On 11 December 2024, the UK’s Prudential Regulation Authority (the “PRA”) published a consultation in which it proposes changes intended to close liquidity reporting gaps for large insurance firms with significant exposure to derivatives or securities involved in lending or repurchase agreements.
The PRA is also proposing to reduce its expectations for life firms that use an internal model to submit standard formula (“SF”) reporting to the PRA.
New liquidity reporting requirements
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 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.
If implemented, the PRA believes that its proposals would ensure that it 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.
Amongst other things, the PRA’s proposals would result in the introduction of four new reporting templates for large insurance firms with significant exposure to derivatives or securities involved in lending or repurchase agreements.
Reduced expectations for solvency reporting for some life insurers
Since the introduction of Solvency II on 1 January 2016, the PRA has expected firms with internal model permissions to submit the SF solvency capital requirement (“SCR”) annually as one of a suite of available metrics that the PRA uses to monitor model drift.
However, the PRA considers that the SF SCR may be less effective in detecting model drift in internal models for life insurance firms. It is therefore proposing to remove the expectation for life insurers with internal model permissions to annually submit the SF.01 template containing SCR information calculated using the SF. The PRA considers that this change would lower the reporting cost on internal model life insurance firms.
Implementation
The PRA proposes that the implementation date for any changes resulting from its consultation would be 31 December 2025.
The PRA does not intend to use SF SCR figures provided by internal model life insurance firms under SF.01 while its proposals are under consultation. Therefore, as a temporary measure beginning on the date of the publication of the consultation (11 December 2024), the PRA has decided that, unless requested by the PRA, the deadline for internal model life insurance firms to submit the SF.01 template for YE2024 has been extended to 15 September 2025. This, the PRA says, will allow time for it to consider the consultation responses and determine whether to implement the policy proposed.
Deadline for feedback
The consultation closes on 31 March 2025.
For further information, please contact:
Duncan Barber, Partner, Linklaters
duncan.barber@linklaters.com
