered in the context of the firm’s application.

3.4

A group using method 2 may also apply to include in the group solvency calculation the local capital requirements calculated for its overseas sub-groups taking into account the factors in the Group Supervision statement of policy 4.2-4.3. The PRA expects the group to make a formal application to the PRA for a permission under section 138BA of FSMA.

3A.1

Where the PRA is the group supervisor of a group that is headed by a mixed-activity insurance holding company, the group solvency calculation will apply to any part of the group satisfying the criteria of Group Supervision 2.1 (1), (2) or (3) rather than to the mixed-activity insurance holding company.

This chapter has been deleted.

5A.1

Group Supervision 9.4 places limits on the own funds which can be included in the group solvency calculation, depending on their availability to absorb losses anywhere in the group.

5A.2

Groups Supervision 9.4 requires groups to assess whether items cannot be made available to cover the group SCR and which should be deducted from the group’s own funds. The PRA expects firms to consider whether deductions should be made due to any significant restriction affecting the availability, fungibility or transferability of own funds within the undertaking. The PRA expects firms to provide this assessment to the PRA. In continuing with existing practice, the PRA does not expect firms to make deductions until the PRA has considered the firm’s own assessment and confirms that it agrees with such deductions, except where the treatment of that own fund item is specifically referenced under Group Supervision 9.4 to 9.4E. The PRA expects firms to provide the appropriate level of detail in these assessments in the solvency and financial condition report (SFCR). These assessments would subsequently be updated by the firm if there are material changes in the group or as agreed with the supervisor. Firms are expected to comply with the EIOPA Group Solvency Guideline 13⁸ when making its own assessment of availability of own funds at group level of related undertakings that are not subsidiaries.

5A.2A

The PRA assesses availability of own funds to cover the group solvency capital requirement (SCR) on the same basis for different types of groups. In particular, the PRA notes that the scope of the assessment, elements of availability and assumptions as to the availability of different types of own funds under Group Supervision 9.4 do not differ depending on structure of the group or the type of entity at its head. Furthermore, where a firm faces legal or other restrictions from issuing other types of own funds as a result of being a mutual or company limited by guarantee, it may place greater reliance on own funds issued by other group undertakings. The PRA considers that it is important that such groups demonstrate that these own funds are not restricted in meeting all types of losses arising anywhere in the group.

5A.2AA

Since the current UK group solvency regime indicates that the group SCR is intended to represent a diversified risk standard, the PRA makes the assumption that diversification benefits are intended to be preserved when the valuation basis and quality of capital used to meet that standard correspond with UK group solvency principles. The consequence of this is that where standards that are not built on the same principles as, and are not similar in outcome to, those applicable under the UK group solvency regime are applied to the valuation basis and quality of capital, then the PRA will not assume that diversification benefits are intended to be preserved.

5A.2B

Therefore, in principle, firms should not consider the solo SCR as restricting the availability of own fund items or assets at the level of the group, in the meaning of Group Supervision 9.4. However this does not prevent the PRA from challenging the availability and transferability of own funds as assessed by groups. In the case where the PRA deems that own fund items are unavailable, the PRA may require the group to make a deduction from group own funds. Groups should engage from an early stage with their group supervisor should there be any doubt as to the availability and transferability of group own fund items.

5A.2C

The assumption made concerning the solo SCR as a restriction for the purposes of calculating the group SCR does not alter the operation of the solo SCR as a requirement for solo own funds.

5A.2D

Firms should note that solo regulatory requirements applied under regimes which are not built on the same principles as, or not similar in outcome to, the UK solvency regime do not necessarily apply the same basis for valuing assets and liabilities, and therefore the availability of capital contributed to the group solvency position and the transferability of assets from those regimes may be different. In these cases the PRA will presume that solo regulatory requirements do restrict the availability of capital or assets at the level of the group and so the PRA expects firms to provide details on how such own funds would be made available considering the elements set out in SoP – The PRA’s approach to insurance group supervision.

5A.2E

Not only could the different valuation bases and quality of capital permitted for the purpose of local regulatory requirements affect the availability of capital which represents the difference between the contribution to the group SCR and the solo SCR, but also the availability of any surplus capital in excess of the local solo regulatory requirement. The PRA expects firms to take this into account when providing it with information on which the PRA will base its judgements as to the point at which other regulators would intervene to restrict flows of capital out of their jurisdiction.

5A.2F

Firms will also need to classify separately own funds at group level in accordance with Group Supervision 8A-8D including those own funds contributed by third-country insurance or reinsurance undertakings. The quality of capital will be one of the factors taken into account by the PRA when determining when and at which level supervisors from jurisdictions that do not have a solvency framework similar to that applicable in the UK may raise regulatory barriers to reduce own funds availability at group level.

