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1. Home
2. Prudential regulation
3. CP19/24 – Closing liquidity reporting gaps and streamlining Standard Formula
reporting
CP19/24 – CLOSING LIQUIDITY REPORTING GAPS AND STREAMLINING STANDARD FORMULA
REPORTING
Consultation paper 19/24
* RELATED LINKS RELATED LINKS
* Solvency II
* Solvency II: Monitoring model drift and standard formula SCR reporting for
firms with an approved internal model
Published on 11 December 2024
Browse content
CONTENT
* Privacy statement
* 1: Overview
* Structure of the CP
* Implementation
* Responses and next steps
* 2: Background
* Liquidity risk for UK insurers
* International regulatory context
* External engagement
* 3: Liquidity reporting: The PRA’s proposals
* Cash flow mismatch template
* Cash flow mismatch (short form) template
* Committed facilities template
* Liquidity market risk sensitivities template
* Reporting thresholds
* 4: Liquidity reporting: The PRA’s statutory obligations
* PRA objectives analysis
* Cost benefit analysis (CBA)
* ‘Have regards’ analysis
* Impact on mutuals
* Equality and diversity
* 5: Removal of the PRA’s expectation that internal model life insurance firms
should annually submit SF.01 report
* Standard Formula Reporting
* Non-Life and Composites IM Insurance Firms
* Implementation
* Cost benefit analysis
* PRA objectives analysis
* ‘Have regards’ analysis
* Equality and diversity
* Appendices
PRIVACY STATEMENT
By responding to this consultation, you provide personal data to the Bank of
England (the Bank, which includes the Prudential Regulation Authority (PRA)).
This may include your name, contact details (including, if provided, details of
the organisation you work for), and opinions or details offered in the response
itself.
The response will be assessed to inform our work as a regulator and central
bank, both in the public interest and in the exercise of our official authority.
We may use your details to contact you to clarify any aspects of your response.
The consultation paper will explain if responses will be shared with other
organisations (for example, the Financial Conduct Authority). If this is the
case, the other organisation will also review the responses and may also contact
you to clarify aspects of your response. We will retain all responses for the
period that is relevant to supporting ongoing regulatory policy developments and
reviews. However, all personal data will be redacted from the responses within
five years of receipt. To find out more about how we deal with your personal
data, your rights, or to get in touch please visit Privacy and the Bank of
England.
Information provided in response to this consultation, including personal
information, may be subject to publication or disclosure to other parties in
accordance with access to information regimes including under the Freedom of
Information Act 2000 or data protection legislation, or as otherwise required by
law or in discharge of the Bank’s functions.
Please indicate if you regard all, or some of, the information you provide as
confidential. If the Bank receives a request for disclosure of this information,
we will take your indication(s) into account but cannot give an assurance that
confidentiality can be maintained in all circumstances. An automatic
confidentiality disclaimer generated by your IT system on emails will not, of
itself, be regarded as binding on the Bank.
Responses are requested by Monday 31 March 2025.
Consent to publication
In the policy statement for this consultation, the PRA will publish an account,
in general terms, of the representations made as part of this consultation and
its response to them. In the policy statement, the PRA is also required to
publish a list of respondents to its consultations, where respondents have
consented to such publication.
When you respond to this consultation paper, please tell us in your response if
you agree to the publication of your name, or the name of the organisation you
are responding on behalf of, in the PRA’s feedback response to this
consultation.
Please make it clear if you are responding as an individual or on behalf of an
organisation.
Where your name comprises ‘personal data’ within the meaning of data protection
law, please see the Bank’s Privacy Notice above, about how your personal data
will be processed.
Please note that you do not have to give your consent to the publication of your
name. If you do not give consent to your name being published in the PRA’s
feedback response to this consultation, please make this clear with your
response.
If you do not give consent, the PRA may still collect, record and store it in
accordance with the information provided above.
You have the right to withdraw, amend or revoke your consent at any time. If you
would like to do this, please contact the PRA using the contact details set out
below.
Responses can be sent by email to: CP19_24@bankofengland.co.uk.
Alternatively, please address any comments or enquiries to:
Insurance Policy Division
Prudential Regulation Authority
20 Moorgate
London
EC2R 6DA
1: OVERVIEW
1.1 This consultation paper (CP) sets out the Prudential Regulation Authority’s
(PRA) proposals to close liquidity reporting gaps for large insurance firms with
significant exposure to derivatives or securities involved in lending or
repurchase agreements. These gaps impede sound supervision of liquidity risk
management as has been evidenced during recent market liquidity stresses. This
CP also sets out the PRA’s proposals to remove the expectation for life insurers
with internal model (IM) permissions to annually submit the SF.01 template
containing Solvency Capital Requirement (SCR) information calculated using the
Standard Formula (SF). The proposals complement recent Solvency II reforms,
which streamline reporting obligations by ensuring they are tailored to the
PRA’s supervisory needs.
1.2 The PRA proposes to introduce liquidity reporting requirements for major
life insurers as part of its response to prominent market stress episodes such
as the ‘dash for cash’ at the onset of the Covid-19 pandemic in March 2020, and
the liability-driven investment (LDI) crisis in September 2022. These episodes
led to derivative driven liquidity strains for some insurers, as well as
highlighting gaps in insurers’ liquidity risk frameworks. During the stresses,
the PRA identified deficiencies in firms providing accurate data in a timely
manner and was therefore limited in determining the full scope and nature of
their liquidity risk exposures in real time, individually or relative to peers.
These information gaps made it significantly more challenging for the PRA and
for firms themselves to measure the risk and take appropriate action.
1.3 If implemented, the proposals would ensure the PRA has access – in advance
of potential market stresses – to more timely, consistent, and accurate
information on the liquidity positions of large UK insurers with the most
significant exposures to liquidity risk. The proposals would also ensure the PRA
can require these firms to report daily on targeted aspects of their liquidity
positions during a crisis. The PRA considers that the proposed reporting would
be critical for improving its ability to manage liquidity-related risks to its
primary objectives of safety and soundness and policyholder protection, as well
as enhancing financial stability in the UK. After engaging with firms and
reviewing their feedback, the PRA considers that its proposals are proportionate
to the risks identified in recent market stresses.
1.4 The liquidity reporting proposals in this CP would support the PRA’s micro
prudential supervision of liquidity risk. The proposals sit alongside broader
efforts to monitor macroprudential vulnerabilities resulting from liquidity
risks at insurers and other types of non-bank financial institution (NBFI). This
includes a Bank of England exercise to understand NBFI behaviour during stress
using a system-wide exploratory scenario (SWES), and the Financial Stability
Board’s work on NBFI preparedness for margin and collateral calls Opens in a new
window.
1.5 In line with its proportionate approach to reporting, the PRA also proposes
in this CP to reduce its expectations for solvency reporting from some life
insurers. Since the introduction of Solvency II on 1 January 2016, the PRA has
expected firms with IM permissions to submit the SF SCR annually as one of a
suite of available metrics that the PRA uses to monitor model drift. The PRA
considers that the SF SCR may be less effective in detecting model drift in
internal models for life insurance firms. The PRA considers that the changes
proposed in this CP would lower the reporting cost on IM life insurance firms,
while not negatively impacting the PRA’s ability to advance its primary
objectives of safety and soundness and policyholder protection.
1.6 The proposals in this CP would result in:
* amendments to the Reporting Part of the PRA Rulebook (Appendix 1);
* the introduction of four new reporting templates and instruction files
(Appendix 2); and
* amendments to supervisory statement (SS) 15/16 – Solvency II: Monitoring
model drift and standard formula SCR reporting for firms with an approved
internal model (Appendix 3)
1.7 The policy proposals included in this CP are:
* the introduction of new liquidity reporting requirements with four
accompanying reporting templates and instruction files; and
* the removal of the expectation for IM life insurance firms to report the SF
SCR annually via the SF.01 template.
1.8 The proposals in this CP are relevant to UK Solvency II firms (‘firms’). The
liquidity reporting requirements would only apply to a subset of larger UK
Solvency II firms, in accordance with the thresholds proposed in Chapter 2. They
would not apply to the Society of Lloyd’s and its managing agents, third-country
branches, or non-Solvency II firms. The proposed changes to SF.01 reporting
expectations apply to life insurers with IM permissions, including those with
partial internal models. This covers all the larger UK Solvency II firms to
which the proposed liquidity reporting requirements are expected to apply.
Therefore, all firms impacted by the proposed liquidity reporting requirements
will derive some benefit from the changes to SF.01 reporting expectations. The
PRA does not propose to change the annual SF.01 reporting expectation for
non-life and composite insurance firms with IM permissions.
1.9 The PRA has a statutory duty to consult when introducing new rules
(Financial Services and Markets Act (FSMA) section 138J), or new standards
instruments (FSMA section 138S). When not making rules, the PRA has a public law
duty to consult widely where it would be fair to do so.
1.10 The PRA consulted the Insurance Practitioner’s Panel in March 2023 about
proposals to introduce new requirements relating to liquidity.
1.11 The PRA consulted the Cost Benefit Analysis (CBA) Panel in November 2024
for the proposals in this CP. The Panel provided feedback on the way the draft
CBA: analysed the prudential benefits of the proposals and the options they
created for PRA supervision, considered sensitivities in the range of firms’
cost estimates, and explained the alignment between the proposals and
international standards on insurance supervision. The CBA in this CP reflects
the Panel’s feedback.
1.12 In carrying out its policymaking functions, the PRA is required to comply
with several legal obligations. The analysis in this CP explains how the
proposals have had regard to the most significant matters, including an
explanation of the ways in which having regard to these matters has affected the
proposals.
STRUCTURE OF THE CP
1.13 The proposals in this CP cover two areas of reporting policy. The CP is
structured as follows:
* Chapter 2: background to the PRA’s policy proposals.
* Chapter 3: the PRA’s proposals to introduce new liquidity reporting
requirements for a subset of UK insurance firms.
* Chapter 4: analysis supporting the PRA’s statutory obligations in respect of
its liquidity reporting proposals.
* Chapter 5: the PRA’s proposals to remove the expectation for IM life insurers
to report the SF SCR annually using the SF.01 template including analysis
supporting the PRA’s statutory obligations.
IMPLEMENTATION
1.14 The PRA proposes that the implementation date for any changes resulting
from this CP would be Wednesday 31 December 2025.
1.15 The PRA does not intend to use SF SCR figures provided by IM life insurance
firms under SF.01 while this proposal is under consultation. Therefore, as a
temporary measure beginning on the date of the publication of this CP, the PRA
has decided that, unless requested by the PRA, the deadline for IM life
insurance firms to submit the SF.01 template for YE2024 has been extended to 15
September 2025. This will allow time for the PRA to consider the consultation
responses and determine whether to implement the policy proposed. The measure is
temporary, and no policy decision has been or will be taken in respect of the
removal of the expectation to submit the SF SCR figures annually for IM life
insurance firms until the end of the consultation and completion of the PRA’s
policy-making processes.
