The UK Government has published its Solvency II consultation which includes a proposal to cut the risk margin for carriers, a move that would free up a lot of capital on company balance sheets.
It was announced in February by the Economic Secretary that the government planned to reform Solvency II legislation with a commitment to consult in April.
Released today, the government says that the consultation is part of its “push to go further and faster to capitalise on the UK’s Brexit freedoms and level up the country.”
As with other so-called post-Brexit freedoms, it remains to be seen what influence the reforms will have, but the government has now outlined some of the proposals.
One of the most notable proposals put forward today is the reduction in risk margin, which is quite significant. For long-term life insurance companies, the reforms propose a cut of around 60-70% in the risk margin, and a consultation on the appropriate level for general insurers. This would free up a lot of capital on insurer balance sheets.
When the Solvency II regime came into force in 2016, the risk margin, which is the difference between the technical provisions and the best estimate liabilities, was a fairly controversial aspect. In the UK, and notably for business subject to long-term guarantees, it was viewed as being too large and too sensitive to interest rate movements. So, the proposal today to greatly reduce the risk margin will be welcomed by industry players.
The consultation also calls for a more sensitive treatment of credit risk in the matching adjustment, which provides incentives for insurers to issue long-term life solutions by matching them against assets with similar characteristics.
Additionally, the reforms include a significant increase in flexibility to enable insurers to invest in long-term assets such as infrastructure.
Other reforms reported today include a meaningful reduction in the current reporting and administrative burden on firms, removing EU bureaucracy including by doubling the thresholds for the size of insurers before the Solvency II regime applies; and to deliver further reforms to EU derived legislation, which will increase access to the market for new insurers and offer greater consumer choice. For instance, the government will introduce a new mobilisation regime to encourage new insurers into the market to boost competition, drive growth and create jobs.
The consultation is set to run for 12 weeks, ending on July 21st, 2022. Then, the government will consider and publish a response to the consultation in due course. Additionally, the PRA will publish a consultation of their own at a later date.
Economic Secretary to the Treasury, John Glen, commented: “Today’s consultation demonstrates our commitment to go further and faster to deliver the benefits of Brexit.
“Our reforms will unlock tens of billions of pounds of investment in the UK economy, spur innovation in the market while protecting policy holders – and will cement the UK’s position as a global hub for financial services.”