5A.3

When firms are providing details of how own funds could be made available to the group, the PRA notes that these may include actions to transfer own funds around the group, for instance through paying dividends, or selling the assets of an undertaking or insurance holding company to recapitalise group companies in difficulty. The PRA will consider these actions when reviewing a group’s assessment of transferability. In respect of parts of the group subject to requirements which are not similar in outcome to those applicable under the UK group solvency regime, the PRA expects groups to provide robust and credible evidence that the apparent availability of own funds at the group level is not compromised or effectively undermined by any legal or regulatory restrictions on transferability, and that the suggested action resulting in the transfer of the own funds does not jeopardise an orderly resolution of the group. In particular, the PRA expects the evidence to cover, as a minimum, the likely scenarios under which the actions could be taken, and the time that would be required to execute the actions. For the own funds considered available at group level, the PRA expects groups to evidence that these own funds can be made available to the group within a maximum of nine months.⁹

5A.4

Under the current group solvency framework, the PRA may decide to apply to a group the deduction and aggregation method (method 2) for calculation of its solvency requirements, which would allow a firm to use local solvency rules when determining the requirements placed on third-country related undertakings (in a designated overseas regime¹⁰). However, the assessment of the availability at a group level of an own funds item of such a related undertaking needs to be carried out by reference to the UK groups provisions, not only local rules.

5A.5

To illustrate this point further, the assessment of availability should demonstrate that both the solo undertaking third-country rules and the UK group rules have been considered. For example, this might mean that for an own funds item to be considered available at the level of the group, the firm should be able to defer coupon payments both in the event of non-compliance with the solo undertaking’s third-country capital requirement and the UK group SCR.

5B.1

SoP – The PRA’s approach to insurance group supervision sets out how own fund items of: a related insurance or reinsurance undertaking; insurance holding company; or mixed financial holding company should be assessed when considering their availability at the group level. Group Supervision 9.4A – 9.4B identifies and describes the treatment of specific own fund items where those own fund items are either:

1. (i) presumed to be unavailable unless the firm can demonstrate to the group supervisor that this assumption is inappropriate (see paragraphs 3.12 to 3.14 of SoP – The PRA’s approach to insurance group supervision which set out the PRA’s policy on modifications to 9.4A); or
2. (ii) not considered to be available in any case.

5B.1A

Subordinated liabilities and preference shares are among own fund items treated as in 5B.1(i). These instruments create legal obligations on the issuing entity to their holders. At the same time, the issuing entity would not ordinarily have legal obligations in relation to losses arising in another group undertaking. This restricts the ability of these instruments to absorb losses in other group undertakings.

5B.1B

Where the PRA is the group supervisor, for a firm to satisfy the PRA that the own fund items are available to cover the group SCR, the firm needs to demonstrate that these own fund items are available to absorb losses anywhere in the group. The PRA considers that a firm may demonstrate this as follows

• Each insurance and reinsurance undertaking in the Solvency II group has the right to claim against the issuing entity if that insurance or reinsurance undertaking is wound up and there is a shortfall for its policyholders and beneficiaries. This includes any insurance and reinsurance undertakings acquired by the group after the issuance of the subordinated liabilities or preference shares. Furthermore, the right of the group insurance and reinsurance undertakings to claim on the issuing entity does not significantly increase group risks, including the level of complexity when winding up and contagion risk for issuing entities that are insurance or reinsurance undertakings.
• The legal obligations of the issuing entity to the holders of the instruments, including coupon payments, are subordinated to any claims made by group insurance and reinsurance undertakings that are being wound up.

5B.1C

The PRA considers that intra-group guarantees used for this purpose increase certain risks in a group. The PRA would assess the level and volume of risks and the possible risks of contagion in the group due to the intra-group guarantees. The PRA would expect a firm to demonstrate that the intra-group guarantees do not significantly increase the level of complexity when winding up the group. The PRA would also expect a firm to demonstrate that the intra-group guarantees do not significantly increase contagion risk for issuing entities that are insurance or reinsurance undertakings by exposing the solvency of the issuing entity to losses in the other insurance and reinsurance undertakings in the group.

5B.1D

The PRA considers that features that increase the impact of intra-group guarantees on these risks include, but are not limited to, the following:

1. (i) the issuing entity is an insurance or reinsurance undertaking;
2. (ii) there are multiple insurance and reinsurance undertakings in the group;
3. (iii) the issuing entity is a subsidiary of an entity that either has related insurance or reinsurance undertakings, or is an insurance or reinsurance undertaking; and
4. (iv) there are significant intra-group transactions, both in terms of volume and value.

