Small change?
CP16/17 is not 'just another' consultation paper on PRA fees. While changes are needed to put the fee calculations on a Solvency II footing, other proposed tweaks to the basis could lead to a material change in fees for some firms. Those affected should consider the impact of the proposed changes and seek to get their views across before the consultation closes on 24 October 2017.
The PRA proposes basing periodic fees on the Solvency II metrics of:
gross written premium (GWP) derived from S.05.01; and
best estimate liabilities (BEL) derived from S.12.01 and, for general insurers, S.17.01.
As currently, managed pension fund (Class VII) business and Trustee Investment Plan business will be excluded from the premium and liability measures.
The new metrics are considered by the PRA to be broadly comparable to the current ones, but there are some subtle…and not so subtle differences. Perhaps the biggest difference is that the life insurance measure of GWP gives regular and single premiums equal weighting whereas, historically, the equivalent measure was single premiums plus ten times regular premiums. That said, other proposed changes are likely to affect all firms.
In determining the overall fees, the PRA proposes changing the weightings between the premium and liability measures.
For general insurers the current 90% premium/10% liability weighting changes to 75% premium/25% liability
For life insurers the current 75% premium/25% liability weighting changes to 50% premium/50% liability
In both cases, the proposed changes will tend to shift the burden towards, shall we say, more “mature” companies.
The proposed fee basis for non-Directive general insurers’ fees is to similarly amend the premium/liability weighting, with the premium and liability measures being sourced from the existing regulatory returns. The current 11% fee discount for non-Directive general insurance firms will remain.
All non-Directive life insurers will simply pay the minimum fee under the PRA’s proposals, although this will not be subject to the non-Directive 11% discount.
The PRA plans to amend the recently introduced Solvency II internal model application fee so that it is determined by reference to the applicant’s BEL. In addition to this, it is looking to introduce an annual “model maintenance fee” for all firms with approved models. The model maintenance fee will be higher for general insurance firms compared to that for life insurers. The model-related fees raised by the PRA should lead to a reduction in fees across other fee blocks.
The calculation basis for Financial Services Compensation Scheme levies will also be updated to work off of Solvency II metrics where relevant, and reported metrics for non-Directive firms. Apart from this, the basis for FSCS fees is being kept broadly aligned to the current structure with the most notable proposed changes being:
The levy to be based solely on remuneration where a life insurer only undertakes occupational pensions fund management (currently a fee element is determined by reference to the Long Term Insurance Capital Requirement (LTICR)).
The levy for flat rate benefits business friendly societies to be based solely on premium income.
Reminder
The PRA consultation closes on 24 October 2017.