Transitional Measure on Technical Provisions

1.1

This Part applies to:

1. (1) a UK Solvency II firm;
2. (2) the Society, in accordance with Insurance General Application 3; and
3. (3) managing agents, in accordance with Insurance General Application 3.

1.2

In this Part, the following definitions shall apply:

base TMTP

is the figure calculated in accordance with 4.2(2).

dynamic insurance and reinsurance obligations

means the qualifying insurance and reinsurance obligations designated by the firm in accordance with 4.2(1) and 6.1(1).

dynamic portion

means the amount (which may be negative) of the best estimate for any dynamic insurance and reinsurance obligations less any amounts recoverable from reinsurance contracts and special purpose vehicles in respect of those obligations.

INSPRU 7

means the rules and guidance known as INSPRU 7 (individual capital assessment) in the PRA’s Prudential Sourcebook for Insurers as at 31 December 2015, made or treated as having been made by the PRA on 7 March 2013 under FSMA and the Financial Services Act 2012 (Transitional Provisions) (Rules and Miscellaneous Provisions) Order 2013.

MA-eligible insurance and reinsurance obligations

means the qualifying insurance and reinsurance obligations for which the technical provisions are calculated in accordance with Technical Provisions 2.5(1) and which comply with Matching Adjustment 2.2(1) to 2.2(4), 2.3 and 2.4 for a particular firm. For the purpose of this definition, references to relevant portfolio of insurance or reinsurance obligations in the Matching Adjustment Part are to be treated as references to qualifying insurance and reinsurance obligations.

non-dynamic portion

means the amount that is the sum of:

1. (1) the amount (which may be negative) of the best estimate for any qualifying insurance and reinsurance obligations for which the technical provisions are calculated in accordance with Technical Provisions 2.5(1) other than any dynamic insurance and reinsurance obligations; and
2. (2) the amount of any of the firm’s technical provisions to which the TMTP Permission relates calculated in accordance with Technical Provisions 2.5(2),

in both cases less any amounts recoverable from reinsurance contracts and special purpose vehicles in respect of those obligations.

qualifying insurance and reinsurance obligations

means insurance and reinsurance obligations for which the technical provisions are subject to a TMTP Permission.

qualifying reinsurance contract

means a proportional reinsurance contract between two UK Solvency II firms:

1. (1) which transfers to the reinsurer a 100% share of the ceding firm’s risk under the reinsured contracts of insurance;
2. (2) where the ceding firm has TMTP Permission in relation to the technical provisions for its insurance and reinsurance obligations under the contracts of insurance referred to in (1); and
3. (3) which is legally binding and enforceable in all relevant jurisdictions.

risk margin portion

means, in relation to a firm’s technical provisions calculated in accordance with Technical Provisions 2.5(1) to which a TMTP Permission relates, the amount of the risk margin.

TMTP method

means the method set out in 5.1 for calculating the amount of TMTP, as updated following any transfer event in accordance with the requirements set out in 6.

transfer event

means:

1. (1) a transfer of qualifying insurance and reinsurance obligations;
2. (2) the transfer of risk under a qualifying reinsurance contract;
3. (3) an amendment to a qualifying reinsurance contract that results in a change to the volume of the risks ceded to the reinsurer under such qualifying reinsurance contract; or
4. (4) the cancellation, expiration, termination, or commutation of a qualifying reinsurance contract.

2.1

A firm may apply TMTP only:

1. (1) if it has a TMTP Permission; and
2. (2) to the extent of its TMTP Permission.

2.2

A firm that has a TMTP Permission must not apply the risk-free interest rate transitional measure.

2.3

A firm must not apply TMTP after 1 January 2032.

2.4

A firm may apply TMTP only to technical provisions for such of its insurance and reinsurance obligations that are the firm’s qualifying insurance and reinsurance obligations on the 31 December 2024 or are such obligations assumed by the firm after 31 December 2024 as a result of a transfer event.

2.5

A firm must calculate TMTP using the TMTP method.

3.1

A firm must as part of its SFCR publicly disclose that it applies TMTP and the quantification of the impact of not applying TMTP on its financial position.

4.1

Chapter 4 has effect for determining:

1. (1) where a firm elects to calculate a dynamic portion, the dynamic insurance and reinsurance obligations; and
2. (2) the values of ‘Z_A’, ‘Z_B’ and ‘C₀’ in the TMTP method.

4.2

When applying the TMTP method for the first time, a firm must perform the following steps in sequence:

1. (1) If it so elects, designate specific MA-eligible insurance and reinsurance obligations in respect of which the dynamic portion will be calculated.
2. (2) Calculate the base TMTP so that it satisfies:

\[0\le \mathrm{T}_0\le(\mathrm{X_N}-\mathrm{Y_N})(1-\frac{\mathrm{N}}{16})\]

where:

T0 =	base TMTP;
XN =	the amount of the firm’s technical provisions to which the TMTP Permission relates, as calculated as at 31 December 2024, less amounts recoverable (if any) from reinsurance contracts and special purpose vehicles. Where a matching adjustment or volatility adjustment is applied to those technical provisions, the amount of the firm’s technical provisions must take into account the matching adjustment or volatility adjustment, as calculated as at 31 December 2024;
YN =	an amount equal to the amount of the firm’s technical provisions to which the TMTP Permission relates, calculated as at 31 December 2024 in accordance with INSPRU 7, applied as at 31 December 2024, less amounts recoverable (if any) from reinsurance contracts; and
N =	represents the years from 2016 to 2032. N takes integer values from 0 to 16, so that 2016 is year 0, 2017 is year 1, 2018 is year 2, and continuing until 2032 which is year 16.