RESPONSES AND NEXT STEPS
1.16 This consultation closes on Monday 31 March 2025. The PRA invites feedback
on the proposals set out in this consultation. Please address any comments or
enquiries to CP19_24@bankofengland.co.uk.
1.17 When providing your response, please tell us whether or not you consent to
the PRA publishing your name, and/or the name of your organisation, as a
respondent to this CP.
1.18 Please also indicate in your response if you believe any of the proposals
in this consultation paper are likely to impact persons who share protected
characteristics under the Equality Act 2010, and if so, please explain which
groups and what the impact on such groups might be.
2: BACKGROUND
2.1 In this CP, the PRA proposes reforms to the insurance reporting framework
following the recent conclusion of the Review of Solvency II.
2.2 The PRA concluded the Review of Solvency II in November 2024.footnote [1]
These reforms and rule restatements provided a more streamlined and flexible
regulatory regime for insurers, enabling opportunities for productive investment
in the UK. The Review of Solvency II included two phases of reporting and
disclosure reforms, which removed a substantial volume of templates from the
existing reporting package. The review also included broader reforms affecting
many of the firms in scope of this CP, such as the streamlining of internal
model tests and standards, a simplification of the transitional measure on
technical provisions (TMTP), and the introduction of a more efficient
application process for the Matching Adjustment (MA).
2.3 By streamlining reporting through the Review of Solvency II, the PRA aimed
to ensure its requirements were more appropriately tailored to its supervisory
needs and to the specific features of the UK insurance sector. The PRA has the
same aims for the proposals in this CP to introduce new liquidity reporting
requirements, as these proposals are designed to ensure the PRA would collect
new information that is appropriately tailored to facilitate more effective
supervision of the liquidity risks faced by major UK life firms.
LIQUIDITY RISK FOR UK INSURERS
2.4 In this CP, liquidity risk means the risk that a firm is unable to realise
investments and other assets in order to settle financial obligations when they
fall due.footnote [2] The PRA describes its expectations for effective
management of liquidity risk in Supervisory Statement (SS) 5/19 – liquidity risk
management for insurers, which remains an important part of the PRA’s
supervision of liquidity risk management.footnote [3]
2.5 Drawing on its experience of market liquidity stresses, engagement with UK
insurance firms, and consideration of international bodies’ assessments and
analysis, the PRA has identified the need to supplement the expectations set out
in SS5/19 Opens in a new window by closing gaps in its reporting framework with
respect to liquidity risk. In this CP, the PRA proposes to close the gaps by
collecting timely, consistent, and comparable data on the liquidity positions of
large UK insurers. Collecting this information would facilitate meaningful
analysis and peer comparison, both in good times and in stress. It would also
enable the PRA to consider the prudential case for a minimum liquidity
requirement in the future.
2.6 UK life insurers are increasingly using derivatives and other financial
instruments to manage various risks to their businesses. For instance, the gross
notional derivatives exposure of UK life firms has more than doubled to £1.4
trillion since 2018 (see Chart 1 in Chapter 3). These instruments can be a
significant source of liquidity risk because they can require firms to increase
margin or collateral payments when market conditions change, resulting in rapid
and substantial outflows. The impact on individual insurers can be material,
depending on the size of their derivative positions and their level of
preparedness for margin calls.
2.7 The PRA highlighted liquidity risk in the 2024 insurance supervisory
priorities letter Opens in a new window. In the letter, the PRA pointed to the
role that derivatives played in a number of liquidity shocks impacting life
insurers and set out plans to develop new liquidity reporting requirements as a
way of gathering information about liquidity risk exposures on a more consistent
and timely basis.
2.8 Market stresses over the last five years have given the PRA the opportunity
to assess liquidity risk management in practice. These stresses, and in
particular the two highlighted below, have revealed shortcomings in life
insurers’ liquidity risk management frameworks and exposed critical gaps in
liquidity reporting to the PRA:
* ‘Dash for cash’ – during the uncertain early stages of the Covid-19 pandemic
in March 2020, market participants sought to protect their finances by
selling riskier investments and even safer assets like government bonds. This
sudden ‘dash for cash’ meant there was significant volatility in market
pricing, leading to spikes in margin and collateral calls under derivatives
contracts held by UK insurers – significantly increasing liquidity risk.
* LDI episode – in September 2022, a UK fiscal policy announcement triggered a
sudden fall in gilt prices, which was then amplified by forced selling from
LDI funds. The resulting movements in gilts and sterling meant UK insurers
needed to raise a material amount of liquidity to meet margin calls on
derivative positions initiated as hedges for interest rate and foreign
exchange (FX) risks Opens in a new window.
2.9 The PRA notes that securities financing transactions (SFTs) also contributed
to the pressure on LDI funds and pension funds during the LDI episode. The fall
in gilt prices meant these funds had to post additional collateral against their
SFTs, increasing liquidity demands at a time when the funds’ assets were also
declining in value. In this CP, the PRA defines SFTs as transactions where
securities are used to secure funding for activities – specifically, via
(reverse) repurchase agreements or securities lending and borrowing. Though
insurer liquidity was mostly affected by derivative exposures during the LDI
episode, the PRA notes that SFTs could increase liquidity strains in the future
through short-term changes in collateral demands or repayment obligations – the
effect of which would depend on the size of positions held by firms.
2.10 In November 2024, the Bank of England published the results of a
system-wide exploratory scenario (SWES) – an exercise that was designed to
improve its understanding of the way banks and NBFIs behave in stress and how
those stresses might amplify shocks in UK financial markets that are core to UK
financial stability. Insurers faced significant liquidity needs in the SWES,
comparable to the liquidity demands faced during the LDI episode. They would
have mostly met their liquidity demands using eligible securities as collateral,
including by posting corporate bonds, which for many insurers is permitted under
the terms of the credit support annexes (CSAs) of their contracts with banks. A
small number of insurers would have had to restore their asset buffers by
selling securities, in some cases after breaching their individual, internal
risk tolerance limits. The findings of the SWES reinforced that risk monitoring
and new policy initiatives such as liquidity reporting for insurers were
important for ensuring NBFI resilience and reducing the potential for market
stress and spillover effects.
2.11 The Bank has also considered measures to support NBFI resilience, which
complement the liquidity reporting proposals set out in this CP. For instance,
the Bank has announced plans to develop a Contingent Repo Facility for NBFIs
(CNRF), including insurance companies, to expand its toolkit to intervene when
liquidity-related dysfunction threatens financial stability.footnote [4]
INTERNATIONAL REGULATORY CONTEXT
2.12 Internationally, standard setters have in recent years recognised the
growing importance of monitoring and better understanding liquidity risks faced
by insurers and other NBFIs – including in respect of margin and collateral
flows.
2.13 The International Monetary Fund (IMF), as part of its Financial Sector
Assessment Programme (FSAP) of the UK, published a report in April 2022 Opens in
a new window evaluating the UK’s alignment with the International Association of
Insurance Supervisors’ (IAIS) Insurance Core Principles (ICPs), a global
framework for insurance supervision. In respect of ICP 9, the IMF recommended
the UK could improve its alignment by expanding ‘supervisory reporting on
liquidity, including flow data’ and by fostering ‘consistency and adherence to
harmonised definitions’.footnote [5] The IMF also noted that liquidity analysis
in the UK was impeded by a lack of consistent data on short-term cash flows
under Solvency II, and that derivatives data need ‘to be further enhanced and
quality-checked to allow for the monitoring of margin call risks’.
2.14 Several international jurisdictions collect additional and more granular
information than the UK collects currently to monitor the liquidity risk of
insurers, including in respect of lapse and surrender risks, where relevant
given common product features in those jurisdictions. The EU updated its
reporting framework Opens in a new window in 2023 to require member states to
provide harmonised information on lapse and surrender rates from insurers.
Requirements in Belgium and France include a higher standard than the minimum
for the EU Solvency II regime, with national specific templates designed to
collect further information on flows and provisions for life insurance
contracts. The US conducts annual stress tests that consider the sensitivity of
liquid asset values, insurance claims and premiums, and derivative flows to
market changes as projected over one month, three month and 12-month time
horizons.
2.15 In April 2024, the Financial Stability Board (FSB) published a consultation
on a series of high-level policy recommendations aimed at enhancing NBFIs’
liquidity preparedness for margin and collateral calls in derivatives and
securities markets Opens in a new window. The FSB’s consultation paper followed
up on the findings from a 2022 review of margining practices by the Basel
Committee on Banking Supervision (BCBS), the Bank for International Settlements’
Committee on Payments and Market Infrastructure (CPMI), and the International
Organisation of Securities Commissions (IOSCO), which also outlined the need for
further work internationally to identify which additional regulatory disclosures
or data could provide regulators with a more comprehensive view of NBFIs’
preparedness for margin requirements.footnote [6]
2.16 The FSB published a report on depositor behaviour and interest rate and
liquidity risks in the financial system Opens in a new window in October
2024.According to the report, ‘when considering the susceptibility to margin and
collateral calls following an increase in interest rates, life insurers appeared
more exposed than other entities’. The report concluded that life insurers were
one of the three types of entities that are most vulnerable to solvency and
liquidity risk in an environment of higher interest rates, alongside certain
banks and non-bank real estate investors.
2.17 In November 2022, the International Association of Insurance Supervisors
(IAIS) finalised the development of a series of liquidity metrics as a tool for
monitoring liquidity risk in the global insurance industry Opens in a new
window.
2.18 In October 2024, the European Insurance and Occupational Pensions Authority
(EIOPA) issued a consultation paper proposing new requirements for insurer
liquidity risk management plans Opens in a new window, including obligations for
certain firms to develop medium-term and long-term analyses in their plans.
EXTERNAL ENGAGEMENT
2.19 During its review of Solvency II, the PRA sought to engage with industry
and gather a broad range of views and information from firms. To this end, the
PRA established a series of subject expert groups (SEGs) comprising industry
experts on specific policy matters. The PRA used the information gathered
through the SEGs to inform its policy development.
2.20 While developing its liquidity reporting proposals, the PRA had regular
meetings with industry representatives via a subject expert group on liquidity
(L-SEG). The PRA established the L-SEG after it held a roundtable in March 2024
to discuss the sources of insurer liquidity risk, the PRA’s existing liquidity
risk management framework Opens in a new window, and its stated plans to develop
liquidity reporting requirements.
2.21 The PRA used interactions with industry experts in the L-SEG meetings to
further its understanding of insurance liquidity risk, including the relevance,
value and cost of providing data over different time horizons and reporting
frequencies. The PRA also discussed its insurer liquidity reporting arrangements
as part of regular executive breakfast meetings. It has taken on board the
feedback from firms when developing the proposals set out in this CP.
