Taking the fast lane – PRA’s Matching Adjustment Investment Accelerator and its implications

The main benefit of the MAIA is the flexibility insurers will have to make new investments without waiting for PRA permission for their inclusion in the MA portfolio. Currently, the c. 6 months to receive new MA permission means these investment opportunities are often foregone. The proposal’s limit (the lower of 5% of MA liabilities and £2bn) will allow significant capacity for MAIA investment by insurers with large existing MA liabilities. However, insurers with no or small existing MA liabilities will initially have limited capacity to invest.

Insurers will be able to combine applications for MAIA assets accumulated over the two-year cycle, submitting one MA application for the multiple assets. This will improve operational efficiency, reducing application costs and regulatory burden.

The greater investment flexibility will allow insurers to invest in a wider range of assets, including sustainable and productive assets. This will contribute to delivery of insurers’ ESG commitments and support economic growth.

The flexibility afforded by the MAIA comes with several regulatory requirements. The PRA has proposed controls to minimise the risks from the self-assessment process, including the risk of non-regularisation. Non-regularisation would result in MAIA assets being transferred outside the MA portfolio, with adverse capital and liquidity impacts.

A MAIA policy is required to ensure that the appropriate governance and oversight arrangements are in place to assess the eligibility of assets. A framework will need to be developed with key eligibility criteria to allow for speed of execution while safeguarding against the risk of MAIA assets being deemed ineligible at the MA permission stage.

Contingency planning activities are needed to manage any capital and liquidity impact in the event of non-regularisation. The contingency plan should be tied to the risk appetite framework.

Annual reporting requirements through an annual MAIA report are also proposed. These reporting requirements will require active monitoring from insurers, with reviews of the effectiveness of the eligibility assessment process. Insurers may wish to embed this reporting requirement within their risk management and MA reporting frameworks.

The MAIA risk appetite framework, forming part of the MAIA policy, will be key in managing new risk exposures and new asset types. Limits may be needed to manage the risk of non-regularisation. In sizing these limits, firms could consider the impact on capital and liquidity of non-regularisation. Stress tests of this and other scenarios can inform the risk appetite framework and contingency plans.

Complexities in valuation and internal model treatment of new asset types will increase operational and regulatory risks. The PRA is expecting that applications to regularise MAIA assets will be submitted alongside applications for Internal Model adjustments. Internal model applications will need to address the modelling of new assets.  

Financial projections may assume that MAIA assets are moved to the MA portfolio every two years, with this “recycling” having a compounding impact on the MAIA capacity over time (before the £2bn limit bites). For longer-term projections, such as pricing and capital planning, the impact would be more material, leading to a more significant impact if MAIA assets are not granted MA permission. Such assumptions in projections should be scenario-tested against the risk of non-regularisation to understand the potential downside.