Saturday releases??

The PRA released its latest Solvency II: Matching Adjustment letter on Saturday 28 March 2015. As might be suspected by the release date, the contents do not make pretty reading for those going through the application process.

Ahead of the individual company advice on their Matching Adjustment pre-applications, the PRA issued the latest Fisher letter on 28 March providing general feedback following the pre-application process.  Key feedback is summarised below:

Management of MA portfolios

  • Reiteration of the processes required to be in place in respect of MA portfolios.
  • PRA does not consider that splitting of derivative contracts notionally between MA and non-MA portfolios is consistent with MA requirements. Firms doing this need to split assets physically and improve systems to manage their exposures at a more granular level
  • It is not appropriate for an MA portfolio to post collateral in respect of business other than the insurance business of that MA portfolio.
  • It is not appropriate for collateral received in respect of MA business to be held outside the relevant MA portfolio.
  • Distinct lack of detail in pre-app submissions related to managing collateral for MA portfolio – PRA encourages more detail. Firms intending formal application are encouraged to complete a pro-forma in the letter and send to the PRA by 15 April 2015.
  • MA applications need to be clearer about the processes to ensure how MA portfolios will continue to meet all MA criteria when new business is written into them.
  • When new business written or assets purchased are not similar to that currently in an approved MA portfolio, additional approval will be required. This is flagged as particularly important for bulk annuity transactions. 
  • IM firms generally provided insufficient justification for the assumed diversification between MA and non-MA portfolios.

Liquidity plan and wider risk management

Liquidity plans should:

  • Include cashflow forecasts for MA portfolios and detail key assumptions made
  • Outline the tools to monitor and manage liquidity risk
  • Consider existing guidance on the extraction of surplus (Fisher letter 15 October 2014)
  • Consider liquidity of collateral posted to MA portfolio

MA calculation process and results

  • Firms should ensure they are using the latest information published by EIOPA (re risk free rates and fundamental spreads)
  • Reinsurance cashflows should be explicitly included in the matching assessment and MA calculation. If pre-app firms were using a ‘net’ approach, they have until 15 April 2015 to explain:
  • How they will map their reinsurance to EIOPA fundamental spreads
  • Or how methodological barriers prevent them from doing so.

Asset eligibility

  • The process for internally rating unrated assets in MA portfolios needs to be better documented. The PRA requires proportionate independent assurance of this process.
  • The PRA thinks that paired/grouped assets that result from using FX forwards to hedge non-sterling bond exposures do not provide fixed cash flows. The PRA does not think these paired/grouped assets meet the eligibility requirements for MA in their current form.
  • The PRA thinks that the use of significantly longer-dated cross currency swaps to hedge currency exposure is consistent with the MA eligibility criteria.
  • Stock lending can only be undertaken within an MA portfolio if the collateral received satisfies the MA asset eligibility requirements. Firms should consider how overall matching position could be restored if a call on collateral leads to failure in matching tests.
  • The PRA does not consider the use of intra-group derivative contracts to remove ineligible features of MA assets transparent enough with respect to the transfer of risk. Such derivative contracts need to be transacted with counterparty outside of insurance group to achieve required level of transparency.
  • Intra-group loans should not be used to circumvent asset eligibility requirements. The suitability of these loans needs careful consideration under the prudent person principle.
  • Firms should consider the appropriateness of the reference gilt for callable assets with spens clauses.
  • Where the spens clause on a callable asset is not sufficient to replace foregone cashflows, firms should consider if other illiquid assets with the same or better credit rating would be available to purchase.

Liability eligibility

  • Firms should clearly document the process for identifying all options (and other features) in their liability contracts.
  • Firms need to better document their assessment of the cost-neutrality of surrender options. PRA method of choice is to compare surrender value to BEL.


  • When providing cashflows underlying matching assessment, firms should explicitly state assumed reinvestment rates and assumed future management actions. Firms in pre-app need to inform PRA of this by 15 April 2015.
  • Passing the PRA’s published matching tests is not sufficient to demonstrate that a portfolio is suitably well matched.
  • The PRA has provided guidance on the treatment of paired/grouped assets.

The full letter is available here on an external website: