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Solvency UK Matching Adjustment:

Another piece of the puzzle falls into place

At a glance:

  • The PRA has published its second consultation on Solvency UK (SUK) reform, focusing on the Matching Adjustment (MA). The CP covers three key areas: investment flexibility, MA operation and enhanced risk management.
  • Overall, this set of proposals provide a detailed view of what the future of investment and risk management in MA portfolios will look like under SUK. Although investment flexibility is being expanded, the risk management enhancements that go with it are going to affect all firms, even those not interested in using the greater flexibility that these proposals provide.
  • Investment flexibility will be enhanced by allowing investment in assets with highly predictable (HP) cashflows meeting a set of criteria – but this will be limited to 10% of the MA benefit (£6.6bn as of YE 22) and subject to strict criteria (which can be limiting) such as cashflows being contractually bound.
  • Firms are expected to carefully consider the fundamental spread (FS) that should apply to assets with HP cashflows to allow for liquidity and other risks; this means that the FS for these assets is expected to be larger than for other MA assets in the portfolio, all other factors being equal.
  • A range of measures to enhance risk management in MA portfolios are included. The most notable is an attestation requirement where firms’ CFOs (in most cases) will need to attest that the FS is sufficient and the MA can be earned to a high degree of confidence. Preparing for delivering this attestation will require a significant technical and logistical effort for firms.
  • Final MA rules are expected in Q2 2024 and will be effective from June 2024 so that firms can reflect them for YE 2024. This is a very tight timeline and firms will need to carefully explore the impact of the proposals and mobilise the operational capabilities to respond quickly to the final rules.
  • We expect the gains of investment flexibility to be gradual and modest at first due to low availability of assets that meet the criteria. The proposals mark the beginning of a long journey. Firms might want to use the next few years to test the benefits of investment flexibility and demonstrate proficiency to the regulator. This will put them in a good position to make the best use of the regime as more eligible assets become available and the regime is bedded down.

Who this blog is for:


Board members, senior executives and actuaries of UK insurers with approvals to use the MA who work on balance sheet management, pricing, reporting, capital optimisation, risk, finance, and compliance.



Following on from the PRA’s CP12/23 (see our previous blog), the PRA published its second consultation (CP) on SUK yesterday. The CP is relevant to life insurers with an approval to use the MA but also insurers with certain liabilities that under the proposals will become eligible for MA application. The CP is open for comments until 5 January 2024, with final rules expected in Q2 2024 with effective date of 30 June 2024.The PRA intends the proposals to improve the way the MA supports investment flexibility while maintaining a high level of policyholder protection.

The proposals are intended to improve the way the MA supports investment flexibility while maintaining a high level of policyholder protection.

The main areas of the proposals are:

A. Improving MA flexibility,

B. Improving the MA operation, and

C. Enhanced risk management expectations.

This blog covers the key proposals on investment flexibility, operation of the MA and attestation requirement including a brief assessment of the impact on firms in each of these areas. We have also summarised other areas of reform including liability eligibility, treatment of internal credit ratings, approach to notching, risk management of sub investment grade assets and reporting. Finally, for the purposes of this article, we have not included an analysis of the impact on SCR and internal model of the proposals in this CP as we are focusing on the elements directly impacted by the MA reform.

A. Improving MA investment flexibility


One of HMT’s reform objectives was to channel more insurance assets towards productive investments. The PRA is therefore introducing more flexibility around MA investments, particularly by allowing insurers to include assets with ‘highly predicable cashflows’.

Under the proposals, the PRA will allow a limited proportion of assets (10% of the MA benefit) with highly predictable cashflows to be included in the MA portfolio provided they meet a set of strict criteria and appropriate controls are in place.

1. Criteria for inclusion

Under the proposals, cashflows of HP assets must be contractually bound in both timing and amount, and failure to meet the contractual terms needs to be a default event. Assets should also meet the relevant MA conditions such as being ‘bonds or other assets with similar characteristics’ and having a credit quality capable of being assessed through a credit rating or internal credit assessment, and firms must demonstrate the assets are managed in line with the Prudent Person Principle (PPP).

Assets in existing MA portfolios should be considered ‘fixed’ cashflows assets. The PRA also suggests that assets restructured to obtain ‘fixity’ might be eligible to be included in unstructured form, which could lower costs for firms and might allow the inclusion of more cashflows from assets in the MA. This would require a new MA application and firms will need to engage early with the PRA to take this route.

2. Controls over matching quality

The PRA controls to mitigate the additional risks inherent in HP cashflow assets include:

  • Maximum of 10% of the total MA benefit to be generated by assets with HP cashflows;
  • Introduction of 2 new matching tests – Tests 4 (reinvestment risk) and 5 (liquidity risk) for firms investing in HP cashflow assets; and
  • Minor amendments to Matching tests 1 and 2 to reflect HP cashflow asset characteristics.

3. Fundamental Spread (FS) additions for HP cashflow assets

As anticipated, the PRA is proposing that FS additions will be necessary for assets with HP cashflows included in the MA portfolio.

