The final rules on how to implement the Solvency II Directive (Solvency II) have been published by the Prudential Regulation Authority (PRA).
The rules will come into effect January 2016 and will apply to around 400-450 retail and wholesale UK insurance firms and to the Lloyd's insurance market.
Andrew Bailey, Deputy Governor, Prudential Regulation, Bank of England and CEO of the PRA said: 'Solvency II represents a fundamental change in the way that insurers are regulated.'
Bailey added that the papers 'provide clarity for UK firms on how the PRA will implement the new regime – acting in the interests of the wider economy and ensuring an appropriate level of policyholder protection. These publications will allow firms to finalise their preparations for Solvency II in order to be ready for the start of the regime on 1 January 2016.'
According to the PRA, Solvency II puts in place a consistent and coherent solvency framework for insurers across Europe and aims to provide greater protection to policyholders by reducing the probability of an insurance firm failure.
The framework better aligns capital requirements to firms' asset and liability profiles and enhances the quality of capital, providing greater protection. It also provides incentives to strengthen risk management, reporting and disclosure across the industry.
In addition to publishing the final rules, the PRA has also published a consultation paper on the application process for the 'volatility adjustment'. This is an adjustment to the Solvency II risk-free discount rate which will be used to value insurance liabilities. It is designed to mitigate the effect of short-term volatility in financial markets on valuation of insurers' long-term liabilities under Solvency II.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
