A new report commissioned by the Association of British Insurers published in response to the Government’s consultation on Solvency II shows how changes made to the Matching Adjustment and the Risk Margin mechanisms could free up £95 billion for re-investment.
The ABI says these changes to the Solvency II regime would still ensure the industry holds enough capital to withstand a 1-in-200-year shock and meet its obligations whilst managing its assets responsibly and safely.
The changes proposed by the ABI would mean £60 billion of the roughly £300 billion in funds held in Matching Adjustment portfolios could be re-invested if rules allow pension funds that insurers manage to invest in a broader and greener range of assets.
It is reportedly much easier to invest in a highly-rated mining company than it is to invest for 30 years in a wind farm.
£35 billion of capital currently backing the Risk Margin, solvency capital requirement (SCR) and firms’ capital buffers could be redeployed either to increase investment in the sector, support the annuity market, or be returned to shareholders for investment elsewhere in the economy.
ABI’s report states how The Risk Margin is an additional layer of capital, introduced by the EU, that insurers are required to hold over and above what they need to meet their obligations to customers and their capital requirement buffer.
£16.6 billion would be generated in additional annual GDP in the UK by 2051 at no cost to the Government.
Every £1 productivity enhancement in 2021 will reportedly lead to a nearly £4 improvement in GDP in 2051.
This is equivalent to a net present value economic benefit of around £190 billion in additional GDP over the next 30 years.
An extra £1.4 billion by 2030 could be received by the Exchequer in tax as a result of the economic growth.
“The insurance and long-term savings industry can do so much more to help our economy and society but only if Solvency II is made fit for purpose for the UK,” said Huw Evans, ABI Director General.
“Our sector can invest an amount equivalent to the budgets of eleven UK government departments in renewable energy, economic recovery and infrastructure investment if these reforms are made – with policyholders still having one of the best protected systems in the world.
“The independent analysis by KPMG experts sets out the £95 billion of opportunities available and we must use our freedom from EU rule-making to seize them.”