The Insurance and Reinsurance Undertakings (Prudential Requirements) Regulations 2023
| Jurisdiction | UK Non-devolved |
| Year | 2023 |
| Citation | SI 2023/1347 |
2023 No. 1347
Financial Services And Markets
The Insurance and Reinsurance Undertakings (Prudential Requirements) Regulations 2023
Made 7th December 2023
Laid before Parliament 8th December 2023
Coming into force in accordance with regulation 1(2)
The Treasury make the following Regulations in exercise of the powers conferred by sections 4, 84(2) and 86(5) of the Financial Services and Markets Act 20231.
Citation, commencement and extent
1.—(1) These Regulations may be cited as the Insurance and Reinsurance Undertakings (Prudential Requirements) Regulations 2023.
(2) These Regulations come into force for the purposes of regulation 7 on 1st April 2024 and for all other purposes on 30th June 2024.
(3) These Regulations extend to England and Wales, Scotland and Northern Ireland.
Interpretation
2.—(1) In these Regulations—
“assigned portfolio of assets” means the portfolio referred to in regulation 4(3);
“credit rating” means a credit rating defined in Article 3(1) of Regulation (EC) No 1060/2009of the European Parliament and of the Council of 16 September 2009 on credit rating agencies2issued or endorsed by a credit rating agency in accordance with Article 4 of that Regulation;
“credit rating agency” means a credit rating agency registered by the FCA in accordance with Regulation (EC) No 1060/2009of the European Parliament and of the Council of 16 September 2009 on credit rating agencies or certified by the FCA in accordance with Article 5 of that Regulation;
“insurance undertaking” means an insurance undertaking, as defined in section 417(1) of FSMA 20003, in relation to which PRA rules provide for the calculation of a best estimate of future cash flows using the relevant risk-free interest rate term structure;
“PRA-authorised person” has the meaning given in section 2B(5) of FSMA 20004;
“PRA rules” means the rules made by the PRA under FSMA 2000, as they have effect from time to time;
“reinsurance undertaking” means a reinsurance undertaking, as defined in section 417(1) of FSMA 2000, in relation to which PRA rules provide for the calculation of a best estimate of future cash flows using the relevant risk-free interest rate term structure.
(2) Any other term used in these Regulations which is used in PRA rules applicable to insurance and reinsurance undertakings has the same meaning as in those rules.
PRA duty to publish technical information
3.—(1) Every quarter the PRA must publish on its website—
(a)
(a) for each currency, duration, credit quality and asset class the PRA considers appropriate, a fundamental spread for the calculation of the matching adjustment to the relevant risk-free interest rate term structure used to calculate the best estimate for a portfolio of long-term insurance or reinsurance obligations, and
(b)
(b) such other information as the PRA considers appropriate relating to the calculation of—
(i) technical provisions, and
(ii) the SCR on the basis of the standard formula.
(2) Paragraph 17(9)(b) of Schedule 6A to the Bank of England Act 19985(restriction on delegation of functions by the Prudential Regulation Committee) does not prohibit the making of a rule that imposes an obligation on PRA-authorised persons by reference to information published by the PRA under this regulation.
Application of the matching adjustment
4.—(1) This regulation applies where an insurance or reinsurance undertaking (“the undertaking”) applies to the PRA to disapply or modify its rules, such that the applicant undertaking may apply a matching adjustment to the relevant risk-free interest rate term structure in order to calculate the best estimate of a portfolio of long-term insurance or reinsurance obligations.
(2) Where this regulation applies, the PRA must grant the application where each of the conditions set out in paragraphs (3) to (9) and (11) is met.
(3) The undertaking must assign a portfolio of assets, consisting of bonds or other assets with similar cash flow characteristics, to cover the best estimate of the portfolio of insurance or reinsurance obligations.
(4) The credit quality of the assets in the portfolio referred to in paragraph (3) must be capable of being assessed through a credit rating or the undertaking’s internal credit assessment of a comparable standard.
(5) The undertaking must maintain the assignment referred to in paragraph (3) over the lifetime of the obligations, except for the purpose of maintaining the replication of expected cash flows between assets and liabilities where the cash flows have materially changed.
(6) The portfolio of long-term insurance or reinsurance obligations to which the matching adjustment is applied and the assigned portfolio of assets must be—
(a)
(a) identified, and
(b)
(b) organised and managed separately from the other activities of the undertaking.
