On the 12 August 2016, the Prudential Regulatory Authority (PRA) published the Final Supervisory Statement on Solvency II remuneration requirements (Supervisory Settlement). The Supervisory Settlement provides additional guidance to all PRA regulated Solvency II firms (including the Society of Lloyd’s and managing agents) on how to comply with the remuneration aspects of the Solvency II Regulation.
The Statement is largely in line with the draft Supervisory Statement and clarifies a few key additional points. The changes introduced are mainly to provide further clarity and address the feedback received during the consultation period.
How to respond to the changes:
For significant insurance firms (PRA Category 1 & 2) given the minor changes from the Consultation Paper, firms should continue to finalise their remuneration policy and Remuneration Policy statement. The deadline for Remuneration Policy Statements is 10 months after the end of the firm’s financial year (i.e. 31 October 2016 for firms with a year end of 31 December).
PRA Category 1 & 2 firms’ should also consider whether a discussion with your Prudential Regulatory Authority supervisory contact is appropriate prior to submitting the Remuneration Policy Statement. This conversation is necessary if you are concerned that you are unable to meet the Prudential Regulatory Authority’s expectations set out in the Supervisory Settlement.
For all other firms (PRA Categories 3-5) please review your remuneration policy against the requirements of the Solvency II Regulation ensuring it reflects the nature, scale and complexity of the risk inherent to your business.
Content of the statement:
The Solvency Statement provides further clarity and addresses the feedback received during the consultation period. The further detail introduced is broadly around the following key points:
- Annual bonus and Long Term Incentive can be used in aggregate to address the 40% variable remuneration requirement.
- For the purpose of determining the 40% variable remuneration deferral requirement the Long Term Inventive should be valued at the grant date at the maximum potential value that could be paid out if 100% of the performance conditions are met.
- Non-EEA entities of a PRA Solvency II group are expected to comply with the Solvency II Regulation. The PRA accepts modification to the remuneration policy of those non-EEA entities to accommodate jurisdictional restrictions.
In terms of implementation timelines, the PRA expects immediate application particularly for significant insurers. This reflects the fact that Solvency II has already been in force from 1 January 2016.
The PRA makes it clear that the policy contained in the SS has been designed in the context of current UK and EU regulatory framework. The PRA will keep the SS under review to reflect the changes to the UK regulatory framework including changes arising from Brexit.
For an overview of other key requirements please click on the link below for our Newsflash pdf, and to find out more on the changes please speak to Dean Farthing, Charlotte Abbasi, Nish Shah or Jad Chartouni.