Regulation 4 Application of the matching adjustmentI1I2

This regulation applies where an insurance or reinsurance undertaking (“the undertaking”) applies to the PRA to disapply or modify its rules, such that the applicant undertaking may apply a matching adjustment to the relevant risk-free interest rate term structure in order to calculate the best estimate of a portfolio of long-term insurance or reinsurance obligations.

Where this regulation applies, the PRA must grant the application where each of the conditions set out in paragraphs (3) to (9) and (11) is met.

The undertaking must assign a portfolio of assets, consisting of bonds or other assets with similar cash flow characteristics, to cover the best estimate of the portfolio of insurance or reinsurance obligations.

The credit quality of the assets in the portfolio referred to in paragraph (3) must be capable of being assessed through a credit rating or the undertaking’s internal credit assessment of a comparable standard.

The undertaking must maintain the assignment referred to in paragraph (3) over the lifetime of the obligations, except for the purpose of maintaining the replication of expected cash flows between assets and liabilities where the cash flows have materially changed.

The portfolio of long-term insurance or reinsurance obligations to which the matching adjustment is applied and the assigned portfolio of assets must be—

Subject to paragraph (8), the expected cash flows of the assigned portfolio of assets must replicate each of the expected cash flows of the portfolio of insurance or reinsurance obligations in the same currency.

Any mismatch between the expected cash flows referred to in paragraph (7) must not give rise to risks which are material in relation to the risks inherent in the insurance or reinsurance business to which the matching adjustment is applied.

The cash flows of the assigned portfolio of assets must be fixed and not capable of being changed by the issuers of the assets or any third parties, except—

In paragraph (9)(a), whether a risk is material is to be determined in accordance with any PRA rules referred to in regulation 7(b).

The undertaking’s application must comply with the requirements of, or imposed under, section 138BA of FSMA 2000^f1 (disapplication or modification of rules in individual cases) and the undertaking must comply with rules referred to in regulation 7(a).

This regulation does not prevent the PRA from exercising its powers under section 138BA of FSMA 2000 where an undertaking to whom the PRA has granted a permission to disapply or modify PRA rules in accordance with paragraph (2) has failed to meet any of the conditions—