On 16 April 2014 the UK Prudential Regulation Authority (“PRA”) published Supervisory Statement SS2/14 “Solvency II: recognition of deferred tax” which sets out the PRA’s expectations of firms regarding the recognition of deferred tax in Solvency II. The supervisory statement outlines the PRA’s expectations in relation to the credibility of projected future taxable profits, as well as highlighting areas to which firms should pay particular attention when considering whether they can:
• Recognise deferred tax assets (“DTAs”) on their Solvency II balance sheets;
• Recognise the loss-absorbing effects of DTAs when performing 1/200 shocks to calculate the solvency capital requirement (“SCR”).
The supervisory statement is aimed at all insurance companies that will be subject to Solvency II, including both internal model and standard formula firms, and reflects feedback that was received by the PRA in response to a public consultation carried out during February and March 2014.
The guidance contained in the supervisory statement, in particular around the projection of future taxable profits to calculate the value of DTAs, serves as a useful clarification of the current Solvency II level 2 guidelines in these areas. However, areas of uncertainty remain, in particular in relation to the basis that firms should use for determining the future profit projections.
PRA summary of Solvency II data collection exercises
On 14 April 2014 the PRA published a summary of the data collection exercises it intends to request from firms during 2014. The main focus of these exercises is to support the transition to Solvency II and aid in preparations for the new regime. A summary of the data collection exercises is given below.
These data collection exercises are similar to those performed in previous years. The most significant difference is the requirement for non-IMAP firms to take part in the SCR comparison exercise (only IMAP firms were required to participate in this exercise in 2013).
The PRA asks firms to be aware that these exercises are in addition to any data collection exercises which may be requested by the European Insurance & Occupational Pensions Authority (“EIOPA”) and that the timing of the SCR comparison exercise is depended on the publication of EIOPA’s Technical Specifications for the Preparatory Phase (due at the end of April 2014), which firms must use when calculating the various elements of their Solvency II balance sheet.
The PRA state that the data collection exercises for 2015 are yet to be determined. Any additional exercises will be to support the submission of information that the PRA expects from firms that are in-scope to report under EIOPA’s preparatory guidelines. The PRA also state that they will make further information available in Q3 2014 regarding National Specific Templates for reporting.
Copies of Solvency II summary papers, together with copies of papers on other topics published by Milliman, can be found on our website.
We look forward to hearing from you if you have any questions or comments on this briefing or any other aspect of Solvency II.
Please contact your usual Milliman consultant, or email SolvencyII@milliman.com for more information.
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