UNITED KINGDOM: Prudential Regulation Authority publishes Solvency II: Income producing real estate loans and internal credit assessment for illiquid, unrated assets – PS9/20

Thursday April 2 2020

On 2^nd April 2020, the Prudential Regulation Authority (PRA) published Policy Statement 9/20 (PS9/20) providing feedback to responses to Consultation Paper (CP) 23/19 ‘Solvency II: Income producing real estate loans and internal credit assessment for illiquid, unrated assets’. It also contains the PRA’s final Supervisory Statement (SS) 3/17, ‘Solvency II: Illiquid unrated assets’.

The PS is relevant to UK insurance and reinsurance companies holding or intending to hold income producing real estate (IPRE) loans. It is also relevant to firms investing in illiquid, unrated assets within their Solvency II matching adjustment (MA) portfolios.

The PRA received six responses to the CP. Respondents generally welcomed the PRA’s proposals but made a number of observations and requests for clarification which are set out in Chapter 2.

The PRA has decided to maintain the expectations set out in CP23/19, but has revised the wording of the SS to clarify some of these expectations. These changes are described in full in Chapter 2 of the PS.

Additionally, the PRA considers that the changes made make the final policy clearer and do not result in any additional requirement on firms compared to the original proposals. As a result, the PRA has not updated the cost benefit analysis or assessment of the impact on mutuals from the CP.

Implementation

The expectations set out in the Supervisory Statement (SS) will come into effect with the publication of the PS on Thursday 2 April 2020. The PRA reminds firms of its ‘Approach to Insurance supervision’, in particular the focus ’on those issues and those firms that, in our judgement, pose the greatest risk to the stability of the UK financial system and, in the case of insurers, to policyholder protection.’ It also refers firms to the published measures aimed at alleviating operational burdens on PRA-regulated insurers in the wake of the Covid-19 outbreak.

The policy set out in PS has been designed in the context of the UK’s withdrawal from the European Union and entry into the transition period, during which time the UK remains subject to European law. The PRA will keep the policy under review to assess whether any changes would be required due to changes in the UK regulatory framework at the end of the transition period, including those arising once any new arrangements with the European Union take effect.

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