Solvency II Newsflash: Market risk is a sensitive issue
19 Jun 2017
With the dust just starting to settle on the first round of SFCRs the PRA is already contemplating adding to insurers’ reporting requirements. They’ve issued a consultation paper on a proposal to require firms to report, in a private submission to the regulator, the sensitivity of their balance sheets to market stresses.
In our recent Current Issues article we looked at how sensitive firms’ solvency coverage ratios are to changes in interest rates. The way in which Solvency II balance sheets respond to changing market conditions is very topical in the industry, with firms having initiated a number of management actions in response to the volatile conditions in 2016. This seems to have attracted the attention of the regulator as well.
The PRA is proposing half-yearly reporting of sensitivities to predetermined market stresses. These are to show the impact on assets, technical provisions, other liabilities, Own Funds and the Solvency Capital Requirement (SCR), and are to be supplied in a template provided by the PRA.
Sensitivities to be reported
In the consultation paper, the PRA sets out nine sensitivities, including many that firms have reported voluntarily in their disclosures. The full list of sensitivities is contained in the table below.
|1||Equity prices fall by 25%|
|2||Property prices (commercial and residential) fall by 25%|
|3||Interest rates rise by 100bps|
|4||Interest rates fall by 100bps|
|5||All government bond spreads over EIOPA risk free rate moves up by 50bps|
|6||Credit spreads (all ratings) increase by 100bps|
|7||20% of assets downgrade from the current Credit Quality Step (CQS) to the next CQS|
|8||An increase in the market- implied real interest rates over the nominal interest rates by a uniform 50bps across the curve|
|9||GBP exchange rates fall by 25% (against all other currencies)|
- Firms will be required to show their sensitivities to the stresses described above both with and without a recalculation of Transitional Measures on Technical Provisions (TMTP).
These additional reporting requirements will be reported by solo UK companies only, with group sensitivities out of scope.
Sensitivities will be shown to each single risk rather than a combination of risks and does not allow for any non-linearity.
The additional reporting is intended to be submitted to the PRA two weeks after the formal submission of Quarterly Reporting Templates, but the 30 June 2017 submission is expected 6 weeks after the Supervisory Statement is published to allow the process to become embedded in the relevant firms’ planning and risk management calendars. The PRA noted that these additional disclosures would be expected to be submitted following a “change in the risk profile of the company (e.g. a recalculation of the TMTP, a merger or acquisition) or upon the PRA’s request due to extraordinary market conditions”.
This data collection exercise is unlikely to come as a surprise to the industry. Asset-liability management procedures shot up priority lists during the first half of 2016 as rates tumbled. It was inevitable that increased regulatory attention would follow. Managing the Solvency II balance sheet is likely to remain in the spotlight for some time to come.
Hymans Robertson has a wealth of relevant life insurance experience, from risk and capital optimisation under Solvency II, through to broader areas such as model calibration and validation in the areas of longevity risk, credit risk and dependency & aggregation.
Our experts would be delighted to support you.
If you would like more information or advice, please get in touch
Andrew Scott, Senior Consulting Actuary - Contact
Fyona Allan, Consulting Actuary - Contact
Stephen Makin, Head of Risk and Capital Management - Contact
Ross Evans, Head of Insurance Investment and ALM - Contact