PRA's proposed changes to Matching Adjustment rules welcomed

The PRA's proposed changes to rules governing how insurers deal with investments held against long-term insurance liabilities have been welcomed

Proposals from the UK’s Prudential Regulatory Authority (PRA) which would widen the scope of Matching Adjustment (MA) rules for insurers have been welcomed by the industry.

Matching Adjustment is a mechanism that lets insurers recognise a portion of their investment returns from assets held against long-term insurance liability – but only returns they are confident they will realise – as upfront capital resources.

What changes are PRA proposing to MA rules?

Reforms to the rules would allow in-payment income protection (IP) liabilities and the guaranteed element of with-profits (WP) annuities towards MA, with implications for insurers.

The regulator will also allow firms to invest in assets with highly predictable cash flows (rather than fixed cash flows) subject to an additional risk allowance and subject to the corresponding benefit being at most 10% of the overall MA benefit.

This would “increase the incentives for insurers to invest in a wider range of long-term, productive assets, including assets with construction phases”, the PRA claims.

According to actuarial and insurance consultancy OAC, the PRA is also proposing safeguards to mitigate perceived risks – including an annual attestation for the MA benefit being claimed, a new annual reporting requirement, and an explicit link to MA eligibility conditions and the Prudent Person Principle (PPP).

What has response to proposed changes been?

As the scale and nature of the proposed changes have emerged, insurance industry insiders have begun taking stock and reflecting on the news.

David Gray, Consultant Actuary at OAC, says: “From our initial reading it looks likely that the PRA will have to clarify details of the coverage of IP liabilities including the treatment of Holloway contracts which encompass an investment option in addition to sickness protection.

“Overall, however, we welcome the PRA’s intention to improve this aspect of regulation and it is reasonable that any ‘loosening’ is managed through new safeguards. Ultimately, policyholders are best served by proportionate risk management which provides a fair value of benefits at a reasonable cost.

“This cost (implementation and ongoing compliance) / reward balance merits consideration of these proposals by With-Profits annuity and Income Protection providers. As proposed, insurers with existing MA portfolios will need to review processes and implement new requirements.”


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