3: LIQUIDITY REPORTING: THE PRA’S PROPOSALS
3.1 This chapter sets out the PRA’s proposals to enhance liquidity reporting
requirements for insurers by introducing four new templates for large insurance
firms with significant exposure to derivatives or securities involved in lending
or repurchase agreements.
3.2 In normal market conditions, the PRA currently collects a very limited
amount of standardised information from insurance firms that is relevant for
monitoring liquidity risk. For instance, the PRA receives very little
information on margin and collateral flows and the sensitivity of derivative
positions to changes in market conditions from existing regulatory reporting.
Where firms do submit information to the PRA that is relevant to liquidity risk,
they report this information infrequently and with significant delay. In
particular, firms provide the PRA with:
* Position-by-position details about derivative exposures on a quarterly basis
via IR.08.01, with a 30-business day remittance period. The information has
minimal value for assessing changes in derivative positions over the short
term, given liquidity stresses generally materialise over days or weeks.
Indeed, as noted in Chapter 2, the IMF has recommended the UK collect more
information on derivative exposures at insurers to allow for the monitoring
of margin call risks.
* A list of assets on a position-by-position basis via IR.06.02, also on a
quarterly basis with a 30-business day remittance period – meaning the
information risks being out of date when market stresses materialise.
Further, data cannot be mapped to ring-fenced funds, making it difficult to
assess restrictions on the fungibility of firms’ assets.
* Where relevant, high-level information on gross insurance cash flow
projections for life insurance policies, via reporting template IR.13.01.
These projections are only required annually, meaning the PRA lacks
information about the distribution of life insurance claims and premiums
throughout the year. The reporting also provides no information about
surrenders, partial surrenders or maturities.
3.3 The PRA currently relies on firms’ management information (MI) to address
these data gaps. However, as this is firm-specific, the content and frequency of
submissions vary between firms making it difficult for supervisors to compare
liquidity positions across insurers or understand the extent to which firms are
sensitive to different changes in market variables. This means the PRA cannot
compare liquidity preparedness across insurers or analyse their potential
vulnerabilities to market shocks. Firms and the PRA also lack a shared language
for engaging on liquidity risk, such as a common understanding of what should
constitute a liquid asset.
3.4 Recent events such as the ‘dash for cash’ during the Covid-19 pandemic in
March 2020, and the LDI shock in September 2022, have highlighted that existing
regulatory reporting – as supplemented by firm MI – is insufficient to give the
PRA timely, consistent and comparable information on insurance firms’ liquidity
risk exposures and liquidity positions.
3.5 The LDI episode crystallised quickly over four trading days towards the end
of a quarter, meaning that quarterly data from existing reporting was nearly
three months out of date at the time of the shock. The PRA lacked information on
liquidity risk exposures going into the LDI episode, both for individual
insurers and the sector as whole. It had limited information to understand
firms’ ability to cope with increasing margin calls and assess which market
scenarios might result in margin calls becoming unsustainable for firms. This
made it difficult for supervisors to prioritise issues and allocate resources
appropriately. The PRA was forced to rely on ad-hoc data requests to complement
existing reporting, but soon realised that requiring firms to provide additional
information during a stress, when resources are already strained, can be
burdensome for firms and may lead to lower quality submissions, reducing the
reliability of the conclusions drawn from them.
FIGURE 1: RATIONALE FOR LIQUIDITY REPORTING REFORM
3.6 The PRA proposes to collect information about liquidity positions on a
systematic basis in advance of potential future market stresses. It also
proposes to collect a limited subset of targeted reporting at a daily frequency
during periods of elevated risk. Specifically, the PRA proposes to introduce new
requirements for insurance firms to report:
* monthly information on cash flows, liquid assets, and the impact of changes
in credit or market conditions (a ‘cash flow mismatch template’);
* a monthly subset of the information included in the cash flow mismatch
template described above, which could be required every business day in the
event of firm-specific liquidity stress or market liquidity stress (a ‘cash
flow mismatch (short form) template’);
* annual information on available credit facilities (a ‘committed facilities
template’); and
* quarterly information showing how changes in market variables affect the
liquidity position (a ‘liquidity market risk sensitivities template’).
3.7 The PRA considers that UK insurers are most significantly exposed to
liquidity risk through their use of financial instruments, particularly
derivatives, which can expose firms to fast-moving margin and collateral calls.
Though SFTs have not had a substantial contribution to recent liquidity strains
at UK insurers, the PRA notes that, where material, these transactions can also
create liquidity risk by increasing short-term collateral or repayment demands
on firms.footnote [7] To ensure its reporting requirements would only apply to
UK insurers with a potentially material exposure to liquidity risk, the PRA
proposes to introduce thresholds that restrict the application of the
requirements to large firms making significant use of derivatives or SFTs (see
‘Reporting thresholds’ section below).
3.8 The proposals would ensure the PRA has sufficient information to supervise
large firms and monitor liquidity risk more effectively in the insurance sector,
both in normal times and in stress. The PRA would have timely access to granular
data on the cash flows that expose firms to short-term liquidity needs. It would
also have information on the availability of liquid assets that could be used to
meet these liquidity demands, as well as information on the market variables
that could lead to material outflows. This information would enable the PRA to
assess the soundness of firms’ liquidity positions and ensure the PRA can engage
with firms to address their vulnerabilities in advance of market stresses. It
may also help firms manage their own liquidity positions and decide on
appropriate risk management actions. Further, firms would be required to provide
liquidity information to the PRA on a consistent basis, which would facilitate
comparisons between firms and foster a common understanding of liquidity risk
within the insurance sector.
3.9 The PRA considers that its proposed reporting collection is proportionate to
the level of liquidity risk faced by insurers compared with other institutions,
such as banks and building societies. By way of comparison, the PRA’s proposed
liquidity reporting templates contain about 3,000 data cells, whereas the
equivalent template for banks and building societies contains about 90,000 data
cells. Though large banks may be required to report all 90,000 data points daily
during stress, the PRA proposes that insurers only shift to daily reporting for
about 150 key data points contained in the cash flow mismatch (short form)
template.
3.10 The proposals in this chapter would result in changes to the requirements
set out in the Reporting Part of the PRA Rulebook (Appendix 1). The proposals
would introduce four new reporting templates and instruction files (Appendix 2).
The PRA provides further detail on the individual proposals for the new
templates and reporting thresholds in separate sections below.
CASH FLOW MISMATCH TEMPLATE
3.11 The PRA proposes to introduce a new requirement for firms to report on
expected and contractual cash inflows and outflows, unencumbered assets, and
certain contingent liquidity demands in a ‘cash flow mismatch’ template. The PRA
considers that the cash flow mismatch template would improve its ability to
assess a firm’s liquidity adequacy, both in benign conditions and in stress.
3.12 Firms currently have varied approaches to monitoring liquidity risk, which
rely on different assessments of liquid assets and consider exposures to
outflows over different time horizons. Using the cash flow mismatch template,
the PRA proposes to collect a standard set of information on cash flows and
liquid assets over consistent time horizons and based on common contingencies.
The PRA considers that its cash mismatch template would therefore improve its
ability to assess liquidity risk exposures and make effective comparisons
between firms. It would also contribute to a common understanding of liquidity
risk in the insurance sector.
3.13 By collecting data across frequent time steps, the PRA considers that its
cash flow mismatch template would help it to monitor potential cash flow
mismatches that could arise over short time horizons. The PRA would require
firms to use the cash flow mismatch template to report information about its
assets and cash flows over various time steps, both backward-looking, to
identify deviations from expectation, and forward-looking, to act as an early
warning indicator for potential stress.
3.14 The cash flow mismatch template would cover a range of information related
to a firm’s liquidity position, including:
* cash flows resulting from insurance and reinsurance contracts, debts and
other financial contracts;
* counterbalancing capacity provided by investments; and
* outflows contingent on external events such as downgrades or market shocks.
3.15 In view of the issues mentioned above, the PRA’s key considerations when
developing its proposals for a cash flow mismatch template were:
* Backward-looking data: This information is important for identifying when
liquidity stresses are beginning to materialise. The cash flows from
financial contracts can change rapidly, impacting a firm’s liquidity
position, so the PRA considers it appropriate to collect backward-looking
information on these contracts over short time steps. The PRA also judges
that information on insurance and reinsurance contracts would be valuable in
helping the PRA track how insurance business contributes to liquidity risk
over time. The PRA recognises, however, that cash flows from UK insurance
contracts are generally more stable and therefore proposes to collect this
information with less granularity, over longer time steps.
* Forward-looking data: Some insurers are significant users of derivatives and
other financial contracts that they may be required to settle quickly. As a
result, the PRA considers it necessary to identify potential cash flow gaps
over short intervals. The PRA acknowledges, however, that key drivers of
acute short-term liquidity needs are likely to be relatively short-lived. It
therefore proposes to collect information on these cash flows in daily time
steps for the first week after the reporting date. Over longer horizons, the
PRA expects that cash flow mismatches will be less volatile and therefore
proposes to collect information in less frequent time steps. As above, the
PRA recognises that cash flows relating to insurance and reinsurance
contracts are generally more stable and has reflected this through reduced
granularity of the time steps.
* Granularity of information on counterbalancing capacity: The PRA considers
that the potential to realise an asset, through outright sale or to
collateralise a transaction such as repurchase agreement or derivative
position, will depend on a number of factors. The factors include asset
class, credit rating, residual maturity and sector – particularly where the
assets have been issued by financial sector firms. These factors are
important in assessing a firm’s liquidity position because they may affect
the potential discount or haircut on the asset at the point of sale. The PRA
therefore proposes to collect granular information on a firm’s asset holdings
– taking account of these factors – as a way of ensuring it can estimate the
realisable value of a firm’s assets more reliably.
3.16 The PRA proposes that firms must submit the cash flow mismatch template
monthly, with a 10-business day remittance period (T+10). The PRA recognises
that liquidity stresses can develop quickly, particularly when short-term
changes in market conditions significantly increase a firm’s collateral,
margining or repayment obligations in respect of their financial contracts. The
PRA considers that the information in the cash flow mismatch template should
therefore be available frequently, enabling supervisors to respond on a timely
basis when there are early warnings of a significant increase in liquidity risk.
3.17 UK Solvency II firms (solo entities) may have multiple ring-fenced funds
(RFFs) or matching adjustment portfolios (MAPs), which could limit the
fungibility of liquidity around the firm. The PRA therefore proposes that firms
submit the cash flow mismatch template for each individual RFF, MAP, and the
remaining part of the firm, giving a more accurate representation of the
availability and location of liquidity within a solo entity. The PRA may
consider removing immaterial funds from the scope of reporting, in view of
proportionality.
3.18 Table 1 provides a simplified summary of the information required by the
cash flow mismatch template. The PRA has included a full version of the draft
cash flow mismatch template and accompanying instructions in Appendix 2.