5B.1E

As these features are present in most groups, the PRA expects that for most groups it will not be appropriate to use intra-group guarantees to make subordinated liabilities and preference shares effectively available to absorb losses anywhere in the group. Furthermore, the PRA would expect a firm to consider any other relevant group-specific factors that increase group complexity. The PRA is receptive to other approaches that firms may wish to propose when seeking to demonstrate availability of subordinated liabilities and preference shares, but these must address the legal restrictions derived from with such instruments. The PRA will assess such proposals on a case-by-case basis.

5B.1F

Where own fund items are not specifically identified in Group Supervision 9.4 to 9.4E, the firm should assume that these own fund items are available to cover the group SCR. The PRA may require the firm to provide an assessment of availability of the own fund items which the PRA will consider to determine whether the PRA agrees with the analysis.

5B.2

The PRA will communicate clearly to the firm the PRA’s determination as to whether an own fund item should be considered available or unavailable. This communication may be considered to be a determination in the context of Supervisory Statement 11/16¹¹ and as set out in the Financial Reporting Council’s (FRC) guidance, Practice Note 20¹².

5B.3

Where the firm has not appropriately assessed any own fund items as being not available to meet the group SCR, and the PRA has not assessed any items as not available, then the PRA considers that no determination has been made.

5B.4

If the PRA has not provided a determination on the availability of an own fund item and a firm has nevertheless assessed an item as unavailable, the PRA recommends that the firm discusses this with the PRA, in order to obtain a formal determination of the PRA’s position.

6.1

A group, for which the PRA is the group supervisor, may apply to produce a single document covering its own risk and solvency assessments (ORSAs) at the level of the group and at the level of any subsidiary in the group at the same time (Group Supervision 17.2(3)).

6.1A

If permission is granted to produce a single ORSA report covering the group and the firm level ORSA findings, the group will be required to submit the single ORSA report at the same time to the group supervisor and all the relevant supervisory authorities whose firms report their ORSA findings in the single ORSA report.

6.2

In addition to the ORSA conducted at group level, the PRA expects the group ORSA document to include sufficient details on the solo firms included within the scope of the group ORSA such that Conditions Governing Business 3.8 (solo ORSA) is satisfied in respect of each of those firms.

7.1

A group, for which the PRA is the group supervisor, may apply to produce a single report on its SFCR at the level of the group, and at the level of any subsidiary in the group which must be individually identifiable (Group Supervision 18.1(2)).

7.2

The PRA expects the single document produced to cover the same level of detail on the solo subsidiary firms as is required in the solo SFCR.

8.1

[Deleted]

8.2

For a group, for which the PRA is the group supervisor, it is sufficient for one relevant insurance group undertaking within an insurance group to undertake the following activities on behalf of the group to:

1. (a) submit the relevant data for and the results of the group eligible own funds and the group SCR to the PRA, as referred to in Group Supervision 5.2;
2. (b) ensure ongoing compliance with the conditions for the prudent management of subsidiaries, where the PRA has agreed to the use of a single document, the production of the single document covering all relevant ORSAs and the production of the single SFCR, as referred to in Group Supervision 15.4(2);
3. (c) inform the PRA in an event of non-compliance with the group SCR within the appropriate timeframes, as referred to in Group Supervision 4.4; and
4. (d) submit a realistic recovery plan and take measures to ensure compliance with the group SCR in an event of non-compliance with the group SCR within the appropriate timeframes, as referred to in Group Supervision 4.4.
5. (e) [Deleted]
6. (f) [Deleted]

9.1

If a third country is not a designated overseas regime¹⁴, in accordance with Group Supervision 20, the relevant PRA requirements will apply to the worldwide group, unless the PRA has specified ‘other methods’ to achieve the objectives of group supervision. In the absence of a decision by the PRA to specify ‘other methods’ for the group, then firms in that group are required to apply the relevant PRA requirements to the worldwide group.

9.2

Firms will be expected to make a formal application to the PRA, where they wish the PRA to specify ‘other methods’ for the purposes of Group Supervision 20.1. Any such specification will be given effect by the PRA issuing a direction under FSMA section 138A. In its application, the PRA expects a firm to propose other methods for the PRA to consider. Firms wishing to apply for a direction may do so using the usual waiver and modification process. The PRA will assess such applications on a case-by-case basis, taking into account the objectives of group supervision.

9.3

If firms wish to submit an application before a relevant designated overseas regime determination is made, they may do so stating the assumptions made with regard to the determination. Where appropriate, the PRA may refrain from making a decision until a HMT determination has been finalised.