Under the proposals, firms will be required to identify all sources of uncertainty in cashflow timing / amount to make adequate allowance for additional risks. Given the scarcity of data this is likely to present a modelling challenge. The PRA proposes allowing firms to use “standard methodologies”, which was not defined within the CP, and it will prescribe a floor to the FS addition (10 basis points) to reflect reinvestment and rebalancing costs arising from changes in cashflow patterns. The PRA also expects firms to set an allowance for cashflow uncertainty of no less than quarter of the difference in MA benefit arising from worst case and best estimate cashflows at the point of investment.

The FS addition needs to be reviewed regularly to ensure it remains appropriate under changing economic and operating conditions. As more data becomes available and modelling capability improves, firms are expected to move towards a more sophisticated approach to determine the additional FS.

4. Determination of best estimate cashflows

The PRA proposes that firms will have discretion over how to project HP cashflows and could choose to use a deterministic or statistical approach depending on available market data. The PRA will not mandate a single methodology across all asset types, but firms will be expected to justify the chosen methodology in their MA application.

Impact on firms

While the PRA is expanding the range of assets eligible for the MA, it also proposes to put in place material safeguards and controls to ensure continued policyholder protection. The proposal to allow 10% of the MA benefit to be derived from HP cashflow assets would amount to a total of £6.6bn MA benefit attributable to HP assets across the industry (YE 2022 data). But firms will need to develop methodologies to assess and quantify the additional risks included in the new assets, which could result in a significant operational burden. Finally, the additional FS related to HP cashflow assets should lead to a lower contribution to MA benefit than that of fixed assets. It is unclear whether all these factors taken together will dampen the appetite for life insurers to seek assets with HP cashflows.

In addition, the requirement for cash flows to be contractually bound in both timing and amounts may limit the assets firms could include. For example, contracts without upper bounds on the cash flows (rental income) could be included if appropriate assumptions for future escalation could be demonstrated (e.g. on rental increases).

In the case of Equity Release Mortgages (ERM), Appendix 3a of the CP outlines that some types of ERM might fall under the category of assets with HP cashflows without the need for structuring but firms would have to assess them against the criteria described above. PRA notes that it is not possible to give a definitive view on ERM classification due to the wide range of features they can present which impact MA eligibility.

Many MA portfolios include a component of structured assets – where fixity was created through restructuring. An implicit implication is that some firms might want to restructure these assets to enable inclusion in the MA portfolio under the new proposals and reduce the cost of maintaining them in the portfolio. Firms might want to assess any potential benefits of this going forward, including being able to capture more cashflows from these assets than previously recognised in the MA, against the additional cost of making a change.

B. Improving the MA operation


The PRA is also proposing changes to the way the MA operates to reduce the administrative burden for firms and regulators and make it more agile.

1. Streamlined and faster applications

The PRA proposes to introduce a streamlined MA application approach for certain types of assets (broadly, less complex assets). These applications will be processed ‘as quick as possible’, with an aim to provide a decision within 6 months after receipt. The PRA will indicate whether the streamlined approach is suitable as and when a firm engages with the PRA regarding a proposed MA application. The PRA is also proposing to introduce a new requirement in MA applications to include evidence that assets meet the Prudent Person Principle (PPP).

As a result of the changes, the PRA expects to receive an increased volume of MA applications.

2. A new approach to MA breaches

Currently, firms must cease to apply the MA if they breach the eligibility conditions or fail matching tests and do not restore compliance within two months. The PRA proposes that non-compliant firms would be required to reduce the MA amount in a staggered fashion (i.e., they would not immediately lose their MA permission). This reduction would be at least 10% of the unadjusted MA – increasing by an additional 10% for each month that the firm remains non-compliant. If the MA has been reduced to zero, the PRA would then expect to revoke the MA permission. The PRA does, however, reserve the right to revoke firms’ MA permissions even in cases where the MA has not been reduced to zero in certain exceptional circumstances.

Impact on firms

The proposals for streamlining MA applications and processing will be well received by industry. The costs of setting up and maintaining the MA are not trivial and allowing for a more efficient process should help firms make wider and more active use of the proposals including those around investment flexibility. The less punitive approach to MA breaches should also put some firms at ease and help firms move towards investing in HP cashflow assets. Since the PRA expects an increase in applications, firms considering them might want to be early to be first in the queue.

C. MA risk management: MA attestation framework


A senior manager will be required to attest to the PRA on the sufficiency of the FS and the quality of the resulting MA generated by the assets in their MA portfolio.

‘…the FS used by the firm in calculating the MA reflects compensation for all retained risks, and the MA can be earned with a high degree of confidence from the assets held in the relevant portfolio of assets.’1

The attestation will be annual or in the event of a material change in risk profile and use standardised wording (above) for each MA portfolio within the firm. The attestor should be the senior management function holder (SMF) responsible for the firms’ financial information. For most life insurers this is likely to be Chief Financial Officer. Based on current timeline we expect the first attestation to be required by March 2025 with a reference date of December 2024.

