Clifford Chance

Solvency UK - Reforming the matching adjustment to support investment and growth

24 November 2023

On September 28 2023, the UK's Prudential Regulation Authority (PRA) released its second consultation paper on Solvency UK, a set of reforms to the Solvency II framework for the UK insurance market. These reforms aim to relax some of the requirements relating to the use of the Matching Adjustment (MA) by insurers.

The MA is a mechanism under Solvency II that enables insurers to discount their long-term liabilities at a rate lower than the standard risk-free rate. The MA is calculated by subtracting a fundamental spread (FS) from the risk-free rate, representing the additional risk insurers assume by investing in non-risk-free assets. In order to be eligible for the MA, assets must satisfy stringent eligibility criteria such as fixed cash flows and alignment with the insurer's liabilities.

With the enactment of the Financial Services and Markets Act 2023, the PRA now has the authority to establish comprehensive rules for the MA, allowing changes to the MA and FS calculations. The PRA envisages that these changes will stimulate investments by life insurers in the UK economy while ensuring policyholder protection.

The consultation period ends on Friday 5 January 2024. The final rules and guidance are planned to be published in Q2 2024 and to come into effect on 30 June 2024.

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