(7) Subject to paragraph (8), the expected cash flows of the assigned portfolio of assets must replicate each of the expected cash flows of the portfolio of insurance or reinsurance obligations in the same currency.
(8) Any mismatch between the expected cash flows referred to in paragraph (7) must not give rise to risks which are material in relation to the risks inherent in the insurance or reinsurance business to which the matching adjustment is applied.
(9) The cash flows of the assigned portfolio of assets must be fixed and not capable of being changed by the issuers of the assets or any third parties, except—
(a)
(a) where—
(i) the risks to the quality of matching are not material, and
(ii) only such limited proportion of the portfolio as the PRA may determine is affected;
(b)
(b) where the cash flows of the assigned portfolio of assets are linked to inflation, and the assets replicate the cash flows of the portfolio of insurance or reinsurance obligations that are linked to inflation; or
(c)
(c) in a case where issuers of the assets or third parties have the right to change the cash flows of an asset, where sufficient compensation is paid to secure an equivalent cash flow by reinvesting the compensation in an asset of equivalent or better quality.
(10) In paragraph (9)(a), whether a risk is material is to be determined in accordance with any PRA rules referred to in regulation 7(b).
(11) The undertaking’s application must comply with the requirements of, or imposed under, section 138BA of FSMA 20006(disapplication or modification of rules in individual cases) and the undertaking must comply with rules referred to in regulation 7(a).
(12) This regulation does not prevent the PRA from exercising its powers under section 138BA of FSMA 2000 where an undertaking to whom the PRA has granted a permission to disapply or modify PRA rules in accordance with paragraph (2) has failed to meet any of the conditions—
(a)
(a) set out in paragraphs (3) to (9) and (11),
(b)
(b) set out in rules referred to in regulation 7(b), or
(c)
(c) imposed under section 138BA(4)(a) of FSMA 2000.
Calculation of the matching adjustment
5.—(1) For each currency the matching adjustment referred to in regulation 4(1) must be equal to the difference of—
(a)
(a) the annual effective rate, calculated as the single discount rate that, where applied to the cash flows of the portfolio of insurance or reinsurance obligations, results in a value that is equal to the value of the portfolio of assigned assets; and
(b)
(b) the annual effective rate, calculated as the single discount rate that, where applied to the cash flows of the portfolio of insurance or reinsurance obligations, results in a value that is equal to the value of the best estimate of the portfolio of insurance or reinsurance obligations where the time value of money is taken into account using the basic relevant risk-free interest rate term structure.
(2) For the purpose of the calculation referred to in paragraph (1)—
(a)
(a) “assigned assets” only includes assets whose expected cash flows are required to replicate the cash flows of the portfolio of insurance and reinsurance obligations, excluding any assets in excess of that;
(b)
(b) valuations must comply with any requirements set out in PRA rules.
(3) In paragraph (2), the “expected cash flow” of an asset means the cash flow of the asset adjusted to allow for the probability of default of the asset that corresponds to the element of the fundamental spread set out in regulation 6(3)(a) or, where no reliable credit spread can be derived from the default statistics, the portion of the long term average of the spread over the basic relevant risk-free interest rate (as provided in regulation 6(4) and (5)).
(4) The matching adjustment must not include the fundamental spread (as calculated in accordance with regulation 6) reflecting the risks retained by the insurance or reinsurance undertaking.
(5) The deduction of the fundamental spread under paragraph (4) from the result of the calculation set out in paragraph (1) must include only the portion of the fundamental spread (as calculated in accordance with regulation 6) that has not already been reflected in the adjustment to the cash flows of the assigned portfolio of assets in accordance with paragraphs (1) to (3).
Calculation of fundamental spread
6.—(1) The fundamental spread referred to in regulation 5 must be calculated in a transparent, prudent, reliable and objective manner that is consistent over time and based on relevant indices where available.
(2) The fundamental spread must be calculated in accordance with paragraphs (3) to (9).
(3) The fundamental spread must be equal to the sum of the following—
(a)
(a) the credit spread corresponding to the probability of default of the assets, and
(b)
(b) the credit spread corresponding to the expected loss resulting from downgrading of the assets.
(4) For exposures to the central...
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