1. (3) Express the base TMTP as:

\[base\ TMTP=(\mathrm{A_0+B_0+C_0})\]

where:

A0 =	the amount of the base TMTP attributable to the risk margin portion;
B0 =	the amount of the base TMTP attributable to the dynamic portion; and
C0 =	the amount of the base TMTP attributable to the non-dynamic portion.

1. (4) Calculate ‘Z_A’ as follows:

\[\frac{\mathrm{A_0}}{\mathrm{D_0}}\]

where:

A0 =	‘A0’ as defined in 4.2(3); and
D0 =	the amount of the risk margin portion calculated as at 31 December 2024.

1. (5) Calculate ‘Z_B’ as follows:

\[\frac{\mathrm{B_0}}{\mathrm{E_0}}\]

where:

B0 =	‘B0’ as defined in 4.2(3); and
E0 =	the amount of the dynamic portion calculated as at 31 December 2024.

5.1

A firm must calculate its TMTP, so that TMTP satisfies:

\[0\le \mathrm{T_r}\le(\mathrm{A_r+B_r+C_r-W_r})\]

where:

Tr =	the amount of TMTP as at the final day of the relevant reporting period;
Ar =	the amount of TMTP attributable to the risk margin portion, which is determined by multiplying ‘ZA’ as calculated in 4.2(4) with the risk margin portion, calculated as at the final day of the relevant reporting period;
Br =	the amount of TMTP attributable to the dynamic portion, which is determined by multiplying ‘ZB’ as calculated in 4.2(5) with the dynamic portion, calculated as at the final day of the relevant reporting period;
Cr =	‘C0’ as calculated in 4.2(3), multiplied by (1-M/7);

M =

1. (a) on 31 December 2024, 0; or
2. (b) after 31 December 2024, represents the days elapsed since 1 January 2025 and must be calculated at least on the final day of each year-end reporting period and on the 1 January 2032 as follows:

\[\frac{x}{365}\]

where:

1. x = the number of days since 1 January 2025 not including 29 February 2028, so that 1 January 2025 is 0; and

Wr = an amount calculated in accordance with 5.2, to increase the rate of run-off of TMTP.

5.2

For the purpose of calculating the value of ‘W_r’ referred to in 5.1, a firm must, on the same day on which the value of ‘M’ used in the TMTP method is updated and following any transfer event in accordance with 6.1(3), calculate a new value for ‘W_r’ as follows:

\[\frac{(\mathrm{A_7+B_7-W_q})}{\mathrm{R(7-M)}} +\mathrm{W_q}\]

where:

A₇ = the projected risk margin portion as at 1 January 2032, multiplied by ‘Z_A’;

B₇ = the projected dynamic portion as at 1 January 2032, multiplied by ‘Z_B’;

M = the value of ‘M’ in the TMTP method for the same reporting period;

W_q = the value of ‘W_r’, if any, as at the final day of the previous reporting period; and

R =

1. (a) if the reporting period is quarterly, 4; or
2. (b) if the reporting period is annual, 1.

6.1

Within two months of the effective date of any transfer event, a firm must:

1. (1) where a firm so elects, update its dynamic insurance and reinsurance obligations by designating specific qualifying insurance and reinsurance obligations assumed by the firm as a result of the transfer event that are MA-eligible insurance and reinsurance obligations;
2. (2) update the values of ‘Z_A’, ‘Z_B’ and ‘C₀’ used in 5 to reflect any change in the firm’s qualifying insurance and reinsurance obligations; and
3. (3) calculate ‘W_r’ as at the effective date of the transfer event using the updated values derived from the steps taken in (1) and (2).

6.2

The updates under 6.1(1) and (2) must not result in any increase in the aggregate amount of TMTP claimed by the firms that are parties to the transfer event, such that:

1. (1) where the firm’s technical provisions increase as a result of the transfer event, the positive difference calculated in accordance with 6.3(3) must be no greater than the amount of TMTP that applied to the qualifying insurance and reinsurance obligations covered by such transfer event immediately prior to its effective date; or
2. (2) where the firm’s technical provisions decrease as a result of the transfer event, the positive difference calculated in accordance with 6.3(3) must be no less than the amount of TMTP that applied to the qualifying insurance and reinsurance obligations covered by such transfer event immediately prior to its effective date.

6.3

For the purpose of calculating the positive difference referred to in 6.2, a firm must perform the following steps in sequence:

1. (1) Calculate the output of the TMTP method as at immediately prior to the transfer event.
2. (2) Calculate the output of the TMTP method as at the effective date of the transfer event using any updated value derived from 6.1(1) to calculate the dynamic portion, and using the values derived from the steps in 6.1(2) and (3).
3. (3) Find the positive difference between the outputs calculated under 6.3(1) and (2).

6.4

A firm must use the same value for ‘M’ in each of the calculations referred to in 6.1(3) and 6.3(1) and (2).

6.5

A firm must submit to the PRA an explanation of any update to the dynamic insurance and reinsurance obligations in accordance with 6.1(1), the methods used to update ‘Z_A’, ‘Z_B’ and ‘C₀’ in accordance with 6.1(2) and the calculations referred to in 6.3 as soon as possible and in any case no later than three months following the transfer event.

7.1

A firm with TMTP Permission must:

1. (1) immediately inform the PRA as soon as it observes that the SCR would no longer be complied with without the application of TMTP;
2. (2) take the measures necessary to achieve compliance with the SCR by 1 January 2032; and
3. (3) within two months from the observation referred to in (1), submit a phasing-in plan to the PRA.

7.2

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.

7.3

A firm that updates its phasing-in plan must submit the updated phasing-in plan to the PRA within two months of updating its phasing-in plan.

7.4

A firm that is required to submit a phasing-in plan in accordance with 7.1(3) must submit annually a report to the PRA setting out the measures taken and progress made to comply with the SCR by 1 January 2032.