PRA consults on SII Prudent Persons Principle

The PRA has published a Consultation in relation to the Solvency II Prudent Persons Principle.  This sets out the PRA’s proposed expectations for investment by firms in accordance with the Prudent Person Principle (PPP) as set out in Chapters 2 to 5 of the Investments Part of the PRA Rulebook (which transpose Article 132 of the Solvency II Directive (2009/138/EC)).

As one would expect, the accompanying draft Supervisory Statement sets-out the PRA’s proposed expectations which relate to a firm’s investment strategy, investment risk management and governance system.

In addition however, the draft also in Chapter 7 contains the following comments in relation to intra-group reinsurances, which can of course play a significant role in both the underwriting and capital management of groups:

7.5 Intra-group reinsurance is used to back TPs but the PRA generally expects that intra-group reinsurance arrangements with no element of investment are less likely to present conflicts of interest in the way it observes, for example, that intra-group loans can. Intra-group reinsurance transfers can be, and usually are, different in substance economically from intra-group investments. They usually transfer risk away from the ceding firm in a way designed to ensure that the insurance obligations are closely matched by the reinsurance. As such, in many situations, we would expect the interests of policyholders and the ceding firm to be better aligned.

7.6 Nevertheless, the PRA remains very interested in intra-group reinsurance arrangements recognising that they carry risks of their own that firms need to be able to measure, monitor, manage, control and mitigate. The PRA will look to the economic substance of arrangements and where an intra-group reinsurance arrangement is structured to effectively function as a loan it would treat it as such for the purposes of this section.

The consultation closes on 18 December 2019.

Jonathan Drake

Jonathan Drake