Prudential Regulation Authority Rulebook

1.1

This supervisory statement (SS) sets out the Prudential Regulation Authority’s (PRA) expectations of firms regarding the application of the Solvency II volatility adjustment (VA) within the calculation of the solvency capital requirement (SCR).

1.2

This SS is relevant to UK Solvency II firms and to the Society of Lloyd’s and its managing agents. It is most relevant to firms with or seeking VA approval and which use a full or partial internal model to determine the SCR, together with UK Solvency II firms who may develop a full or partial internal model in future.

1.3

This SS should be read in conjunction with the following Parts of the PRA Rulebook:

• Technical Provisions (Chapter 8);
• Solvency Capital Requirement – General Provisions (Chapter 3);
• Solvency Capital Requirement – Internal Models (Chapters 4 and 10 to 16);
• Investments (Chapters 2 to 5); and
• Conditions Governing Business (Chapters 2 and 3).

1.4

It should also be read in conjunction with the document ‘The PRA’s approach to insurance supervision’.^[1]

1.5

The PRA has considered the relevant sections of the Solvency II Directive^[2] (the Directive) and the Solvency II Commission Delegated Regulation³ when setting the expectations noted in this SS.

1.6

The VA allows firms to adjust the relevant risk-free interest rate term structure for the purposes of calculating the best estimate of a portfolio of insurance or reinsurance obligations. To apply a VA, firms must have PRA approval, as per Regulation 43 of the Solvency 2 Regulations.^[4] This SS covers the application of a VA as part of the SCR calculation.