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The criteria for the inclusion of assets with highly predictable cash flows – certain assets currently regarded as ‘fixed’ (such as those with investor friendly clauses) may in future fall into the ‘highly predictable’ bucket. It is not clear whether this is intentional, or just poor drafting. Additionally, the definition of ‘highly predictable’ used by the PRA appears to be very restrictive and will limit insurers’ appetite to invest in such assets. There is a question as to whether a definition of ‘highly predictable’ is needed, given the safeguards that the PRA is proposing around the quality of matching.
Controls on the quality of matching – the PRA has introduced a range of safeguards (additional matching tests, a de minimis Fundamental Spread uplift of 10 bps, etc.). Not all these additions may be necessary, and there may be an impact on insurers’ appetite for assets with ‘highly predictable’ cash flows.
The quantum of the proposed Fundamental Spread addition for non-fixity risks – the PRA proposes that for assets with economic (pure) variability, such as callable bonds, under a standard approach firms could project cash flows on a ‘yield to worst’ basis, together with the 10 bps de minimis addition. For assets with non-economic (event) variability, most commonly seen where the borrower has options contingent on particular specified events, for the standard approach, the PRA proposes that firms provision a proportion (at least 25%) of the difference in MA benefit arising from the worst case and the best estimate cash flow projection. It is not clear whether this latter proposal is viable, or what impact these calibrations will have on insurers’ appetite for assets with ‘highly predictable’ cash flows.
The attestation – the PRA considers the proposed attestation requirement for the ‘MA to be earned with a high degree of confidence’ is an appropriate standard to provide a safeguard to the amount of MA being claimed. This would require the MA in base to be materially more certain than a 50th percentile or best estimate basis. Under stress, the PRA appears to be saying that it expects the Matching Adjustment to decrease significantly – however, industry was not expecting a significant impact on overall capital levels from these proposals. There is a concern that this may be introducing a more onerous Fundamental Spread calibration via the back door.

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Press Team

Helen Mitchell

Assistant Director, Head of Communications and Marketing

Heidi Pullig

Communications Manager

Shaelyn Stout

Communications Adviser

Jemima Wright

Communications Adviser

David Otudeko

Director of Regulation

25.10.2023 | 5 min read

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