Standard formula and proportionality reforms on PRA's Solvency UK radar

Written by Adam Cadle

20/09/2023

The next wave of Solvency UK reforms could target the standard formula and proportionality, the PRA has suggested.

In a speech given at the Bank of America Financials Conference, PRA director, prudential policy, Gareth Truran, said: “Once the regime is fully in our Rulebook rather than locked in legislation, there are other areas we can explore. For example, we could consider whether we can go further to improve the proportionality of the regime for smaller insurers, following similar efforts we are making for banks.”

Furthermore, he said: “In addition, most insurers (including most smaller insurers) use the Solvency II standard formula to calculate their capital requirements rather than internal models, and we have chosen not to prioritise any changes to the standard formula as part of these reforms. But in due course we could consider whether any reforms are warranted here to better suit the UK market.”

Truran commented on the PRA’s future supervisory approach and how it would include enhanced stress testing for insurers – drawing on new legal powers to allow the regulator to publish individual results. Enhanced stress testing – and the public disclosure of individual results at least for those life insurers where these issues are likely to be most material – should play an important role in promoting greater transparency and market discipline, he stated. The PRA’s expectation is that the first of the new stress tests will be launched in Q1 2025 with the publication in Q4 that year.

“For this next exercise, given the amount of reform under way for both us and firms over the next year or so, we expect individual disclosure of results for the largest life insurers will be one of the more material changes from our last stress test in 2022. Beyond that point, we will consider how the framework might evolve in future,” Truran added.

“Secondly, for general insurers, our approach to disclosure for our next stress test will remain, as before, on an aggregate basis – further details will be set out over the next month.”

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