Solvency II regulatory update
From LIBOR to SONIA…the clock is ticking
18 Feb 2021
The London Interbank Offered Rate (‘LIBOR’) will be discontinued by year-end 2021 and, for GBP, replaced with the Sterling Over Night Indexed Average (‘SONIA’) (see our previous articles on this topic here and here). In relation to this, the PRA released its first consultation paper (‘CP’) of the year, CP 1/21 ‘Solvency II: Deep, liquid and transparent assessment, and GBP transition to SONIA’.
The CP outlines the PRA’s proposed approach to deep, liquid, and transparent (‘DLT’) assessments and the transition of SII technical information (‘TI’), including the risk-free rate (‘RFR’) curve and fundamental spreads (‘FSs’), that are currently based on LIBOR and will soon be SONIA-based. This TI, which was produced and published by EIOPA pre-Brexit, is now produced and published by the PRA.
CP 1/21 sets out the PRA’s preference for TI to be with reference to SONIA-based swaps from 31 July 2021. The PRA proposes an immediate shift to SONIA, without the use of a ‘blended approach’ as proposed by EIOPA.
Firms need to take action now to ensure any solvency and operational impacts are managed appropriately.
Read the full update to find out about:
Assessment of the depth, liquidity, and transparency of the market
Transition of Solvency II technical information
How the transition will affect technical provisions
How the transition will affect your matching adjustment
How the transition will affect your internal model
Commercial and operational impacts