TABLE 1: CASH FLOW MISMATCH TEMPLATE SUMMARY
The PRA proposes to collect information on potential mismatches in inflows and
outflows
Template:Cash flow mismatchSupervisory purpose:Assess liquidity adequacy and
monitor potential mismatches between inflows and
outflows.Frequency:MonthlyRemittance period:T+10Reported for:RFFs, MAPs, the
remaining partKey information:inflows and outflows from:insurance
business;financial transactions;other sources;unencumbered assets by type and
maturity;securities flows;impact of specified market changes on contingent
inflows and outflows; andmemorandum items.
CASH FLOW MISMATCH (SHORT FORM) TEMPLATE
3.19 The PRA proposes to introduce a requirement for firms to submit a short
form version of the cash flow mismatch template, alongside the full version of
the template. The short form template would include a subset of data on the
fastest-moving drivers of liquidity strain at insurers. The data subset is the
information the PRA considers to be most useful in a stress situation, based on
its experience during market stresses over the last five years.
3.20 In the event of a firm specific liquidity stress or a general market
liquidity stress event, the PRA proposes that it could require firms to submit
the cash flow mismatch (short form) template every business day. This would give
the PRA the necessary information, in a timely manner, to ensure that it can
carry out its supervisory functions effectively and minimise any resulting risks
to its primary objectives of safety and soundness and policyholder protection.
3.21 In normal market conditions, the PRA proposes to require firms to submit
the cash flow mismatch (short form) template monthly, with a one-business day
remittance period (T+1). The PRA considers that the shorter remittance period
would ensure that firms are prepared for the potential for accelerated daily
reporting. As with the full cash flow mismatch template – and for the same
reasons – the PRA would require firms to submit the short form template for each
individual RFF, MAP, and the remaining part of the solo entity.
3.22 The PRA considers that the cashflow mismatch (short form) template includes
a proportionate set of information that would be beneficial for measuring
liquidity risk and providing a consistent basis for firm comparisons in times of
stress. By ensuring it can collect this information daily, the PRA considers
that its proposals would contribute to a more effective and time-efficient
management of potential liquidity crises compared with an approach based solely
on ad-hoc and improvised firm engagement during a fast-moving stress scenario.
3.23 Table 2 provides a simplified summary of the information required by the
cash flow mismatch (short form) template. The PRA has included a full version of
the draft cash flow mismatch (short form) template and accompanying instructions
in Appendix 2.
TABLE 2: CASH FLOW MISMATCH (SHORT FORM) TEMPLATE SUMMARY
The PRA proposes to collect information on potential mismatches in inflows and
outflows
Template:Cash flow mismatch (short form)Supervisory purpose:Assess preparedness
for accelerated reporting and monitor key risks to liquidity adequacy during
stress.Frequency:Monthly (and daily at the PRA’s discretion)Remittance
period:T+1Reported for:RFFs, MAPs, the remaining partKey information:inflows and
outflows from:financial transactions;unencumbered assets by type;securities
flows; andMemorandum items.
COMMITTED FACILITIES TEMPLATE
3.24 The PRA proposes to introduce a requirement for solo firms and groups to
report on committed credit and liquidity facilities. Committed facilities are
potentially useful contingency actions that firms can use to recover from a
liquidity stress. The PRA would look to use the information in the committed
facilities template in its assessment of recovery plans and actions.
3.25 The PRA considers that the committed facilities template would provide
important additional information about any significant contingent sources of
liquidity that may be available to a firm in a stress scenario, beyond the
information on unencumbered assets that is included in the proposed cashflow
mismatch template. The PRA proposes to require firms to submit the committed
facilities template at both the solo and group level, as groups may hold
facilities at the parent level to maintain the flexibility to use the money
where most needed within the group.
3.26 The PRA would require firms to use the proposed template to report on all
committed credit and liquidity facilities received from third parties with a
total committed amount that is greater than £10 million – or the foreign
currency equivalent. The PRA proposes a floor of £10 million on the total
committed amount of facilities to ensure the reporting remains proportionate by
only capturing more material sources of funding that might be available to
insurers if they have significant liquidity demands during stress.
3.27 The PRA proposes that firms must submit the committed facilities template
annually, with a 70-business day remittance period (T+70), in line with other
annual reporting obligations. The PRA considers that it is sufficient to receive
the committed facilities template annually – rather than on a more frequent
basis – because the PRA does not generally expect that there would be
significant variation throughout the year in the number or composition of
facilities with total committed amounts greater than £10 million. The template
would collect information on various aspects of the facilities, including on the
lender, the contractual payment and maturity date, any requirement for
collateral, and the total amount still available through the facility. The PRA
considers that the information would enable it to estimate the extent to which
firms may be able to draw down significant additional liquidity in times of
stress.
3.28 Table 3 provides a simplified summary of the information required by the
committed facilities template. The PRA has included a full version of the draft
committed facilities template and accompanying instructions in Appendix 2.
TABLE 3: COMMITTED FACILITIES TEMPLATE SUMMARY
The PRA proposes to collect information on facilities that may be available in
stress.
Template:Committed facilitiesSupervisory purpose:Estimate whether additional
liquidity may be available to firms during stress.Frequency:AnnuallyRemittance
period:T+70Reported for:Solo entities and groupsKey information:information on
liquidity facilities, including:total committed amount;total amount drawn and
available; andcontractual payment and maturity date.
LIQUIDITY MARKET RISK SENSITIVITIES TEMPLATE
3.29 The PRA proposes to introduce a requirement for solo firms to report on the
sensitivity of their assets and collateral demands to changes in market
conditions via a liquidity market risk sensitivities (L-MRS) template. The PRA
would use this information to identify potential vulnerabilities in a firm’s
liquidity position and that of the broader sector.
3.30 The PRA proposes to require firms to use the proposed L-MRS template to
report on the sensitivity of the value of unencumbered assets to changes in
market conditions, including in respect of government bonds, investment grade
corporate bonds, and shares. The PRA would also require firms to use the
template to report on the sensitivity of variations in the mark-to-market value
of derivatives, as well as the value of the collateral held in respect of
derivatives, securities financing transactions, or reinsurance contracts, to
changes in market conditions. By focusing on the value of key elements for a
firm’s liquidity position, the PRA considers that its template would enable it
to estimate in an efficient way whether certain changes in market conditions
might give rise to the potential liquidity strains.
3.31 The PRA specifies the changes in market conditions that firms should use as
sensitivities for the L-MRS template in the instructions file included with this
CP (Appendix 2). Sensitivities include changes to interest rates, sterling
exchange rates, inflation, government bond spreads, and corporate bond credit
spreads, as compared with market conditions at the time of reporting. The PRA
recognises that the sensitivities are simple and do not account for correlated
stresses. However, the PRA considers that the information would be useful for
isolating potential risk drivers. The proposed sensitivities for the L-MRS
template would also complement the PRA’s existing market risk sensitivities
(MRS) used for monitoring potential vulnerabilities in firms’ solvency
positions.
3.32 The PRA proposes that firms must submit the L-MRS template quarterly, with
a 30-business day remittance period (T+30). This would mean that firms complete
L-MRS returns more frequently than the existing solvency MRS, which they submit
half-yearly. The PRA considers that it is important to require liquidity MRS on
a more frequent basis, because it expects that firms’ liquidity sensitivities
will change more quickly than their solvency sensitivities. The PRA would
therefore require updates to the information on a regular basis to ensure it can
continue to monitor liquidity risk effectively and responsively over the course
of a year.
3.33 The PRA proposes that firms would submit the L-MRS template for the solo
entity only. This would generally align the proposed template with level of
reporting required for existing MRS reporting and would ensure the PRA has
access to additional information about sensitivities to liquidity risk at the
solo level, complementing the more granular information that would be collected
at fund and portfolio level via the proposed cash flow mismatch templates.
3.34 Table 4 provides a simplified summary of the information required by L-MRS
template. The PRA has included a full version of the draft L-MRS template and
accompanying instructions in Appendix 2.
TABLE 4: L-MRS TEMPLATE SUMMARY
The PRA proposes to collect information on market risk sensitivities in
liquidity positions
Template:L-MRSSupervisory purpose:Assess the sensitivity of firms’ liquidity
positions to changes in market variables.Frequency:QuarterlyRemittance
period:T+30Reported for:Solo entitiesKey information:sensitivity of unencumbered
asset values and collateral flows to changes in:Interest rates;sterling exchange
rates;inflation;government bond spreads; andcredit spreads.
REPORTING THRESHOLDS
3.35 The PRA proposes that the new reporting requirements described in this
chapter would only apply to solo UK Solvency II firms with assets that have
exceeded £20 billion on average over the previous three quarterly reporting
periods – excluding assets held for index or unit-linked contracts. This measure
would be defined by information provided via reporting template IR.02.01
(columns and rows C0010/R0500, minus C0010/R0220).
3.36 As well as meeting the £20 billion asset threshold, the PRA proposes that
UK Solvency II firms would only be required to apply the new reporting
requirements set out in this chapter if they also meet one or both of the
following thresholds at any reporting period end date:
* gross notional value of derivatives contracts exceeding £10 billion, as
defined by template IR.08.01 (C0130) and excluding those held in index or
unit-linked contacts (C0080); or
* total value of on and off-balance sheet securities involved in lending or
repurchase agreements exceeding £1 billion, excluding those held for index or
unit-linked contracts.
3.37 The PRA considers that large firms are more likely to face substantial
liquidity demands and their stress is more likely to cause spillover effects for
other PRA-regulated entities. The PRA considers that £20 billion is appropriate
measure of significant size in the insurance sector, as firms with more than £20
billion in assets account for about 70% of the total asset base of the UK
insurance sector.footnote [8] A £20 billion asset threshold would also align
with one of the thresholds at which a bank is no longer considered a ‘small
domestic deposit taker’ under the PRA’s Strong and Simple Framework.footnote [9]
The PRA proposes to measure compliance with the asset threshold using an average
value over the last three quarterly reporting periods to ensure that firms would
not move in or out of the scope of the requirements suddenly or unexpectedly.
The PRA considers that its proposal would therefore help firms with close to £20
billion in assets to have more certainty over their regulatory reporting
requirements.
3.38 The PRA proposes to narrow the scope of its proposed reporting requirements
further by focusing on large firms that have greater contingent exposure to
liquidity risk through their use of specific types of financial instruments. As
noted above, the PRA considers that margin and collateral calls and other
short-term payment demands are particularly significant drivers of liquidity
risk for UK insurers. The PRA has therefore focused its additional threshold
proposals on derivatives and SFT exposures, as relevant measures of short-term
liquidity risk. The PRA considers that firms with more than £1 billion of
securities involved in SFTs have a material exposure to short-term funding, such
that they could face significant liquidity demands if required to post
additional margin or repay borrowers over short term. The PRA further considers
that £10 billion is an appropriate threshold for derivatives exposure. This is
much higher than the SFT threshold because the PRA proposes a gross notional
measure to capture the full extent of a firm’s derivative position, rather than
its perceived market risk exposure – which may underestimate potential liquidity
demands.