Firms will be required to set up a policy on how the attestations will be provided including internal processes, systems and controls to assess the FS and MA. Firms will be required to submit the attestation, and supporting evidence, to the PRA (none of which will be subject to external audit).

The attestation exercise is applicable and relevant to all firms with an MA regardless of their asset portfolio. However, the PRA acknowledges that many of the assets in firms’ MA portfolios have a similar risk profile to those used to calibrate the FS (Government and corporate bonds) and in those cases an FS addition would be unlikely to be needed.

Assets of particular concern to the PRA include private, unrated and illiquid assets, these may include HP cashflows that might become MA eligible under the investment flexibility part of the proposals. The proposed attestation should also reflect FS adjustments required to reflect differences in credit quality by rating notch. The PRA expects firms to review the size of the FS and MA separately from each other. Firms will need to provide verification and a rationale for the size of the MA.

Firms will be allowed to apply a voluntary addition to the FS where they judge it to be insufficient or the MA to be inconsistent with the attestation.

The PRA expects that no voluntary FS additions will automatically lead to a reduction in SCR. In particular, the PRA is proposing that changes to the FS in stress conditions should include any changes to additions made to the FS, including those made as part of the attestation process. Therefore, firms will need to assess whether their current calibration and methodology of the MA under stress remains appropriate. If not, (major) model changes may be required.

Impact on firms

For the assets highlighted as of concern, it is likely the PRA will expect firms to conclude an additional FS is needed unless there is robust evidence to the contrary. This might impact the overall levels of MA benefit across the industry for YE 2024. The PRA also expects firms to assess the FS and MA on an asset-by-asset basis and we expect this will be a labour-intensive exercise. Firms might want to start considering how to develop a streamlined, automated system that can also capture qualitative elements and areas of judgement required for the attestation. We expect standing up the MA attestation programme will require significant time and resources and should be a priority to ensure a smooth transition into the new regime.

Other areas of reform


There are a number of other areas that are covered in the proposals. We highlight three but, as with the rest of this article, they should be considered in detail to understand the full implications.

1. Liability eligibility

The CP proposes expanding the liabilities allowed in the MA portfolio to include the guaranteed benefits of with-profits annuities and in-payment income protection liabilities, which is in line with what the industry expected. The non-guaranteed part of the with-profits annuities (“WPA”) liabilities would remain outside the MA portfolio. Firms should perform a cost benefit analysis to determine whether the cost of applying and maintaining an MA on such liabilities is beneficial.

2. Internal credit ratings and notching

Enhanced requirements around internal credit ratings, particularly around the scope of credit risks considered and how they interact with those from a Credit Rating Agency (CRA), could be challenging for firms. Introducing notched credit ratings to increase the risk sensitivity of the MA and the speed of response to credit risk changes should increase consistency and reduce the incentive to hold lower quality assets. Removing the sub-investment grade (SIG) asset cap could also lead to firms choosing to invest more in SIG green and digital assets, subject to firms’ risk appetite and compliance with the PPP.

3. Formalising MA reporting

A Matching Adjustment Asset and Liability Information Return (MALIR) will be introduced. This will build on the PRA’s last collection template and include new data fields such as HP assets, and FS add-ons, and results from the two new cash flow tests. All firms with MA approval (except those who apply for a full or partial waiver) would need to submit the MALIR to the PRA annually from YE 2024.



Firms will need to dedicate time and resources towards assessing in detail the impact of the proposals. This is a highly technical consultation that will impact all firms with an MA portfolio and the timeline for implementation is very tight.

Key challenges in meeting the enhanced risk management standards in relation to the MA will include availability and quality of asset data, methodologies required to determine the split between FS and MA, and the sheer effort of standing up an MA attestation programme to ensure the attestation can be delivered on time and in accordance with PRA expectations.

Firms might want to identify any expertise and capability gaps over the next few months to enable them to engage with the PRA and comply with the enhanced requirements, as well as grasp opportunities around improved investment flexibility whilst noting the criteria proposed by the PRA. We expect actuarial and asset valuation expertise to be in high demand.

Looking more closely at what the attestation might mean, firms should consider their current MA portfolio at an asset level to determine the areas where FS addition might be required, or consider what evidence could be used to justify remaining in the current calibration.

Overall, this set of proposals provide a detailed view of what the future of investment and risk management in MA portfolios will look like under SUK. Although investment flexibility is being expanded, the risk management enhancements that go with it are going to affect all firms, even those not interested in using the greater flexibility that these proposals provide. We expect the gains of investment flexibility to be gradual and potentially modest at first due to low availability of assets that meet the criteria. The proposals mark the beginning of a longer journey where firms and PRA will learn through the process and fine tune the regime further. For firms with significant MA portfolios, using the next few years to test the benefits of investment flexibility, learn and demonstrate proficiency to the regulator will put them in the best position to make the best use of the regime as more eligible assets become available and the regime is bedded down.



1PRA’s proposed MA attestation wording.