MA functioning ‘as intended’ during COVID-19 but some clarifications needed, PRA says

Written by Adam Cadle

07/07/2020

The matching adjustment (MA) has functioned as intended thus far throughout the COVID-19 crisis, the PRA has said, but areas remain where clarifications are needed to ensure consistency in firms’ interpretation of the regulator’s policy.

In a statement to insurers, the PRA said in their MA applications, some firms indicated that their approach to managing the MA portfolio (MAP) would include occasionally removing certain assets despite their continued eligibility. This might lead, for example to firms selling assets that were downgraded below a certain level. “Although the level of MA benefit that can be derived from such assets may change, the PRA reminds firms that there is generally no requirement or expectation to sell downgraded assets as long as the MAP continues to comply with Regulation 42 of the Solvency 2 Regulations and firms’ own governance and risk management systems,” it said.

“The PRA recognises that, within what the legal framework allows, firms may wish to change their approach to managing the MAP in light of the financial turbulence caused by COVID-19. For example, it would be reasonable for firms to seek to avoid being forced sellers of assets. In particular, it may be reasonable for firms to reconsider their strategies for managing the MAP in the face of the current global pandemic and its effect on financial markets, particularly the timing of planned asset disposals. In each of these cases, firms should discuss their intentions with their supervisors, and in particular note whether the changed risk profile is consistent with the assumptions underlying their calculation of the Solvency Capital Requirement, for example, in their internal model specification.”

The PRA said it is also aware that internal model firms may use limits or caps within their calculations of the MA in the Solvency Capital Requirement. As noted in paragraph 4.31 of SS8/18, the PRA places most weight in the detailed modelling undertaken when assessing internal models against the relevant tests and standards.

“Firms are always welcome to discuss improvements to their models with their supervisors, but such changes cannot be considered in isolation, and the PRA will need to reconsider the firm’s detailed modelling work in order to determine whether, in the PRA’s view, it is warranted to revisit any limits or caps present in the model,” the statement said.

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