Regulators need to clarify how the Prudent Person Principle (PPP) of Article 132 of the Solvency Directive impacts on self-directed or portfolio bond business, according to George McCutcheon of Financial Risk Solutions in a recent article in the Actuarial Post. This principle prescribes that an insurer should only invest in assets and instruments the risks of which it can properly identify, measure, monitor, manage, control and report. On the face of it this would seem to exclude self –directed/portfolio bond business where the client picks the investments – an important part of Ireland’s life assurance business, particularly in the international sector.
EIOPA commented in a response to a query during the public consultation on its Solvency II Guidelines that where the policyholder ‘has freedom of choice this would be outside the remit of PPP and this guideline’. However, as McCutcheon points out, such comments are not binding on the national supervisors and the point is not referenced in the final guidelines. As things stand insurers are at risk of being non-adherent to PPP.
The issue has not received much attention yet among insurers and there seems to be an expectation that further guidance will clear up the matter. It is a reminder of how much still needs to be clarified under Solvency II.
- John Lyons