PRA publishes PS2/24 with final Solvency UK rules

The Prudential Regulation Authority today published Policy Statement PS2/24, setting out near-final Solvency UK rules and updated policy materials following its Solvency II reform consultation. The package affects UK Solvency II firms, Lloyd’s, third-country branches and UK groups within scope of PRA reporting, and confirms a 31 December implementation date for the final policy and associated systems and controls changes.

The PRA describes PS2/24 as one of a series of policy statements implementing the wider Solvency UK reform package, which follows Consultation Paper CP12/23 on adapting Solvency II to the UK market. External advisory analysis notes that PS2/24, alongside PS3/24, is viewed as the first step towards a tailored UK insurance and reinsurance framework under the new regime. CP12/23 had set out proposals for reforms to Solvency II aimed at supporting a more competitive and dynamic UK insurance sector, and PS2/24 now converts those proposals into near-final rules with some material changes.

Monetary policy actions

Market backstops / facilities

Prudential / capital measures

PS2/24 introduces near-final rules through the “PRA Rulebook: Solvency II Reform Instrument 2024”, which amends core capital and liability measurement Parts of the Rulebook. The instrument changes the Solvency Capital Requirement – General Provisions and Solvency Capital Requirement – Internal Models Parts, as well as the Technical Provisions and Transitional Measure on Technical Provisions Parts. PS2/24 also introduces a new Transitional Measure on Technical Provisions Part, creating a standalone Part for this area within the Rulebook.

In Chapter 2 of CP12/23, the PRA had proposed a simplified new default method for calculating the transitional measure on technical provisions, referred to as the “TMTP method”. PS2/24 is accompanied by a new statement of policy titled “Permissions for transitional measures on technical provisions and risk-free interest rates”, which sets out how the PRA will handle permissions in these areas under the reformed framework. Advisory commentary notes that PS2/24 contains material changes to the draft policy in CP12/23, indicating that consultation feedback has led to adjustments in the final calibration and operation of these measures.

The policy statement confirms additional flexibility in group capital calculations where acquisitions involve internal model entities. Under the final approach, an insurance group will have up to six months after an acquisition to create a clear and realistic plan to integrate any internal models, rather than being required to have that plan at the point of acquisition.

PS2/24 also raises the gross written premium threshold at which a firm becomes subject to Solvency II, adjusting the entry point for the full regime. The threshold is increased to £25 million of gross written premiums, which the PRA states is a further £10 million increase compared with the level proposed in CP12/23. This change sits within the chapter of the policy statement dealing with thresholds and is part of the broader calibration of which firms fall within the Solvency UK regime. Supervisory relief and rulebook transfer

Beyond the core capital and technical provisions changes, PS2/24 amends several cross-cutting Parts of the PRA Rulebook to align terminology and requirements with Solvency UK. The policy statement specifies amendments to the Glossary, the Conditions Governing Business Part, the Transitional Measures Part and the Third Country Branches Part.

PS2/24 confirms the PRA’s intention to transfer the remaining firm-facing Solvency II requirements from assimilated law into the PRA Rulebook and other policy materials without major policy reforms. The PRA states that it intends to consult in Q2 2024 on this transfer, which will complete the move of Solvency II requirements into domestic rulebook form. The PRA expects the transfer of these remaining firm-facing requirements to take effect from 31 December, aligning the legal migration with the implementation date of the final policy in PS2/24.

The policy statement also confirms that changes to systems and controls required under the Solvency UK reforms must be implemented by insurers by 31 December. External legal commentary notes that PS2/24 provides the PRA’s feedback to CP12/23 consultation responses and sets out near-final rules and near-final policy materials, including material changes to the draft policy.

The PRA describes PS2/24 as one of the policy statements implementing the Solvency UK package, and advisory analysis characterises PS2/24 and PS3/24 as the first step towards a tailored UK insurance and reinsurance framework. The next formal decision point will be the PRA’s planned Q2 2024 consultation on transferring the remaining firm-facing Solvency II requirements into the Rulebook, ahead of the 31 December 2024 go-live for the Solvency UK changes and associated systems and controls.

--- Sources: https://www.bankofengland.co.uk/prudential-regulation/publication/2024/february/review-of-solvency-ii-near-final-rules https://www.bankofengland.co.uk/prudential-regulation/publication/2024/february/review-of-solvency-ii-adapting-to-the-uk-insurance-market-policy-statement https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/policy-statement/2024/february/ps224app2.pdf