Following the UK Government’s response to consultations over changes to Solvency II, re/insurance broker Aon has released a report highlighting the potential impact on the market, noting it will be a gradual process rather than an observable one as insurers change behaviours and optimise strategies.
According to Aon, the primary legislative changes announced were a reduction in the Risk Margin (an extra reserve for risks that are harder to hedge, mostly longevity risk for annuity funds) of around 65% for long term life insurers; and a broadening of the available pool of assets that can back annuities, to improve investment flexibility.
The report explains that the reforms have been expected since Brexit, and that it was clear that the Government aimed to reduce regulatory burdens on insurers.
This would be from both a capital and administrative perspective, says Aon, with the intention of tailoring the regime to the UK economy, thus opening up more opportunities to invest in the country.
As for the expected impact on the insurance market, the report notes, “We do not expect significant step changes to insurer pricing or capital levels. The wider pool of eligible assets should help with capacity constraints for annuity funds, potentially supporting higher bulk annuity volumes without price rises, by opening up more illiquid asset opportunities with a favourable yield.”
Analysts at AM Best also reiterated this idea, stating that changes to the framework will allow the country’s life insurers to invest in a wider array of assets, and likely lead to a higher proportion of UK-based assets underpinning the UK annuity portfolio.
Though, Aon adds that a few factors are weighing in on how long it will take for this to occur, such as the passing of the legislation, the Prudential Regulatory Authority (PRA) determining how to implement the revised requirements, and the asset and insurance industry structuring new investments accordingly.
Aon’s report concludes, “The consultation responses indicated that capital levels held by insurers are unlikely to change materially and other aspects of the regime, such as the Solvency Capital Requirements to reserve for 1-in-200-year stress events, are not changing.
“We do not expect the reforms to result in any observable changes at any specific point, but rather a more gradual process as insurers change behaviours and optimise strategies. At this stage, the Government and PRA have yet to announce when the various changes will be in force, but we presume the Government are planning to legislate within 2023.”
