Sam Woods, Deputy Governor for Prudential Regulation and Chief Executive Officer of the Prudential Regulation Authority, has assured that proposed reforms to Solvency II insurance regulations in the UK will ensure “competitiveness and growth” for re/insurers in the country.
Speaking at a recent event for the Association of British Insurers, Woods acknowledged that there remains “some unease” in the industry about how the PRA plans to use the additional tools the government intends to equip it with following the changes.
“Specifically, there is a concern that we will use those tools to try and reverse-engineer the effect we had been looking to achieve through fundamental spread reform,” Woods commented. “Let me say very clearly and simply that we will not do this.”
Running through the proposed reforms, Woods claimed that the “basic point” of competitiveness and growth had got lost amid discussions over the risk margin and fundamental spread.
Amongst the other points under consideration, the PRA is planning to consult on more reporting cuts for small and medium-sized firms, Woods said, and to implement a significant streamlining of the rules for internal model approvals.
“It is vital that the model approval process is very robust, given it leads directly to the setting of capital requirements. But the mandated process we have inherited from the EU is much too bureaucratic,” Woods said. “We intend to do away with around 70% of the nearly 200 internal model tests and standards, alongside other changes.”
Additionally, the PRA intends to widen the range of assets that are eligible for the Matching Adjustment, and is also working with industry to implement the government’s decision to widen the eligibility requirements to include assets with highly predictable cash flows.
Further points include raising the threshold at which firms are required to enter the Solvency UK regime, removing capital requirements for branches of international insurers operating in the UK, and allowing greater flexibility in the calculation of group capital requirements.
Rather than all these reforms being implemented at once, Woods said that the PRA would work to deliver some reforms as quickly as possible, while also giving time for adequate consultation on others, based on their complexity.
In terms of a timeline, he expects to publish a first consultation on some of the aforementioned topics in June, followed by a second consultation, on those areas that will benefit from more time for industry engagement, in September.
“We are also mindful that for some changes, firms will need advance notice to prepare, but we expect that these consultations will give firms a good sense of how the detailed regime will operate,” Woods concluded. “In particular, it means that firms will have a very good sense well before the end of 2023 of how we expect the new regime to operate, so that they can begin to adapt their investment plans as soon as they wish.”
