The Prudential Regulation Authority (PRA) recently released its Policy Statement “Review of Solvency II: Reform of the Matching Adjustment” (PS10/24) and the accompanying final rules and guidance. This significant update, effective from June 30, 2024, follows extensive consultation and legislation changes to The Insurance and Reinsurance Undertakings (Prudential Requirements) Regulations 2023. 

The reforms aim to leverage the capital of long-term insurers for “productive investments” in the UK, including infrastructure projects, social housing, and green investments. The revised Matching Adjustment (MA) rules expand asset eligibility to include highly predictable cash flow assets, remove the cap on sub-investment grade assets, and streamline application processes to enhance investment flexibility. 

Key reforms include allowing up to 10% of the aggregate MA benefit to come from highly predictable cash flow assets, and expanding liability eligibility to cover more types of long-term insurance business. The removal of the cap on sub-investment grade assets addresses the so-called “BBB cliff,” encouraging insurers to invest in lower-rated assets while adhering to rigorous risk management and prudential standards. 

The PRA’s reforms also emphasize enhanced risk management and governance, requiring senior management attestation and formalizing expectations for internal credit assessments and reporting. These changes aim to balance increased investment flexibility with robust protections for policyholders. 

While the expanded MA eligibility and the removal of the sub-investment grade asset cap offer significant opportunities for insurers, the PRA has embedded safeguards to ensure prudential standards are maintained. The real-world impact of these reforms on investment strategies and ESG-focused sustainability development remains to be seen, as the industry adapts to the new regime and explores opportunities for productive investment under the updated framework. 

Sources: 

https://www.regulationtomorrow.com/eu/solvency-uk-reform-of-the-matching-adjustment/ 

https://www.deloitte.com/uk/en/Industries/financial-services/blogs/solvency-uk-matching-adjustment-reforms.html