Guidance

SS2/14 – Solvency II: recognition of deferred tax

Chapter

Introduction

Printed on: 06/11/2024

Rulebook at: 25/11/2016

1

Introduction

1.1

This supervisory statement[1] is addressed to all UK firms that fall within the scope of the Solvency II Directive (‘the Directive’),[2] and to Lloyd’s. It sets out the Prudential Regulation Authority’s (PRA’s) expectations of firms in relation to the recognition of deferred tax under Solvency II.

  • 1. On 21 November 2016, this SS was updated – see appendix for full details.
  • 2. Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) (recast).
  • 25/11/2016

1.2

This statement should be read in conjunction with the PRA’s rules in the Solvency II Sector of the PRA Rulebook, and the PRA’s insurance approach document.[3]

  • 25/11/2016

1.3

This supervisory statement expands on the PRA’s general approach as set out in its insurance approach document. By clearly and consistently explaining its expectations of firms in relation to the particular areas addressed, the PRA seeks to advance its statutory objectives of ensuring the safety and soundness of the firms it regulates, and contributing to securing an appropriate degree of protection for policyholders.

  • 25/11/2016

1.4

The three key principles for firms addressed by this statement, whether life or general, standard formula or internal model, can be summarised as:

  1. (i) projections and assumptions should be credible;
  2. (ii) there should be no double counting of future tax payable; and
  3. (iii) any set-off should be appropriate, for example as regards the type of tax and jurisdiction.
  • 25/11/2016

1.5

In particular this statement:

  • highlights areas (in respect of both balance sheet recognition and the solvency capital requirement (SCR) calculation) to which a firm should pay particular attention when considering whether it can recognise deferred tax assets (DTA) or the tax effects of a 1-in-200 shock; and
  • sets out the PRA’s expectations in relation to the credibility of profit projections. Unless otherwise stipulated, these relate to the SCR calculation.
  • 25/11/2016

1.6

The expectations set out in this supervisory statement apply equally to firms using the standard formula or an internal model to calculate their SCR, except in regard to the ability to apply group relief where the expectations are different depending on the means of calculation.

  • 25/11/2016