1. Date (Arial 16pt) Title of the event – (Arial 28pt bold) Subtitle for event – (Arial 28pt) Other approvals Sid Malik Head of Department, Life and Pensions Risk Department

2. Discussion of the timeline for Solvency II approvals between now and implementation Key information from CP23/14 Solvency II: applying for Solvency II approvals Information for matching adjustment applications Feedback from the PRA’s review of the matching adjustment trial submissions Key discussion points on group approvals What firms need to do now to prepare Objectives of session 2

3. Timeline CP23/14 published 15 October on other approvals applications Firms start to apply for approvals Approvals granted or declined by the PRA Balance sheet reviews Ongoing evaluation of approvals Additional CP to be published on further approval applications MA pre- application opens 1 December MA pre- application closes 6 January Simultaneous firm specific information on MA in March Two supervisory statements published in March following consultations Outcome provided in writing to firms Paul Fisher’s letter on MA PRA decision/activity Firm activity PRA communication to firms Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 2016 Transposition 31 March 2015 Implementation 1 January 2016 3

4. CP 23/14 Draft supervisory statement on Solvency II: applying for Solvency II approvals CP 23/14 includes information on: Internal model Matching adjustment Undertaking specific parameters Ancillary own funds Exclusion of entity from scope of group supervision Single group ORSA SFCR dispensation Calculation method for group capital Draft application checklists Paul Fisher’s letter gives further information for firms intending to apply for the matching adjustment Q4 2014 CP23/14 published 15 October on other approvals applications Additional CP to be published on further approval applications MA pre- application opens 1 December Paul Fisher letter on MA 4

5. Q4 2014 further information on other approvals Further information on approvals is expected to cover: Transitional measure for technical provisions Transitional measure for the risk-free rate CP23/14 published 15 October on other approvals applications Additional CP to be published on further approval applications MA pre- application opens 1 December Paul Fisher letter on MA Q4 2014 5

6. Matching adjustment pre-application (1) The PRA intends to conduct a pre-application for matching adjustment Firms can submit their applications between 1 December 2014 and 6 January 2015 Firms should submit pre-applications based on the Directive, draft Delegated Act and draft Implementing Technical Standards (ITS) The PRA will contact firms if more information is required but otherwise will not discuss the application in great detail Q4 2014 CP23/14 published 15 October on other approvals applications Additional CP to be published on further approval applications MA pre- application opens 1 December Paul Fisher letter on MA 6

7. By 31 March 2015 the PRA will provide simultaneous feedback to all firms that submitted a matching adjustment pre-application by the deadline of 6 January 2015 This feedback will be firm-specific MA pre- application closes 6 January Simultaneous firm specific information on MA in March Two supervisory statements published in March following consultations Q1 2015 Matching adjustment pre-application (2) 7

8. MA is an adjustment to the risk free discount rate used to value liabilities under Solvency II It is similar in concept to the illiquidity premium that firms take credit for under ICAS, but there are some important marked differences Firms that want to use MA need to get supervisory approval; approval can only be given if ALL of the eligibility criteria in the Directive are met The approval process will present challenges for both firms and the PRA So, the PRA invited firms to take part in a ‘trial ITS submission exercise’ Firms put a lot of thought and effort into their submissions, as has the PRA in its review of the submissions. The PRA has provided feedback via Paul Fisher’s letter of 15 October 8 Introduction to matching adjustment

9. 9 1. Provide feedback to firms from the PRA’s review of the trial submissions 2. Answer questions from firms about the PRA’s interpretation of the requirements 3. To help firms prepare high quality pre-application submissions Three reasons for Paul Fisher’s letter

10. 1. Submissions focused mainly on asset and liability eligibility Asset eligibility Partial recognition of an asset’s cash-flows Make-whole clauses Equity Release mortgages Liability eligibility Surrender options Other eligibility Least developed thinking in the liquidity plan 10 Main themes of Paul Fisher’s letter

11. 2. Materiality and proportionality Materiality and proportionality principles do not obviate eligibility requirements; evidence required that each requirement is met Market standard redemption clauses – wrong to assume that as present in vanilla assets they are automatically compatible Reinsurance assets are not necessarily eligible; the evidence required should not be burdensome but has to be provided 11 Main themes of Paul Fisher’s letter

12. 3. Evidence of future processes This is about plans that may not be in place by date of submission but which need to be in place by Solvency II implementation e.g. the processes for managing the fund and maintaining matching over time Firms need to convince the PRA not only of the end point but demonstrate how it will be achieved 12 Main themes of Paul Fisher’s letter

13. MA is very technical in nature and has a large financial impact Approval process is resource intensive for both industry and the PRA Quality and not quantity of evidence is key Solvency II has raised the bar in this area compared to ICAS The eligibility criteria require firms to evidence how they will earn the matching adjustment benefit This should drive up standards of risk management 13 Evidence too burdensome?

14. Q2 2015 Formal application Firms will be able to submit formal applications after transposition, from 1 April 2015. Firms should consider the dependencies between approvals now, including dependencies for internal model, and have a contingency plan in place in case applications are not approved Firms should not wait until Q2 2015 to develop such plans Firms are encouraged to discuss these plans with their supervisors at the earliest opportunity Firms start to submit final applications for approval Q2 2015 14

15. Balance sheet reviews All internal model firms and some larger standard formula firms may be asked to complete an independent review of their balance sheets. The PRA has proposed a two step process to balance sheet reviews: Step 1: a ‘review and recommend’ report on the firm’s preparedness to implement the Solvency II regulatory framework Step 2: a ‘reasonable assurance’ opinion on the balance sheet, technical provisions (excluding risk margin) and own funds that the firm should obtain from an external audit firm Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Balance sheet reviews 15

16. The Directive allows the Deduction and Aggregation Method to be applied to the calculation of the group capital requirement if the exclusive application of the default ‘Method 1’, Consolidation, is inappropriate The following issues will be considered: is the related undertaking in an equivalent or provisionally equivalent jurisdiction? is there enough data available and is it of sufficient quality? is the entity part of the internal model and what is the materiality of its risks? is the exclusive application of Method 1 overly burdensome? are intra-group transactions substantial? Choice of Group Solvency Calculation Method 16

17. All solos conduct an ORSA report and provide input to the group The group conducts an ORSA at the group level, then takes into account the ORSA output from the solos The group submits the single ORSA report to all supervisory authorities – in this case, to both the UK and French Each solo needs to be identifiable in the report Single ORSA report Group (UK) Solo (UK) Solo (France) Single ORSA Report Group findings Solo findings 17

18. Conclusion and what should firms be doing now to prepare? Preparing for Solvency II approvals Vital to have a contingency plan in place in case approval is not received Read and understand the raft of material that is now available e.g. Solvency II Directive and other text, EIOPA and PRA material to understand which approvals would be appropriate and discuss this with supervisors Know the impact that a rejection of application(s) on the business, and on other applications a firm has submitted or is intending to submit The PRA has provided a significant amount of materials to help firms prepare submissions for Solvency II approvals Firms have made good progress but there is still a considerable amount of work to complete in less than six months Firms planning for MA pre-app need to reflect on feedback, consider their actions and put together a credible pre-app submission 18