- Latest available (Revised)
- Original (As made)
The Solvency 2 Regulations 2015, Section 42 is up to date with all changes known to be in force on or before 29 April 2024. There are changes that may be brought into force at a future date. Changes that have been made appear in the content and are referenced with annotations.
Revised legislation carried on this site may not be fully up to date. Changes and effects are recorded by our editorial team in lists which can be found in the ‘Changes to Legislation’ area. Where those effects have yet to be applied to the text of the legislation by the editorial team they are also listed alongside the legislation in the affected provisions. Use the ‘more’ link to open the changes and effects relevant to the provision you are viewing.
42.—(1) An insurance undertaking, reinsurance undertaking or third-country insurance undertaking may apply to the PRA for permission to apply a matching adjustment to a risk-free interest rate term structure in order to calculate the best estimate of a portfolio of life insurance or reinsurance obligations.
(2) The PRA must approve an application made under paragraph (1) if the conditions specified in paragraph (4) would be satisfied if approval were granted.
(3) The PRA must revoke an approval granted under paragraph (2) if an undertaking fails to comply with a condition specified in sub-paragraphs (a) to (k) of paragraph (4) in relation to that approval for a period of two months or more.
(4) The conditions referred to in paragraphs (2) and (3) are—
(a)the undertaking assigns a portfolio of assets, consisting of bonds or other assets with similar cash flow characteristics, to cover the best estimate of the portfolio of insurance or reinsurance obligations;
(b)the undertaking maintains the assignment referred to in sub-paragraph (a) over the lifetime of the obligations, except for the purpose of maintaining the replication of expected cash flows between assets and liabilities where the cash flows have materially changed;
(c)the portfolio of insurance or reinsurance obligations to which the matching adjustment is applied and the assigned portfolio of assets are—
(i)identified; and
(ii)organised and managed separately from the other activities of the undertaking;
(d)the assigned portfolio of assets referred to in sub-paragraph (c) cannot be used to cover losses arising from the other activities of the undertaking;
(e)the expected cash flows of the assigned portfolio of assets replicate each of the expected cash flows of the portfolio of insurance or reinsurance obligations in the same currency;
(f)any mismatch between the expected cash flows referred to in sub-paragraph (e) does not give rise to risks which are material in relation to the risks inherent in the insurance business to which the matching adjustment is applied;
(g)the contracts underlying the portfolio of insurance or reinsurance obligations do not give rise to future premium payments;
(h)the only underwriting risks connected to the portfolio of insurance or reinsurance obligations are longevity risk, expense risk, revision risk or mortality risk;
(i)where the underwriting risk connected to the portfolio of insurance or reinsurance obligations includes mortality risk, the best estimate of the portfolio of insurance or reinsurance obligations does not increase by more than 5% under a mortality risk stress that is calibrated in accordance with rules implementing paragraphs (2) to (5) of Article 101 of the Solvency 2 Directive;
(j)the contracts underlying the insurance or reinsurance obligations include—
(i)no options for the policyholder; or
(ii)only a surrender option with a surrender value not exceeding the value of the assets, valued in accordance with [F1rules 2.1 and 2.2 of the Valuation part of the PRA Rulebook], covering the insurance or reinsurance obligations at the time the surrender option is exercised;
(k)the cash flows of the assigned portfolio of assets are—
(i)fixed and cannot be changed by the issuers of the assets or any third parties; or
(ii)fixed except for a dependence on inflation, and the assets replicate the cash flows of the portfolio of insurance or reinsurance obligations that depend on inflation;
(l)the undertaking does not apply a volatility adjustment to the risk free interest rate term structure in accordance with an approval granted under regulation 43;
(m)the undertaking does not apply a transitional measure to the risk free interest rates in accordance with an approval granted under regulation 53;
(n)the undertaking has not ceased to apply a matching adjustment to the risk-free interest rate term structure in the 24 months prior to the application.
(5) For the purposes of paragraph (4), the insurance or reinsurance obligations of an insurance or reinsurance contract must not be split into different parts when composing the portfolio of insurance or reinsurance obligations.
(6) For the purposes of sub-paragraph (4)(k)(i), where issuers or third parties have the right to change the cash flows of an asset, that right does not disqualify the asset from admissibility to the assigned portfolio, provided the investor receives sufficient compensation to allow it to obtain the same cash flow by re-investing the compensation in assets of an equivalent or better quality.
