Re/insurance broker WTW has released a report, exploring the key challenges that come from the PRA’s Quantitative Impact Study, whilst analysing HM Treasury’s call for evidence on re-shaping the UK insurance regulatory regime.
The purpose of the study is to explore variations in several technical aspects of particular importance to writers of long-term insurance, although WTW has made it clear that the new QIS framework does not satisfy the collective objectives of the HM Treasury review of Solvency II.
If the QIS framework was implemented, it would lead to material reductions in insurers’ funds available to withstand shocks, which would result in prioritising increased prudence to the detriment of competition and growth, the broker claims.
WTW also noted that the framework will hinder growth and investment in the UK, especially for infrastructure and long-term productive assets that the UK Government is keen for insurers to invest more in.
The framework could lead to higher and more volatile annuity prices with resulting lower demand for such products and impact the broader pensions sector, ultimately leading to reduced income security for pensioners.
WTW believes that there is a need for increasing levels of engagement to develop an approach that better aligns to the review objectives on international competitiveness and supporting insurers as providers of long-term capital, and which is not to the detriment of policyholder protection and the safety and soundness of firms.
“We strongly support working together in a constructive dialogue between policymakers and industry that progresses development on these important area,” the broker said.
Analysts at WTW claim that the Matching Adjustment (MA) would reduce by 44% in Scenario A and by 13% under Scenario B, equating to an increase in annuity liabilities of £14.1 billion and £4.3 billion, respectively.
The Risk Margin (RM) for annuity business would reduce by 56% under Scenario A, while Scenario B would lead to a 21% reduction.
The RM for non-annuity life business would reduce by 42% and 18% for Scenario A and Scenario B respectively.
In aggregate, insurers’ funds available to withstand shocks would reduce by 4.2% under Scenario A and by 1.0% under Scenario B.
For firms with MA portfolios, the average reduction in solvency ratio is 8% and 2% for Scenario A and Scenario B, respectively, based on holding the SCR constant across the scenarios, whereas firms that specialise in annuities, the average solvency ratio drops by 31% and 11% under Scenario A and Scenario B, respectively.
Under an “extreme spread” stress, as specified by the PRA, the MA under the QIS scenarios offset the spread movement by approximately 30% less than the current approach.
