Prudential Regulation Authority Rulebook

1.1

This Supervisory Statement (SS) sets out the PRA’s expectations of firms in accordance with the requirements under the Prudent Person Principle (PPP) under the Investments Part of the PRA Rulebook regarding:

• their development and maintenance of an investment strategy;
• their management of risks arising from investments and their internal governance within the investment function; and
• their investment in assets not admitted to trading on a regulated market (hereafter ‘non-traded assets’)^[1] and intragroup loans and participations.

1.2

This SS is addressed to all UK Solvency II firms, including in the context of provisions relating to Solvency II groups, mutuals, third-country branches, the Society of Lloyd’s and its managing agents (collectively called ‘firms’ in this SS). 

1.3

The PRA notes that the PPP sets objective standards for prudent investment.^[2] These include standards in relation to portfolio diversification,^[3] the use of financial derivatives,^[4] exposure to non-regulated markets^[5] and risk concentration,^[6] asset-liability matching,^[7] and the security, quality and profitability of the whole investment portfolio.^[8] Compliance with these standards must be assessed on an objective basis, from the standpoint of the hypothetical prudent person in similar circumstances (taking into account all relevant factors case-by-case), rather than a firm’s subjective view about the prudence of its investment standards. This does not mean that a firm’s own views about the prudence of its investments are irrelevant or would be disregarded. Indeed, firms are required to make their own judgments about the prudence of the way they manage their business for the purposes of the risk management requirements in Solvency II. Nor does this imply that the same investment policy or the same investment limits ought to apply to different firms with different business strategies and risk profiles.

1.4

Compliance with the PPP must be considered on a case-by-case basis, as what is prudent for one firm, based on its particular business strategy and risk profile, may not be prudent for a different firm. When applied to a particular firm’s circumstances, the PPP’s standards are likely to allow for a range of reasonable investment strategies. In line with the PRA’s supervisory approach to insurance regulation, the PRA will exercise its independent judgement, and where it concludes that a firm is not meeting the PPP’s standards it will expect the firm’s senior managers responsible for investment to take action.

1.5

The SS should be read in conjunction with the following:

• The Investments, Conditions Governing Business, Valuation and Matching Adjustment Parts of the PRA Rulebook;
• Chapters I (General Provisions), II (Valuation of assets and liabilities), VI (Solvency capital requirement - full and partial internal models), IX (System of Governance), XII (Public disclosure) and XIII (Regular supervisory reporting) and Article 376 (significant risk concentrations) of the Commission Delegated Regulation (EU) 2015/35;
• ‘The PRA’s approach to insurance supervision’;^[9]
• SS5/19 ‘Liquidity risk management for insurers’;^[10]
• SS41/15 ‘Solvency II: applying EIOPA Set 2, System of Governance and ORSA Guidelines’;^[11]
• SS4/18 ‘Financial management and planning by insurers’;^[12]
• SS19/16 ‘Solvency II: ORSA’;^[13]
• SS3/17 ‘Solvency II: illiquid unrated assets’;^[14]
• SS7/18 ‘Solvency II: Matching adjustment’;^[15]
• SS5/16 ‘Corporate governance: Board responsibilities’;^[16]
• SS3/19 ‘Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change’;^[17]
• SS10/18 ‘Securitisation: General requirements and capital framework’;^[18]
• SS35/15 ‘Strengthening individual accountability in insurance’;^[19]
• Policy Statement 15/18 ‘Strengthening individual accountability in insurance: Extension of the SM&CR to insurers’;^[20]
• SS1/19 ‘Non-binding PRA materials: The PRA’s approach after the UK’s withdrawal from the EU’;^[21]
• SS20/16: ‘Solvency II: reinsurance – counterparty credit risk’;^[22]
• SS8/18 ‘Solvency II: Internal models – modelling of the matching adjustment’;^[23]
• statement of policy on MA permissions;^[24] and
• EIOPA Guidelines on the systems of governance.^[25]

1.6

The PRA rules require that ‘as regards investment risk, a firm must demonstrate that it complies with the Investments Part of the PRA Rulebook’.^[26] Accordingly, this SS addresses firms’ investment risk management practices and sets out some specific areas where the PRA would expect firms to pay particular attention in order to comply with the PPP.

1.7

The PRA also reminds firms:

• of the responsibilities resting with Senior Management Functions under the Senior Managers and Certification Regime. Specifically, the Chief Risk Officer is responsible for managing and reporting to the board on the risk management strategies and processes in place, including those relating to investments;
• that if firms appear to the PRA to be in breach of the Investments Part of the PRA Rulebook, the PRA would consider exercising its relevant supervisory powers under section 55M of the Financial Services and Markets Act 2000; and
• that a breach of the PPP may be associated with a failure to meet the requirements set out in the Conditions Governing Business or Matching Adjustment Parts of the PRA Rulebook. In particular, the MA eligibility conditions (which firms should comply with at all times) require compliance with the PPP at the level of both the asset and portfolio.^[27] The PRA may consider imposing capital add-ons when certain of these requirements of the Conditions Governing Business Part are breached. In the case of a breach of MA eligibility conditions that is not rectified for more than two months, the PRA may consider necessary changes to the MA permission (which may be in addition to the reduction to the MA required by Matching Adjustment 13.5).

1.8

The expectations set out in this SS do not amend the scope of the requirements that apply under the rules in the PRA Rulebook. In some cases, the rules or regulations apply at a portfolio level while in others the requirements are more granular.^[28] Accordingly, the level of granularity at which the expectations in this SS should be applied will depend in each case on (among other things) the scope of all relevant requirements to which the expectation refers or relates and the specific circumstances of each firm case-by-case, taking into account the principle of proportionality.

1.9

In this SS, any reference to any provision of direct EU legislation is a reference to it as it forms part of assimilated law.