(7) In this regulation, “life insurance and reinsurance obligations”—
(a)includes annuities stemming from non-life insurance or reinsurance contracts; [F2and]
(b)in the case of a third-country insurance undertaking F3..., refers only to insurance and reinsurance obligations assumed in the United Kingdom; F4...
F5(c). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Textual Amendments
F1Words in reg. 42(4)(j)(ii) substituted (31.12.2020) by The Solvency 2 and Insurance (Amendment, etc.) (EU Exit) Regulations 2019 (S.I. 2019/407), regs. 1(2), 10(6)(a) (as amended by S.I. 2020/1385, regs. 1(2), 54(2))
F2Word in reg. 42(7)(a) inserted (31.12.2020) by The Solvency 2 and Insurance (Amendment, etc.) (EU Exit) Regulations 2019 (S.I. 2019/407), regs. 1(2), 10(6)(b)(i) (as amended by S.I. 2020/1385, regs. 1(2), 54(2))
F3Words in reg. 42(7)(b) omitted (31.12.2020) by virtue of The Solvency 2 and Insurance (Amendment, etc.) (EU Exit) Regulations 2019 (S.I. 2019/407), regs. 1(2), 10(6)(b)(ii) (as amended by S.I. 2020/1385, regs. 1(2), 54(2))
F4Word in reg. 42(7)(b) omitted (31.12.2020) by virtue of The Solvency 2 and Insurance (Amendment, etc.) (EU Exit) Regulations 2019 (S.I. 2019/407), regs. 1(2), 10(6)(b)(iii) (as amended by S.I. 2020/1385, regs. 1(2), 54(2))
F5Reg. 42(7)(c) omitted (31.12.2020) by virtue of The Solvency 2 and Insurance (Amendment, etc.) (EU Exit) Regulations 2019 (S.I. 2019/407), regs. 1(2), 10(6)(b)(iv) (as amended by S.I. 2020/1385, regs. 1(2), 54(2))
Modifications etc. (not altering text)
C1Pt. 4 modified (31.12.2020) by The Solvency 2 and Insurance (Amendment, etc.) (EU Exit) Regulations 2019 (S.I. 2019/407), regs. 1(2), 12 (as amended by S.I. 2020/1385, regs. 1(2), 54(2) and S.I. 2020/1301, regs. 1, 3, Sch. para. 27(e))
Latest Available (revised):The latest available updated version of the legislation incorporating changes made by subsequent legislation and applied by our editorial team. Changes we have not yet applied to the text, can be found in the ‘Changes to Legislation’ area.
Original (As Enacted or Made): The original version of the legislation as it stood when it was enacted or made. No changes have been applied to the text.
Geographical Extent: Indicates the geographical area that this provision applies to. For further information see ‘Frequently Asked Questions’.
Show Timeline of Changes: See how this legislation has or could change over time. Turning this feature on will show extra navigation options to go to these specific points in time. Return to the latest available version by using the controls above in the What Version box.
Explanatory Memorandum sets out a brief statement of the purpose of a Statutory Instrument and provides information about its policy objective and policy implications. They aim to make the Statutory Instrument accessible to readers who are not legally qualified and accompany any Statutory Instrument or Draft Statutory Instrument laid before Parliament from June 2004 onwards.
Access essential accompanying documents and information for this legislation item from this tab. Dependent on the legislation item being viewed this may include:
Impact Assessments generally accompany all UK Government interventions of a regulatory nature that affect the private sector, civil society organisations and public services. They apply regardless of whether the regulation originates from a domestic or international source and can accompany primary (Acts etc) and secondary legislation (SIs). An Impact Assessment allows those with an interest in the policy area to understand:
This timeline shows the different points in time where a change occurred. The dates will coincide with the earliest date on which the change (e.g an insertion, a repeal or a substitution) that was applied came into force. The first date in the timeline will usually be the earliest date when the provision came into force. In some cases the first date is 01/02/1991 (or for Northern Ireland legislation 01/01/2006). This date is our basedate. No versions before this date are available. For further information see the Editorial Practice Guide and Glossary under Help.
Use this menu to access essential accompanying documents and information for this legislation item. Dependent on the legislation item being viewed this may include:
Click 'View More' or select 'More Resources' tab for additional information including: