This means that any reforms to the MA will be a key determinant of success against all three of the government’s objectives for the Solvency II Review. My colleague Charlotte Gerken discussed in April how we use the MA as part of our supervisory approach, and I won’t rehearse the points that she made today4. As a regulator, we have long believed in the core concept behind the MA. We firmly supported its inclusion in Solvency II, and we brought in a similar mechanism in our previous Individual Capital Adequacy Standards (‘ICAS’) regime. There has been a lot of feedback about broadening of the asset eligibility criteria for the MA, and about simplification of the application process. We have heard this feedback, and are confident that the review can achieve improvements in these areas. If we get these changes right, the path can be smoothed for insurers to invest for the long term in a way which supports innovation and growth and is sustainable. Of course as I said earlier, unless there is adequate policyholder protection, any such changes will not meet these objectives. So through the QIS we will be gathering data around how the MA could be calculated, so that we can be sure that the reformed MA provides adequate protection given the wide range of assets annuity writers hold. Changes on eligibility and process don’t so easily lend themselves to a QIS, but they can be designed to ensure that the MA meets the government’s other objectives for the review.
To build as accurate a picture as possible of the impact of reforms, we need high-quality data. In particular we are asking firms to validate internally the data they submit to us. Other aspects of the review There are some aspects of the review which are important but which do not lend themselves to being tested quantitatively through a QIS, and I wanted to touch briefly on a few of these. To support thinking about asset eligibility criteria for the Matching Adjustment, there will be some qualitative questions about this in the QIS, alongside the main part of the exercise. The Solvency II review also presents an opportunity to simplify the regime, not just for the MA but more broadly: streamlining of the process for approving internal models and model changes, for example. And there are some simplifications that can be made by the PRA even within the existing framework: we plan to produce a consultation paper on simplifications to the Solvency II reporting process. Together, these changes will allow our supervisors to increase their focus on the big risks that matter, while reducing cost, and increasing flexibility for industry. LIBOR The building work for the Solvency II review is important, but insurance isn’t the only sector with construction work going on. And as is so often the case, the building work next door is affecting us too. Sterling Libor is ceasing at the end of this year.