Volatility adjustment consultation

The volatility adjustment (VA) application window opens on 1 April.  We look at the consultation paper (CP11/15) to see what firms need to do, and what we still do not know.

Application contents

Firms applying need to include the following in their applications:

  1. The firm’s written policy on risk management (as required by Article 41(3)).
  2. Firm’s assessment of sensitivity of technical provisions and own funds to assumptions underlying VA (including effect of forced sale of assets and zero VA).
  3. Liquidity plan.
  4. Where reduction in VA to zero would result in non-compliance with SCR, an analysis of how the firm would restore compliance.
  5. Assessment of compliance with capital requirements referred to in Article 45 1(b) (ORSA), with and without VA.

 There will be a (non-compulsory) checklist that firms are encouraged to complete before submission.

Basis of PRA review

The Prudential Regulation Authority (PRA) will look to ensure applications meet the following conditions when undertaking their reviews.

  1. VA is correctly applied (taking into account currency and country of sale).  Firms will need to describe details of the liabilities to be covered to evidence this.
  2. Use of the VA will not lead to pro-cyclical investment behaviour (i.e. risking up in good times, de-risking in bad).  Firms need to describe interaction of investment policy and use of VA.
  3. No breaches of a 'relevant requirement'.  This includes evidence that any temporary market volatility will not affect ability to meet claims without resorting to selling assets at temporarily depressed prices.  Key factor to this is the liquidity of the liabilities - 'liability cash flows…should be sufficiently predictable'.


The consultation explains that the PRA will use the principle of proportionality in its reviews.  It will take into account the impact of the VA on both the financial and risk profile of the firm applying when reviewing.


PRA have confirmed the details in the Government’s announcement.  They expect standalone applications to take just six weeks.  Applications submitted concurrently with other applications (e.g. matching adjustment or IMAP) will take up to six months. 

Unanswered questions

A few aspects of applying the VA are still not clear to us:

  • Exactly what types of business will the PRA allow it to be used for (particularly with-profits and unit-linked in the absence of surrender penalties).
  • Do you need to hold assets similar to the representative portfolio?  It seems to odd to us that your investment strategy could contain very few assets with illiquidity premia but you are taking credit for it.
  • Does a 'concurrent' VA application need to go in at the same time as the other approval application?  This is particularly important for those looking to submit matching adjustment or IMAP applications as soon as possible.

Firms may wish to consider the above when responding to the consultation which closes on Monday, 20 April 2015.