Prudential Regulation Authority Rulebook

2.1

A firm must not apply a matching adjustment to the relevant risk-free interest rate term structure to calculate the best estimate of its insurance or reinsurance obligations unless it has a matching adjustment permission.

2.2

The conditions referred to in regulation 4(11) of the IRPR regulations are: 

1. (1) except as set out in 2.5, the contracts underlying the relevant portfolio of insurance or reinsurance obligations do not give rise to future premium payments;
2. (2) the only underwriting risks connected to the relevant portfolio of insurance or reinsurance obligations are longevity risk, expense risk, revision risk, mortality risk or recovery time risk;
3. (3) where the underwriting risk connected to the relevant portfolio of insurance or reinsurance obligations includes mortality risk, the best estimate of the relevant portfolio of insurance or reinsurance obligations does not increase by more than 5% under a mortality risk stress that is calibrated in accordance with Chapter 3 of the Solvency Capital Requirement – General Provisions Part and otherwise complies with 2.4;
4. (4) the contracts underlying the relevant portfolio of insurance or reinsurance obligations include:
   1. (a) no options for the policyholder; or
   2. (b) only a surrender option with a surrender value not exceeding the value of the assets, valued in accordance with Valuation 2.1 and 2.2, covering the insurance or reinsurance obligations at the time the surrender option is exercised;
5. (5) the relevant portfolio of assets cannot be used to cover losses arising from the other activities of the firm; and
6. (6) the relevant portfolio of assets and each individual asset contained in it meets the requirements of the prudent person principle contained in Chapters 2 and 3 of the Investments Part.

2.3

For the purposes of this Part, the insurance or reinsurance obligations of an insurance or reinsurance contract must not be split into different parts when composing the relevant portfolio of insurance or reinsurance obligations, other than in the case of an eligible element.

2.4

1. (1) The mortality risk stress referred to in 2.2(3) shall be the more adverse of the following two scenarios in terms of its impact on basic own funds:
   1. (a) an instantaneous permanent increase of 15% in the mortality rates used for the calculation of the best estimate; or
   2. (b) an instantaneous increase of 0.15 percentage points in the mortality rates (expressed as percentages) which are used in the calculation of technical provisions to reflect the mortality experience in the following 12 months.
2. (2) For the purpose of (1) the increase in mortality rates shall only apply to those policies for which the increase in mortality rates leads to an increase in technical provisions, taking into account the following:
   1. (a) multiple policies in respect of the same insured person may be treated as if they were one policy; and
   2. (b) where the calculation of technical provisions is based on groups of policies as referred to in Article 35 of Commission Delegated Regulation (Solvency II) 2015/35, the identification of the policies for which technical provisions increase under an increase of mortality rates may also be based on those groups of policies instead of single policies, provided that it yields a result which is not materially different.
3. (3) With regard to reinsurance obligations, the identification of the policies for which technical provisions increase under an increase of mortality rates shall apply to the underlying insurance policies only and shall be carried out in accordance with (2).

2.5

The condition set out in 2.2(1) does not apply in respect of an eligible element specified in 1.2 eligible element (1)(b).

[Note: In accordance with regulation 4(11) of the IRPR regulations, this Chapter sets matching adjustment eligibility conditions in addition to those set out in regulation 4(3) to (9) and (11) of the IRPR regulations, under which a firm is eligible to apply a matching adjustment]