The UK’s Economic Secretary to the Treasury & City Minister has confirmed that the UK Government intends to soften its Solvency II regulations for the insurance sector, in a departure from European Union (EU) standards.
Speaking at an Association of British Insurers (ABI) event this week, John Glen said officials planned to “seize Brexit opportunities and slash red tape through bold reforms to Solvency II.”
He says the move will unlock billions of pounds of investment into UK infrastructure, while also allowing businesses to better innovate and create jobs.
“We have a genuine opportunity… to maintain and grow an innovative and vibrant insurance sector… while protecting policyholders and ensuring the safety and soundness of firms… and making it easier for insurance firms to use long-term capital to unlock growth,” Glen said in his speech.
His comments were welcomed by the ABI, who said the reforms would help the re/insurance industry play an even larger role in the Government’s ‘levelling up’ agenda, as well as in the transition towards net zero.
“This announcement is a positive step that sees us well on the way to ensuring that we have a package that provides additional investment in the UK, without undermining the high standards of policy holder protection we have,” said Charlotte Clark, Director of Regulation.
Specific details of the reforms outlined by Glen include a substantial reduction in the risk margin, which promises a cut of around 60-70% for long-term life insurers.
They also include more sensitive treatment of credit risk in the matching adjustment, a significant increase in flexibility to allow insurers to invest in long-term assets such as infrastructure, and a reduction in the current reporting and administrative burden on firms.
“It’s also important that we avoid introducing material volatility on to balance sheets,” Glen added. “In particular, the fundamental spread should not be materially, if at all, impacted by short-term fluctuations in market spreads.”
He continued: “we believe there should be a sizeable reduction in the risk margin for long-term life insurers and a review of the methodology used to determine the fundamental spread.”
Analysts at Jefferies said that the reforms, and in particular the 60-70% reduction in the risk margin, would be “major positive step” for UK life insurers, with Legal & General and Aviva identified as firms most likely to benefit.
JP Morgan concurred that the changes are “positive for the UK life insurers in general,” but especially for those growing and writing new business in Pensions Risk Transfer, by potentially improving future capital generation and growth potential.
Further commenting on the risk margins reductions, analysts at JP Morgan expect the regulatory adjustments to “increase the quality of Solvency II ratios,” while also “potentially increasing capital generation from the existing business due to a lower amortization impact from transitional adjustments” and “reducing the high new business strain of writing new business.”
“Hence, companies with a large exposure to the Risk Margin, and capital-intensive new business, stand to gain the most,” they concluded.
According to Glen’s timeline, the UK Government intends to publish a set of detailed proposals and a consultation document in April 2022, setting out concrete elements of the changes.
