PRA publishes final Solvency II rules

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The Prudential Regulation Authority (PRA) has published its final rules setting out how the Solvency II Directive will be implemented in the UK.

The rules explain how the "long-term guarantees" package will be implemented and how insurers can reduce the risk on long-term liabilities with long-term assets. 

The long-term guarantees package means that insurers will be able to reduce their capital and reserve requirements where they are matched and invested for the long term.

A consultation paper has been published on the application process for "volatility adjustment" which is designed to adjust the risk-free discount rate used to value insurance liabilities. 

The risk-free discount rate is designed to mitigate the effect of short-term liability in financial markets on the valuation of long-term liabilities for Solvency II.

Applications for volatility adjustments can be made from 1 April 2015, with the PRA aiming to make decisions on standalone applications within six weeks.

Solvency II will apply to between 400-450 retail and wholesale UK insurance firms, and to the Lloyd's insurance market.

Andrew Bailey, deputy governor of Prudential Regulation at the Bank of England and CEO of the PRA said: "Solvency II represents a fundamental change in the way that insurers are regulated.

"The papers published today provide clarity for UK firms on how the PRA will implement the new regime - acting in the interests of the wider economy and ensuring an appropriate level of policyholder protection.

"These publications will allow firms to finalise their preparations for Solvency II in order to be ready for the start of the regime on 1 January 2016."

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