Recalculation of the Solvency II transitional measures on technical provisions

Solvency II came into force on 1 January 2016 and included a transitional measure on technical provisions (“TMTP”) designed to help smooth in the capital impact of Solvency II over a 16-year period. The working party’s view is that the main intention of the TMTP is to mitigate the impact of the introduction of the risk margin, which significantly increases the technical provisions of firms, relative to their Solvency I Pillar 2 liabilities. The majority of firms who hold a TMTP have now had at least one recalculation approved by the Prudential Regulation Authority (PRA); or are in the process of applying for a recalculation. Despite this large number of approved recalculations, there remains significant uncertainty in the industry around the approach and triggers for recalculation. This paper considers aspects of TMTP recalculation for regulated UK life firms, for example practicalities of the calculation, asset and liability considerations, and communications/announcements. In this paper, we outline the need for pragmatism when considering the approach to recalculation of a measure originally intended to serve as the bridge between two regimes. We call for an allowance for doing what is sensible in a principles-based regime balancing what might be more theoretically correct with what is practical and possible to support effective management of the business.