3.39 Having met the reporting thresholds, the PRA proposes that firms would
continue to submit the proposed returns for three years before they can fall out
of scope to ensure stability in the requirements. The proposed reporting
thresholds are set out in full in the PRA’s draft amendments to the Reporting
Part of the Rulebook (Appendix 1).
3.40 The PRA considered other options for limiting the scope of application of
its proposals, including using scenarios to identify which firms are most
exposed to liquidity risk. The PRA judged that it would be more practical and
proportionate to use thresholds based on straightforward measures relating to
size and financial exposures, because this alternative option would require a
new process of regular scenario testing to determine whether firms are required
to comply with the proposed requirements. Further, the PRA also judged that it
would be appropriate to exclude other, smaller firms from the proposed reporting
on the basis that the value of requiring them to submit the information would be
less proportionate to its cost of production – in view of their smaller size and
complexity, or their lesser exposure to potential margin, collateral, or
repayment demands.
3.41 The PRA has excluded assets and derivatives held in index and unit-linked
funds from its proposed threshold measures because policyholders bear the
investment and liquidity risks associated with the funds, rather than insurance
company. The PRA considers that its proposed thresholds should focus on
measuring the extent to which firms themselves may be exposed to liquidity risk
as part of the day-to-day management of their financial positions.
3.42 For the avoidance of doubt, the PRA would apply the proposed reporting
thresholds retrospectively. In other words, firms would be subject to the
requirements if they meet the thresholds at the proposed implementation date of
31 December 2025, based on their balance sheet over the three quarterly
reporting periods prior to implementation.
3.43 The PRA’s proposals would not apply to the Society of Lloyd’s or its
managing agents on grounds of proportionality, recognising that liquidity risk
management practices begin at the level of syndicates.
4: LIQUIDITY REPORTING: THE PRA’S STATUTORY OBLIGATIONS
PRA OBJECTIVES ANALYSIS
4.1 The proposals set out in this CP would advance the PRA’s primary objectives
of safety and soundness and policyholder protection by improving the PRA’s
framework for monitoring and supervising liquidity risk at large insurance
firms. Liquidity risk has increased for large life insurers in recent years amid
significant growth in derivatives usage, which leaves firms more exposed to
fast-moving margin and collateral demands (see Chart 1). As revealed by market
stresses like the ‘dash for cash’ and the LDI episode, current regulatory
returns do not give the PRA sufficiently detailed or regular information on the
granular cash flows that form the basis of liquidity risk for large insurance
firms. They also provide limited evidence about firms’ vulnerability to
liquidity shocks when market conditions change. The PRA’s proposals would ensure
it has access to crucial data about assets and cash flows on a consistent and
timely basis, which would facilitate a more effective supervisory response to
actual and potential liquidity risks. In this way, the PRA considers that its
proposals would improve its ability to address vulnerabilities at firms,
promoting their safety and soundness and protecting policyholders from risks
related to liquidity stresses.
4.2 The PRA has assessed whether the proposals in this chapter facilitate its
secondary objective on effective competition. The PRA considers that its
proposals would enable a more consistent and transparent approach to the
supervision of liquidity risk. They would give the PRA access to the same
information about all in scope firms, which would level the playing field
between affected firms and facilitate more effective competition by ensuring the
PRA can supervise firms on the basis of their risk exposures rather than on the
basis of a heterogeneous set of available information. The PRA also considers
that its proposals support competition by ensuring that smaller firms, with
lesser resources and less material exposures to key sources of liquidity risk,
would not fall in scope of the reporting requirements.
4.3 The PRA has also assessed whether the proposals in this chapter facilitate
its secondary objective on the international competitiveness, and growth of the
economy in the medium to long term. The PRA considers that its proposals would
help to reduce the risk that large insurance companies fail as a result of
liquidity shocks, which would underpin confidence in the UK insurance sector and
the ability of firms to provide long-term capital for investment – in support of
the medium to long-term growth of the UK economy. As noted in the ‘Background’
section of Chapter 1, other jurisdictions collect additional and more granular
information than the UK to monitor the liquidity risk at insurers. Having
considered the specific nature and risks of the UK insurance sector, the IMF has
recommended that the UK expands its supervisory reporting on liquidity –
including in respect of flow data – as a way of improving its adherence to ICP 9
of the IAIS’s global supervisory framework. The PRA therefore considers that the
proposals in this CP would align the UK more closely with international
standards, promoting the UK’s competitiveness by protecting its reputation as a
leading jurisdiction in the area of insurance regulation and supervision.
COST BENEFIT ANALYSIS (CBA)
4.5 This cost benefit analysis (CBA) considers the impact of introducing
liquidity reporting requirements in line with the proposals set out in this
chapter, compared with a baseline under which the PRA does not introduce
consistent and timely liquidity reporting requirements and continues to rely on
ad-hoc information to supervise liquidity risk at life insurers in normal times
and during stress.
4.6 The PRA has analysed the costs and benefits of its proposals using
information from a range of sources, including information provided by firms to
support the PRA’s work on liquidity reporting, and engagement with
representatives of firms as part of regular subject expert group meetings during
2024.
4.7 The PRA has consulted the CBA Panel (‘the Panel’) on the preparation of this
CBA. The PRA submitted a draft CBA for the Panel to review prior to a meeting to
discuss its feedback and advice. The Panel provided feedback on the CBA,
including recommending more analysis of the prudential benefits of the proposals
and considering sensitivities for the potential costs to firms. Specifically:
* The Panel recommended the CBA should include a more detailed analysis of the
benefits of the proposals, including more information on the market scenarios
that concern the PRA and further description of how the proposed reporting
collection would help to reduce prudential risks. The PRA has addressed these
comments in the section below titled ‘Assessment of the risks addressed by
the proposals’, and in paragraph 4.17.
* The Panel recommended the CBA include sensitivities in the range of estimates
for the cost of the proposals to firms. The PRA has now considered cost
sensitivities as set out in paragraphs 4.25-4.26.
* The Panel suggested the CBA should further explain the alignment between the
proposals and international standards on insurance supervision. Paragraph
4.18 provides further detail in response to this feedback.
* The Panel recommended the CBA include an assessment of the cost of firms
moving in and out of scope of the reporting requirement. The PRA has
addressed this comment in paragraph 4.9 by giving more information about the
expected scope of application of the proposals.
* The Panel recommended the CBA to be more explicit in its consideration of
marginal costs and marginal benefits of the proposals, and the trade-off
between them. Paragraphs 4.30-4.31 reflect this feedback.
SCOPE
4.8 The PRA proposes to limit the scope of application of its liquidity
reporting requirements to firms that have more than £20 billion in assets on
average over the last three quarters, and that either have gross nominal
derivatives exposure of more than £10 billion or SFTs of more than £1
billion.footnote [10] Based on prudential information available at the time of
consultation, the PRA expects its proposals would therefore impact about nine
life insurance firms.
4.9 The PRA expects the population of firms affected by the proposals would
remain relatively stable year on year, given that firms would need to meet the
£20 billion asset threshold as an average over three consecutive quarters to be
in scope of the reporting requirements and they would also need to be below the
asset threshold as an average over three consecutive annual reporting periods to
fall out of scope. The PRA further considers that there is a low risk of firms
moving very frequently into and out of scope of the reporting requirements,
based on an assessment of recent changes in insurer asset, derivative and SFT
exposures versus the proposed thresholds.
4.10 The PRA considers that the prudential benefits of its proposals would be
lower for smaller firms with less exposure to financial instruments, and who may
nonetheless face similar or higher relative costs to larger firms. The PRA has
therefore targeted the scope of application of its requirements to firms with
large asset bases and significant derivatives or SFT positions, which it expects
would ensure its proposals maintain a more proportionate balance between costs
and benefits for the UK insurance industry.
BENEFITS
Assessment of the risks addressed by the proposals
4.11 Large life insurers are exposed to material liquidity risks through their
derivatives exposures, which have grown significantly in the last five years
(see Chart 1). Firms often use derivative instruments to hedge risks to their
financial positions, but these hedges may fail in volatile market conditions,
resulting in outflows exceeding inflows. Under derivatives contracts, market
participants generally must post collateral to cover their current and future
counterparty exposures. Derivatives users are required to collateralise changes
in the market value of their trades by providing variation margin. They must
also post initial margin, which covers for losses that could potentially occur
in the time following a default and the point at which the other counterparty
closes out a trade.
4.12 During the ‘dash for cash’ in 2020, and the LDI episode in 2022, insurers
were exposed to significant net outflows to meet margin calls on derivatives.
Firms had to take various actions to raise liquidity at short notice. Many of
them did not have immediate access to all the granular information they would
need to form a complete view of their liquidity positions. This led to some
confusion and made it harder for firm senior management to identify breaches in
risk appetite and pursue appropriate remedial actions. Insurers were able to
cover their liquidity demands during the LDI episode, but there remains a
plausible risk in future market scenarios that firms are unable to realise
enough liquid assets to cover their margin calls and satisfy the terms of their
derivatives contracts. This would mean that firms could default on their
contractual obligations or fail altogether if continued net outflows mean their
losses mount further.
4.13 The default or failure of one insurer could have severely negative
consequences for other firms and for market stability more broadly. It could
lead to a loss of confidence and further asset sales, as market participants
seek to improve their own liquidity positions. This could put downward pressure
on the price of assets, which may make it harder for other firms to raise cash
when necessary – increasing the likelihood that more firms fail or default on
their obligations. Wider dislocation in the financial markets could also impact
on hedging costs, share prices, credit ratings, and the Financial Services
Compensation Scheme. If there is significant risk of contagion in systemic
markets, public balance sheets may be required to step in and provide support to
affected institutions through asset purchases, emergency liquidity assistance or
capital injections. In any case, the costs of stabilising a systemic liquidity
stress would likely be very high – whether they are borne by public stakeholders
or firms operating in the markets.
4.14 Using current sources of data, namely existing regulatory reporting and
firm management information, the PRA does not have access to timely or
comparable information about the extent to which insurance firms may be exposed
to margin call pressures in different market scenarios. The PRA also has limited
access to consistent information on the stock and quality of unencumbered assets
that may be available to meet liquidity demands in stress. It is therefore
challenging for the PRA to identify liquidity risk at insurance firms and take
appropriate supervisory action to address vulnerabilities before stresses
crystalise.
