PRA guidance on treatment of private assets in matching adjustment
The PRA today set out how it expects insurers to treat private and other non-traditional assets in matching adjustment portfolios under its Solvency II reform proposals in CP19/23, published in September 2023.
The consultation proposes reforms designed to enable broader and quicker investment in matching adjustment portfolios, including into assets with highly predictable cashflows, while introducing new controls and reporting to manage additional risks.
WHAT CHANGED • Broader eligibility to include assets with highly predictable cashflows, subject to safeguards and a cap on the matching adjustment benefit. • New criteria for admitting a wider range of assets to matching adjustment portfolios beyond those currently eligible. • Additional controls on matching quality and fundamental spread for assets with non-fixed or optional cashflows. • Clarified expectations on risk management of structurally important (SIG) assets and on senior attestation. • A new Matching Adjustment Asset and Liability Information Return to formalise data submissions to the PRA. • Expansion of the types of insurance business that may claim the matching adjustment.
Broader eligibility for private and illiquid assets
CP19/23 proposes extending matching adjustment eligibility beyond assets whose cashflows are strictly fixed and cannot be changed by the issuer or any third party, which is the current requirement. The PRA proposes that assets with “highly predictable” cashflows could also be included, subject to conditions and safeguards. The PRA states that the primary purpose of these changes is to support the extension of eligibility criteria to include assets with highly predictable cashflows, which would allow a wider range of private and illiquid assets to be considered for matching adjustment treatment. Under the proposals, the contribution from highly predictable cashflows would be capped at 10% of the total matching adjustment benefit for a portfolio.
In chapter 2 of CP19/23, the PRA sets out proposed criteria for including a wider range of assets in matching adjustment portfolios beyond those currently eligible, reflecting the broader asset universe that could qualify under the new framework. The PRA has also considered the treatment of existing portfolios and expects that assets already held in matching adjustment portfolios would remain in the “fixed” component once the reforms are implemented, rather than being reclassified as highly predictable.
Controls on matching quality and fundamental spread
To address the additional sources of cashflow uncertainty introduced by extending eligibility to assets with highly predictable or otherwise non-fixed cashflows, CP19/23 proposes new controls on the quality of matching between assets and liabilities. These controls are intended to ensure that any increased flexibility in asset types is accompanied by safeguards around how reliably asset cashflows align with liability profiles. These fundamental spread additions are intended to capture risks that are not fully mitigated by structuring or contractual protections when insurers invest in assets with features such as variable payments or embedded options.
CP19/23 includes examples relating to assets with issuer optionality, illustrating how the proposed framework would treat instruments where the issuer can alter the timing or amount of cashflows. These examples are intended to guide firms on how to assess and model optionality within the matching adjustment framework under the new rules.
Treatment of existing portfolios and business scope
The PRA states that, following implementation of the CP19/23 proposals, assets currently in matching adjustment portfolios are expected to remain classified within the fixed cashflow component, rather than being moved into the highly predictable category. This approach is intended to avoid reclassification of existing holdings while introducing the new category for future investments that meet the highly predictable criteria. Beyond asset eligibility, CP19/23 also proposes expanding the types of insurance business that may claim the matching adjustment, allowing more insurance liabilities to benefit from the mechanism. This would broaden the scope of business lines that can be backed by matching adjustment portfolios, alongside the changes to the range of admissible assets.
CP19/23 outlines a proportionate process that firms could follow when providing attestations, indicating how the PRA expects boards and senior management to demonstrate oversight of matching adjustment use. These expectations are aimed at promoting strong risk management for key assets while facilitating greater investment freedom under the expanded eligibility framework.
Data reporting and the new MALIR return
CP19/23 proposes formalising the data that insurers submit on the assets and liabilities in their matching adjustment portfolios through a new Matching Adjustment Asset and Liability Information Return, known as MALIR. The PRA plans to use this return to gather more structured and regular information on matching adjustment portfolios. By standardising the format and content of data submissions, the MALIR is intended to support the PRA’s ongoing supervision of how firms apply the expanded eligibility criteria, manage matching quality and calculate fundamental spread additions under the proposed reforms. This requirement has limited the range of private and illiquid assets that insurers can include in matching adjustment portfolios, particularly where instruments contain optionality or variable payment features.
The PRA’s proposals in CP19/23 would expand this framework by allowing assets with highly predictable cashflows to qualify, subject to safeguards including the 10% cap on their contribution to the total matching adjustment benefit. The combination of new eligibility criteria, matching quality controls, fundamental spread additions and enhanced reporting is intended to support broader and quicker investment in matching adjustment portfolios while maintaining prudential standards.
