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PRA clarifies its expectations on the use of UK GAAP under Solvency II

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14 Apr 2015

The Prudential Regulation Authority (PRA) has issued a consultation paper seeking feedback on a draft supervisory statement that sets out its expectations for firms within the scope of Solvency II wishing to recognise and value assets and liabilities under UK Generally Accepted Accounting Principles (UK GAAP) for Solvency II purposes.

The draft supervisory statement is relevant to all insurance firms within the scope of Solvency II reporting under UK GAAP rather than under International Financial Reporting Standards (IFRSs).

The Solvency II Regulation contains a derogation, within Article 9 (4), which allows firms within the scope of Solvency II and preparing annual financial statements under UK GAAP the option to recognise and value assets and liabilities under UK GAAP if:

  • UK GAAP is consistent with Article 75 of the Solvency II Directive;
  • the valuation method is proportionate to the nature, scale, and complexity inherent in the business of the undertaking; and
  • the process of valuing the assets and liabilities using international accounting standards would impose costs which are disproportionate with respect to the total administrative expenses of the firm. 

The consultation paper comments:

The PRA’s clarification of which UK GAAP provisions may potentially be applied for recognition and valuation purposes (if the specific criteria of the derogation are fulfilled) will reduce the administrative burden on firms which are considering whether to seek to apply the derogation and so facilitates both effective competition and consistent treatment between firms.

The statement expands on the PRA’s general approach as set out in its Insurance Approach document (link to PRA website).

Responses to the consultation are requested by 10 July 2015.

The press release and full consultation are available on the PRA website.

*UPDATE 02/09/2015 - the PRA has now released its supervisory statement (link to PRA website).  As a result of the above consultation there were amendments made to improve clarity of wording but no change in policy*

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