4.15 The PRA proposes to require firms to produce monthly returns containing
more granular information on assets, insurance cash flows, derivative cash
flows, and other financial contract cash flows. For faster-moving exposures, the
PRA would require data in frequent, sometimes daily time steps showing how
positions have changed in the past month, and how they would be expected to
change in the next three months. The PRA also proposes to collect regular
information on how assets and cash flow positions could change in response to
certain market variables. Had this information been available in advance of
previous market stresses, the PRA considers that it would have been able to:
* identify which firms were more susceptible to large outflows from margin
calls;
* anticipate the market conditions that would lead to firms breaching risk
tolerance limits or failing to meet contractual obligations;
* assess the liquidity adequacy of individual firms and compare them with peers
on a consistent basis, including by using common definitions for key aspects
of a firm’s liquidity position;
* make effective decisions about where to allocate supervisory resource;
* where necessary, work with firms through regular supervisory processes to
reduce their vulnerability to liquidity strains – including by examining
liquidity risk policies, contingency plans, and the quality and quantity of
available assets;
* ensure that firms and supervisors have reliable access to timely information
on cash flows and available assets before and during stress; and
* engage more effectively with firms on appropriate contingency actions,
reducing the risk of unnecessary asset sales.
CHART 1: DERIVATIVES EXPOSURE FOR UK INSURERS
Life insurers have increased their derivatives exposures significantly in recent
years.
FOOTNOTES
* Source: PRA data
PRUDENTIAL BENEFITS
4.16 In light of the assessment outlined above, the PRA considers that its
liquidity reporting proposals would ensure it has appropriate information on a
sufficiently frequent basis to be able to monitor key liquidity risks in the
insurance sector and supervise firms effectively in advance of market stress –
reducing the risk of individual failures, contagion to other firms, or private
costs being borne by the public balance sheet.
4.17 The PRA considers that its proposals would therefore result in the
following key prudential benefits:
* Better monitoring of liquidity risk: The proposals would give the PRA access
to detailed and more timely information about actual and expected inflows and
outflows – both in normal market conditions and during times of stress. The
cash flow information would ensure the PRA can assess the liquidity adequacy
of large insurers on a consistent basis when partnered with an assessment of
PRA’s proposed returns on asset holdings, committed facilities and liquidity
risk sensitivities. The information could also provide an early warning
indicator about liquidity stress, giving the PRA a better opportunity to
identify firms that may be facing difficulties their financial situation
deteriorates further. In a similar way, the proposals would also ensure firms
themselves have access to timely and detailed information that could help
them to manage their liquidity position and ensure they can remain within
their risk tolerance limits.
* More effective supervision of liquidity risk: By enhancing its ability to
monitor liquidity risk, the PRA considers that its proposals would also lead
to more effective supervision of insurance firms. The PRA would be more
informed about liquidity positions as a result of its proposals, meaning it
would be able to engage more productively with firms about their potential
risks and vulnerabilities in normal market conditions – which may facilitate
improvements in risk management frameworks through the actions described in
paragraph 3.54 above. This engagement would be further supported by greater
consistency in the information available to firms and the PRA, which may
facilitate a common understanding of the key elements of a liquidity
position, such as what constitutes a liquid asset Similarly, based on its
experience during the ‘dash for cash’ and the LDI episode, the PRA considers
that access to more detailed, consistent and timely information on assets,
cash flows, and sensitivities would also enable it to make quicker and more
targeted supervisory decisions with respect to liquidity risk.
* Potential to reduce costs: The cost of failure for in-scope firms, which had
more than £950 billion in assets at year-end 2023, would be very substantial
and could negatively impact policyholders and the Financial Services
Compensation Scheme (FSCS). Similarly, firms may incur significant losses if
fire sales of assets or defaults on contractual derivative obligations create
spillover effects and put downward pressure on asset prices. The PRA
considers that its proposals may reduce the risk or magnitude of these
potential costs, by equipping supervisors with the information they require
to work with firms to address liquidity risk in advance of stress, as noted
above. These benefits are particularly pronounced given the PRA has targeted
its proposals at larger UK insurers through the design of its proposed
reporting thresholds, with the nine in-scope firms representing more than 95%
of the gross notional derivative exposure of the UK insurance sector.footnote
[11]
ADDITIONAL BENEFITS
4.18 The PRA considers that its liquidity reporting proposals would also have
the following benefits for firms and the PRA:
* Reduction in ad-hoc supervisory engagement on liquidity risk: The PRA has
limited visibility on liquidity risk indicators through current regulatory
returns. It therefore has to request information on an ad-hoc basis from
firms to understand more about their liquidity risk exposures, including by
carrying out expert-led reviews into firms’ liquidity risk. The PRA’s
proposals would ensure it has a clearer picture of a firm’s liquidity
position over the short-term, which is likely to reduce the scale and
frequency of ad-hoc information requests both in normal market conditions and
in stress. The PRA considers that this would ultimately result in lower costs
for firms and the PRA compared with the baseline of leaving reporting
requirements unchanged. For instance, the PRA considers that it might have
been able to reduce its supervisory costs by about a third during the LDI
crisis if its proposals had been in place at the time. Similarly, the PRA
expects the introduction of a regular and standardised liquidity reporting
process would help to reduce the amount of time that firms spend producing
additional regulatory information during a crisis – which could entail an
unhelpful redirection of resources at a crucial and time-sensitive period.
This includes any time that senior executives or boards may require to review
and approve information before it can be shared with the PRA.
* Greater UK competitiveness by increasing compliance with international
standards: While there are no common international standards for regulatory
returns on liquidity risk exposures, the IAIS has various Insurance Core
Principles (ICPs) within its international supervisory framework that would
be relevant to liquidity reporting. In particular, as noted in Chapter 1, the
IMF has recommended the UK enhances its liquidity reporting framework to
align with ICP 9 of the IAIS’s framework Opens in a new window. The IMF
reviewed the specific characteristics of the UK insurance sector before
determining that more consistent data on short-term cash flows would be
important for enhancing the UK’s ability to monitor margin call risks and
improve its supervision of insurers. In view of the data items included in
its draft templates, the PRA considers that its proposals would strengthen
the UK’s alignment with ICP 9, in line with the IMF’s recommendations. This
would promote the UK’s competitiveness by protecting its reputation as a
leading jurisdiction in the area of insurance regulation and supervision.
* Improvements in liquidity data available to firms: The PRA selected data
fields for inclusion in its proposed reporting templates based on its view of
what information is important for monitoring liquidity risk at insurance
firms. In part, the data fields were selected with reference to the types of
information the PRA collected from firms using ad-hoc templates during the
LDI episode. The PRA notes that some firms found these ad-hoc templates
useful and, in one case, referenced them in their decision-making processes.
The PRA therefore expects that its proposals for standardised liquidity
reporting may benefit firms by ensuring they themselves have access to more
granular information on assets, cash flows, and sensitivities that the PRA
considers to be useful for monitoring and risk management purposes. This may
in turn help them to mitigate the risk of suffering liquidity issues and
either failing or defaulting on their contractual obligations.
COSTS
Costs to firms
4.19 The analysis below is based mainly on reporting cost estimates provided on
a voluntary basis by firms. The PRA received cost estimate information from
eight of the nine firms expected to be in scope of the proposals.
4.20 The PRA estimates that the firms in scope of its proposals spend an average
of about £530,000 a year on internal liquidity reporting. Expenditure depends on
the nature and extent of each firm’s liquidity risk monitoring processes, which
vary significantly across the life insurance sector. The PRA expects that firms
would incur additional ongoing costs associated with regular provision of the
proposed reporting to the PRA, as well as one-off costs to implement the
necessary systems and processes for producing the data required by the
proposals.
4.21 The PRA has sought to limit the cost of its proposals to firms while
ensuring that the proposals still achieve the PRA’s objectives of timely,
consistent and comparable data on liquidity risk. Using information on likely
costs of new reporting requirements from the L-SEG, the PRA considered which
aspects of liquidity reporting would be the costliest for firms and has sought
to ensure its proposed data collection remains proportionate to its purpose. In
particular, the PRA understands that in-scope firms would face significant
challenges in providing backward-looking information on insurance business cash
flows, segregated into more granular time buckets. Given the unexpectedly
high-cost estimates for these items, the PRA reduced the quantity of
backward-looking insurance cash flow data in its proposed cash flow mismatch
templates during the course of its policy development. Instead, the PRA has
focused its proposed collection of backward-looking data on derivative flows and
those from other financial instruments, which the PRA expects would be simpler
for firms to report and more valuable to the PRA as an early warning indicator
of liquidity risks crystallising. Similarly, the PRA has sought to limit its
proposed collection of forward-looking insurance cash flow data because it
considers that projected financial market flows provide a better measure of
short-term liquidity adequacy when compared with liquid asset availability in
normal market conditions and in stress.footnote [12]
4.22 One-off costs to firms: In view of its analysis of the reporting cost
estimates provided by firms, including adjustments for the refinements described
in the paragraph above, the PRA estimates that its proposals may result in
one-off implementation costs of about £11 million in total for the firms
affected by the proposals. The one-off implementation costs may relate to
various actions, including:
* sourcing the data required by the templates, including some types of
backward-looking cash flow data;
* investing in staff or systems to transform data into the formats required by
the proposals, such as dividing asset data among particular maturity buckets;
* ensuring that data is available at the reporting level required by the
proposals, including, where relevant, for each individual RFF, MAP, and the
remaining part of the solo entity;
* establishing processes to run the stresses or sensitivities envisaged by the
proposals at the frequency required by the PRA;
* setting up procedures to report the information to the PRA, including in
respect of internal governance and quality control; and
* ensuring information can be prepared in line with the PRA’s reporting
timeframes, including in respect of the cash flow mismatch (short form)
template, which the PRA may require at T+1 on a daily basis in times of
stress.
4.23 Ongoing costs to firms: In addition to the one-off implementation costs,
the PRA estimates that its proposals would result in ongoing costs of about £3.6
million annually in total for all affected firms, based on its analysis of the
cost estimates provided by firms. These recurring costs may result from various
activities, including:
* carrying out any automated or manual processes required to gather the data
required by the proposed templates;
* running and maintaining models to perform the stresses and sensitivities
envisaged under the proposals;
* cleaning and validating data to be used in the proposed reporting
submissions; and
* executing regular processes to submit the proposed templates to the PRA at
the required frequencies, including in respect of internal governance.
4.24 Cost assumptions: The PRA assumes that the cost of producing cash flow
mismatch (short form) template would mostly overlap with the cost of producing
the cash flow mismatch template, because the short form template contains a
subset of the information in the cash flow mismatch template — though it would
need to be provided faster and more frequently to the PRA. Given they contain
the majority of the PRA’s proposed data collection, the PRA estimates that the
two cash flow mismatch templates would represent about 60% of the total costs
incurred by firms on average. The L-MRS template would represent about 35% of
the total costs, which would largely relate to the cost of setting up and
running models to perform the sensitivities required on a quarterly basis. The
PRA expects the information in the committed facilities template would be
readily available to firms on an annual basis and that costs would therefore be
minimal, at less than 5% of the total costs on average – and zero for those with
no committed facilities.
4.25 The PRA expects both the one-off implementation costs and recurring annual
costs would vary considerably between in-scope firms, depending on the extent to
which their current approach to liquidity monitoring overlaps with the PRA’s
proposals. The PRA recognises that its cost estimates encompass a very wide
range of estimates across individual firms. The PRA also notes that it used an
average to estimate costs for the one in-scope firm that did not provide the PRA
with specific cost estimates. When controlling for potential outliers, the PRA
determines that its proposals would continue to result in one-off implementation
costs of about £11 million in total for all affected firms, though the recurring
annual costs would fall to £2.9 million per year.footnote [13] Setting the
missing cost estimate at the high or low end of this range would put the one-off
implementation costs in total for affected firms at between £9.7 million and
£12.1 million and the ongoing annual costs between £2.6 million and £3.9
million.
4.26 As noted above, the PRA decided not to include some types of data in its
proposed templates during policy development. The PRA made a few key assumptions
about the impact these omissions would have on the cost estimates provided by
firms, with a view to ensuring the reduction in the size of the templates
resulted in a proportionate reduction in the estimated reporting costs. The PRA
has carried out an analysis of the sensitivity of its cost estimates to changes
in these key assumptions. The sensitivity analysis suggested that the one-off
implementation costs could range between £8.4 million and £14 million in total
for all affected firms, if the data not included in the template were more or
less costly for firms to produce than the PRA expected. The recurring annual
costs could range between £2.7 million and £4.4 million.
Costs to the PRA
4.27 The liquidity reporting proposals would require the PRA to manage a new
data collection. The PRA expects that it would be able to collect and store
information received from firms within its existing reporting framework, though
some further investment would be required to compile and validate the data in a
timely fashion following monthly or daily returns. Overall, the PRA estimates
that the one-off cost of implementing the project would be less than £500,000.
4.28 The PRA would incur further costs to analyse the information received from
firms on an ongoing basis, including by considering liquidity adequacy at
individual firms, comparing liquidity positions across different firms, and
monitoring liquidity risks as they develop in the insurance sector. The PRA
expects that some of this analysis would be performed alongside existing
supervisory monitoring processes, meaning that additional costs would be small
relative to the baseline for this CBA. Further, as noted above, the PRA
considers that access to timely and consistent data on liquidity – in normal
market and stressed market conditions – would offset some existing costs by
reducing the need for costly investigations into firms’ liquidity positions
through ad-hoc information requests or analysis of heterogenous firm management
information.
4.29 In addition to the ongoing costs, the PRA could incur implementation costs
from providing training and guidance to supervisors and other staff on using the
proposed templates for the first time to analyse liquidity risk exposure at
insurers.
OVERALL ASSESSMENT
4.30 Overall, the PRA considers that the costs to firms and the PRA are
outweighed by the expected benefits to firms, policyholders and financial
stability. Given it is starting from a position of collecting no information on
liquidity risk exposures from firms, the PRA expects that the marginal benefits
of its proposals are likely to be very high relative to the baseline. The PRA
identified some examples during its policy development where it expects that
collecting additional information on particular types of cash flows may be less
beneficial relative to the potential reporting costs to firms. It has reflected
these considerations in its policy proposals by not including disproportionately
costly data cells in the templates, ensuring a better balance between marginal
costs and benefits.
4.31 The PRA recognises that firms may incur material costs to set up and run
new systems and processes for the regular liquidity reporting requirements
proposed in this CP. But the PRA considers that these costs would be
proportionate in view of the expected contribution of the proposals towards the
PRA’s objectives. In particular, the PRA considers that its proposed reporting
collection would be vital for ensuring firms and supervisors can monitor assets,
cash flows and margin calls on a timely and consistent basis in the insurance
sector. As outlined above, this would facilitate more effective supervision of
liquidity positions and improve the PRA’s ability to manage market stress
episodes affecting large insurers. In turn, the PRA expects its proposals would
help to lower the risk of defaults or failures of firms with close to £950
billion in assets and £1.4 trillion in gross notional derivative exposure,
reducing potential costs for the PRA, firms and policyholders.
‘HAVE REGARDS’ ANALYSIS
4.32 In developing these proposals, the PRA has had regard to its framework of
regulatory principles. The regulatory principles that the PRA considers are most
material to the proposals include:
1. Proportionality, and recognition of differences between businesses (FSMA
regulatory principles): The PRA considers that the costs of its proposals
are proportionate to the benefits, as detailed in the cost benefit analysis
above. The PRA has sought to limit the granularity of the proposed data
collection where possible, in an effort to reduce the reporting burden on
firms without compromising the supervisory value of the templates. The PRA
also proposes to limit the scope of application of the reporting proposals
to larger firms with greater exposure to margin or collateral calls, as a
way of ensuring the requirements apply in a proportionate way – respecting
the different sizes and business risks of UK firms.
2. Efficient and economic use of PRA resources (FSMA regulatory principles):
The PRA may initially need to use additional resources to embed the proposed
liquidity reporting into its supervisory processes. However, the PRA
considers that the proposals would enable it to monitor and supervise
liquidity risk more efficiently and effectively over time than its current
approach, which is based on ad-hoc and bilateral firm engagement.
3. Regulators should target their activities at cases in which action is needed
and should base their activities on risk (LRRA principles of good
regulation): The PRA targeted liquidity risk as a supervisory priority for
2024 because it noted shortcomings in the framework for reporting on
liquidity following recent market stresses. In setting its supervisory
priorities, the PRA noted that derivatives had contributed significantly to
liquidity risk at insurers and highlighted concerns about potential
increases in lapse risk. Opens in a new window The PRA’s proposals would
enhance reporting framework and help to improve the PRA’s understanding of
the liquidity risks facing insurers.
4. Transparency (FSMA regulatory principles) (LRRA principles of good
regulation): The PRA considers that it is exercising its policymaking and
supervisory functions transparently by clearly and openly describing the
reasons for its focus on liquidity risk and explaining the rationale behind
its resulting proposals for enhancing the reporting framework.
5. Maintaining and enhancing the UK’s position as a world-leading global
finance hub (HMT 2024 recommendation letter): The IMF has reviewed the
specific characteristics of the UK insurance sector and has recommended the
UK enhances its liquidity reporting framework to align with ICP 9 of the
IAIS’s international supervisory standards. The PRA considers that its
proposals would address the IMF's recommendations and could therefore
promote the UK’s competitiveness by protecting its reputation as a leading
jurisdiction in the area of insurance regulation and supervision.
4.33 The PRA has had regard to other factors as required. Where analysis has not
been provided against a ‘have regard’ for these proposals, it is because the PRA
considers that ‘have regard’ to not be a significant factor for these proposals.
IMPACT ON MUTUALS
4.34 The PRA proposes to limit the scope of its proposed liquidity reporting to
insurance firms with more than £20 billion in assets, as well as significant
exposure to liquidity risk through derivatives or SFTs. Based on the reporting
thresholds, the PRA notes that few mutual firms would be captured by the scope
of its proposals compared with other firms. Where mutuals are included in scope
of the proposed reporting requirements, the PRA considers they would not face
higher costs to implement the proposals than other firms – including by virtue
of their ownership, structure, or any other characteristic that may be specific
to mutuals.
EQUALITY AND DIVERSITY
4.35 In developing its proposals, the PRA has had due regard to the equality
objectives under section 149 of the Equality Act 2010. The PRA considers that
the proposals do not give rise to equality and diversity implications because
they do not have an impact on equality of opportunity or the relations between
persons who share a protected characteristic and those who do not. The PRA will
continue to consider the equality and diversity implications of its proposals
during the consultation period, and when it makes any final policy in relation
to the proposals.
5: REMOVAL OF THE PRA’S EXPECTATION THAT INTERNAL MODEL LIFE INSURANCE FIRMS
SHOULD ANNUALLY SUBMIT SF.01 REPORT
5.1 This chapter sets out the PRA’s proposed changes to remove Internal Model
(IM) life insurance firms from the scope of the PRA expectation that IM
insurance firms should annually submit the SF.01 template containing Solvency
Capital Requirement (SCR) information calculated using the Standard Formula
(SF). The proposals in this chapter would make amendments to SS15/16 – Solvency
II: Monitoring model drift and standard formula SCR reporting for firms with an
approved internal model (Appendix 3) setting out the PRA’s proposed updated
approach for assessing model drift for insurance firms. This chapter also
proposes to amend any references to internal model ‘approvals’ to ‘permissions’
to be aligned with FSMA s138BA.
5.2 The proposed changes in this chapter are relevant to IM life insurance
firms, including those with a partial internal model. IM non-life and composite
insurance firms will be expected to continue to submit form SF.01 annually as
the PRA continues to find the SF SCR figures for these firms useful for model
drift monitoring.
STANDARD FORMULA REPORTING
5.3 Since the introduction of Solvency II on 1 January 2016, the PRA has
expected firms with permission to use an internal model to submit the SF SCR
annually as one of a suite of available metrics that the PRA uses to monitor
model drift.
5.4 The PRA acknowledges that the SF SCR may be less effective in detecting
model drift in internal models for life insurance firms. For example, the SF
treatment of non-vanilla assets, particularly internally securitised and
internally rated assets such as equity release mortgages commonly invested by
life insurers, can lead to significant changes in the SF SCR year-on-year while
the IM SCR remains more stable. This makes the SF SCR less informative of model
drift for life insurance firms with such investments. Therefore, the PRA is
proposing to remove the expectation that IM life insurance firms should submit
the SF.01 report annually. The PRA intends to use other supervisory tools for
monitoring model drift, such as IM.01 and Quarterly Model Change (QMC) data. The
PRA also expects to derive further useful information under AoC.01 from YE2025
Opens in a new window.
5.5 The PRA has also received industry feedback from prior consultation papers
and industry engagement. Those providing feedback do not consider the SF SCR and
any derived metrics calculated using the SF SCR a meaningful indicator of model
drift for IM life insurance firms. Furthermore, they considered that the costs
incurred by IM life insurance firms to prepare and submit the SF SCR annually
are not justified given the limited insights that they provide.
5.6 If our proposed change were to be implemented, IM life insurance firms would
still need to maintain the capability to be able to fulfil a PRA request for an
estimate of the SF SCR in line with Rule 3.4 of the Solvency Capital Requirement
– Internal Models Part of the PRA Rulebook.
5.7 The proposed amendments to SS15/16 to reflect these proposals are set out in
Appendix 3.
NON-LIFE AND COMPOSITES IM INSURANCE FIRMS
5.8 The proposed change would not apply to IM non-life and composite insurance
firms. The PRA will continue to expect these firms to submit the SF.01 report
annually, because it remains one of the key metrics used by the PRA to analyse
model drift for these firms for the following reasons:
* Non-life insurance firms tend to hold more vanilla assets (such as gilts and
traded corporate bonds) and market risk is generally not the dominant risk
driver in the SCR. Therefore, the SF SCR provides a reasonable comparison for
the risks inherent in non-life insurers’ vanilla asset classes.
* On the other hand, the risks underwritten by non-life insurance firms tend to
be more heterogenous, with different firms targeting different market
segments and providing different aspects of insurance cover, making direct
peer comparisons harder. In addition, firms’ risk profiles can also evolve at
fast pace. The SF SCR remains a useful standardised measure for assessing
changes in these firms’ risk profile and IM calibrations over time.
* Composite insurance firms hold non-life exposures and to ensure the PRA
receives the required information to assess model drift, we will retain the
expectation for composite insurance firms to submit the SF.01 report
annually.
5.9 In any case, the PRA recognises that any comparison between a firm’s SF SCR
and its IM SCR has some limitations and requires careful analysis and
interpretation.
IMPLEMENTATION
5.10 The PRA proposes the implementation date for any changes resulting from
this CP to be 31 December 2025. The PRA does not intend to use SF SCR figures
provided by IM life insurance firms under SF.01 while this proposal is under
consultation. Therefore, as a temporary measure beginning on the date of this
CP, the PRA has decided that, unless requested by the PRA, the deadline for IM
life insurance firms to submit the SF.01 template for YE2024 has been extended
to 15 September 2025 to allow time for the PRA to consider the consultation
responses and determine whether to implement the policy proposed. This measure
is temporary, and no policy decision has been or will be taken in respect of the
removal of the expectation to submit the SF SCR figures annually for IM life
insurance firms until the end of the consultation and completion of the PRA’s
policy-making processes.
COST BENEFIT ANALYSIS
5.11 This CBA considers the impact of removing the expectations for IM life
insurance firms to submit the SF.01 template in line with the proposals set out
in this chapter, compared with a baseline under which the PRA does not remove
said expectation and continue to rely on the SF.01 information to monitor model
drift in IM life insurance firms.
5.12 The PRA has consulted the CBA Panel (‘the Panel’) on the preparation of
this CBA. The PRA submitted a draft CBA for the Panel to review prior to a
meeting to discuss its feedback and advice. On cost analysis, the Panel
suggested that other supervisory tools available for monitoring IM life
insurers’ model drift are discussed to demonstrate that risks would still be
effectively managed after the removal of SF.01 reporting for IM life firms. More
details are provided in paragraph 5.4 to address the Panel's feedback. On
benefit analysis, the Panel questioned how the continued expectation that firms
should retain capability to complete the SF.01 template on an ad-hoc basis
affects the estimate on potential reduction in compliance costs. More details
are provided in paragraphs 5.13 to 5.15 to address the Panel’s feedback.
5.13 Based on bilateral engagement with IM life insurance firms as part of
ongoing model drift work, the PRA estimates that, on average, the resources
required by these firms to prepare and analyse the SF.01 ranges from 0.3 to 0.9
FTE, and the estimated cost of the exercise ranges from £30,000 to £110,000 each
year. The cost varies depending on the complexity and size of the business.
5.14 The PRA acknowledges that firms will still need to incur overheads costs to
maintain the capability to produce the SF SCR in order to meet Rule 3.4 of the
Solvency Capital Requirement – Internal Models Part of the PRA Rulebook.
However, these costs will be lower than the cost of preparing an SF.01 annually.
5.15 The PRA considers that the proposals would benefit IM life insurance firms
overall by reducing the cost incurred to prepare and submit SF.01 – eg the costs
to run the SF model, prepare the SF.01 template and for internal reviews and
governance within the firm. The PRA will also derive efficiency benefits from
further resources becoming available to focus on supervising key risk areas.
5.16 As the consultation does not propose any changes to non-life and composite
firms, there would be no change in costs for firms in this category. As
mentioned in the section ‘Non-Life and Composite IM Insurance Firms’, the PRA
obtains key information from non-life and composite firms’ SF.01 submissions.
PRA OBJECTIVES ANALYSIS
5.17 The PRA considers that the proposals in this chapter would continue
advancing its primary objectives of safety and soundness and policyholder
protection. Existing reporting requirements and the proposed amendments would
continue to ensure that the PRA receives adequate information to support
supervision, while ensuring a robust and proportionate regime applies to IM life
insurance firms. It enables the PRA to focus greater resources where needed to
discharge its functions as a prudential regulator.
5.18 The PRA has also assessed whether the proposals advance its secondary
objectives. The PRA considers that these proposals would, overall, reduce the
reporting and compliance cost and hence compliance costs for IM life insurance
firms. These proposals support a more proportionate and streamlined regime,
facilitating the competitiveness of the UK life insurance sector. Furthermore, a
more proportionate regime makes operating in the UK more attractive for
international life firms.
‘HAVE REGARDS’ ANALYSIS
5.19 In developing these proposals, the PRA has had regard to its framework of
regulatory principles. The regulatory principles that the PRA considers are most
material to the proposals include:
1. Efficient and economic use of resources (FSMA regulatory principles):
Removing the SF.01 reporting expectation will free up PRA’s resources to
focus on other more impactful work.
2. Burden or restriction should be proportionate to the benefits (FSMA
regulatory principles): The PRA considers that removing the SF.01 reporting
expectation would lead to the application of a less burdensome regime for
life insurance firms, without affecting their safety and soundness, or the
protection of policyholders.
3. Exercising functions in a way that recognises differences in the nature of,
and objectives, of business carried on by different persons (FSMA regulatory
principles): The PRA recognises the different nature of the risks that life
and non-life insurance firms are exposed to and is proposing to remove its
SF.01 annual reporting expectations for IM life insurance firms only.
5.20 The PRA has had regard to other factors as required. Where analysis has not
been provided against a ‘have regard’ for these proposals, it is because the PRA
considers that ‘have regard’ to not be a significant factor for the proposals.
EQUALITY AND DIVERSITY
5.21 The PRA considers that this proposal does not give rise to equality and
diversity implication.
1. The Review of Solvency II concluded with PS15/24. It includes the reforms
published as part of PS29/21, P2/24, PS3/24, and PS10/24.
2. This definition of liquidity risk is consistent with the Conditions
Governing Business Part of the PRA Rulebook: Conditions Governing Business
| Prudential Regulation Authority Handbook & Rulebook (prarulebook.co.uk)
Opens in a new window
3. The Conditions Governing Business Part of the PRA Rulebook requires UK
Solvency II firms to have systems in place to manage their liquidity risk:
Conditions Governing Business | Prudential Regulation Authority Handbook &
Rulebook (prarulebook.co.uk) Opens in a new window
4.
5. ICP 9 concerns supervisory review and reporting. It states that
jurisdictions should collect all necessary information to conduct effective
supervision of insurers and evaluate the insurance market. ICP and ComFrame
Online Tool - International Association of Insurance Supervisors Opens in a
new window
6. See page 37: Review of margining practices (bis.org) Opens in a new window
7. As noted above, in this CP, the PRA defines SFTs as transactions where
securities are used to secure funding for activities – specifically, via
(reverse) repurchase agreements or securities lending and borrowing.
8. According to PRA data at year-end 2023.
9. SDDT Regime – General Application 2.1(1)(a) of the PRA Rulebook: SDDT
Regime – General Application | Prudential Regulation Authority Handbook &
Rulebook (prarulebook.co.uk) Opens in a new window
10. Excluding assets and derivatives held for index and unit-linked funds.
11. Insurers had close to £1.45 trillion of gross notional derivate exposure at
year-end 2023, according to PRA data.
12. Notwithstanding these considerations, the PRA still proposes to collect a
limited set of backward- and forward-looking data on insurance surrenders,
partial surrenders, maturities, and premium payments to ensure it can
further analyse the extent to which insurance contracts contribute to
liquidity risk for UK firms.
13. To control for potential outliers, the PRA removed the smallest and largest
values from the dataset and focused on the cost estimates within the 5th
and 95th percentiles.
FOOTNOTE [13]
To control for potential outliers, the PRA removed the smallest and largest
values from the dataset and focused on the cost estimates within the 5th and
95th percentiles.
Close
FOOTNOTE [12]
Notwithstanding these considerations, the PRA still proposes to collect a
limited set of backward- and forward-looking data on insurance surrenders,
partial surrenders, maturities, and premium payments to ensure it can further
analyse the extent to which insurance contracts contribute to liquidity risk for
UK firms.
Close
FOOTNOTE [11]
Insurers had close to £1.45 trillion of gross notional derivate exposure at
year-end 2023, according to PRA data.
Close
FOOTNOTE [10]
Excluding assets and derivatives held for index and unit-linked funds.
Close
FOOTNOTE [9]
SDDT Regime – General Application 2.1(1)(a) of the PRA Rulebook: SDDT Regime –
General Application | Prudential Regulation Authority Handbook & Rulebook
(prarulebook.co.uk) Opens in a new window
Close
FOOTNOTE [8]
According to PRA data at year-end 2023.
Close
FOOTNOTE [7]
As noted above, in this CP, the PRA defines SFTs as transactions where
securities are used to secure funding for activities – specifically, via
(reverse) repurchase agreements or securities lending and borrowing.
Close
FOOTNOTE [6]
See page 37: Review of margining practices (bis.org) Opens in a new window
Close
FOOTNOTE [5]
ICP 9 concerns supervisory review and reporting. It states that jurisdictions
should collect all necessary information to conduct effective supervision of
insurers and evaluate the insurance market. ICP and ComFrame Online Tool -
International Association of Insurance Supervisors Opens in a new window
Close
FOOTNOTE [4]
Close
FOOTNOTE [3]
The Conditions Governing Business Part of the PRA Rulebook requires UK Solvency
II firms to have systems in place to manage their liquidity risk: Conditions
Governing Business | Prudential Regulation Authority Handbook & Rulebook
(prarulebook.co.uk) Opens in a new window
Close
FOOTNOTE [2]
This definition of liquidity risk is consistent with the Conditions Governing
Business Part of the PRA Rulebook: Conditions Governing Business | Prudential
Regulation Authority Handbook & Rulebook (prarulebook.co.uk) Opens in a new
window
Close
FOOTNOTE [1]
The Review of Solvency II concluded with PS15/24. It includes the reforms
published as part of PS29/21, P2/24, PS3/24, and PS10/24.
Close
APPENDICES
* PRA Rulebook: Amendments to the Reporting Part (PDF 0.7MB) Opens in a new
window
* Draft liquidity reporting templates and LOG file instructions (ZIP 9.9MB)
* Draft amendments to (SS)15/16 - Solvency II: Monitoring model drift and
standard formula SCR reporting for firms with an approved internal model (PDF
1.6MB) Opens in a new window
Convert this page to PDF
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