Draft regulations to reform Solvency II, the prudential regulatory framework for insurers and reinsurers, have been made available by the UK Government for the purpose of early engagement.
The Financial Services and Markets Bill was first introduced to Parliament in July 2022 and creates new powers for the Treasury by regulations to make transitional amendments to, restate, or modify retained EU law relating to financial services and markets.
These regulation-making powers are subject to Parliamentary approval. After the Bill gains Royal Assent, it will allow the Government to commence the revocation of existing Solvency II legislation.
Thus, the Treasury has developed early drafts of regulations that will be made under the powers in the Bill to give effect to the reforms to the prudential regulation of the re/insurance sector in the UK.
These reforms were announced in the Review of Solvency II: Consultation Response in November 2022, and received widespread approval from the insurance and reinsurance industry.
That same month, S&P released a report noting that the changes would support UK insurers’ business positions.
Meanwhile, in February this year, Sam Woods, Deputy Governor for Prudential Regulation and Chief Executive Officer of the Prudential Regulation Authority (PRA), assured that proposed reforms to Solvency II insurance regulations in the UK will ensure “competitiveness and growth” for re/insurers in the country.
“The reforms will boost economic growth by delivering a more tailored, clearer and simpler regulatory regime. They will also cement the UK as one of the best countries in the world in which to do business,” The UK Government has now said.
It continued, “The Government is determined to implement reforms as soon as possible. The Government expects that reform of the risk margin will be in force in legislation by year-end 2023.
“It is considering options to enable reforms to the matching adjustment to come into force by the end of June 2024, and the remainder of the new regime will come into force by year-end 2024.”
Those parts of the Solvency II regime which are not restated or saved under this statutory instrument will be replaced with the PRA’s new rules.
According to the UK Government, this will bring the regime into line with the Financial Services and Markets Act 2000 model of regulation by keeping the overarching framework for regulation set by the government in legislation but removing most detailed regulation from the statute book.
“These draft statutory instruments are subject to change based on further engagement made possible by publishing the draft now. These regulations will also need to work effectively with related PRA rules,” The UK Government added.
Further adjustments to the regulations may be necessary as the PRA complete the development of their rules. Final statutory instruments will be laid in Parliament after the Bill receives Royal Assent.
Commenting on the drafts, Matt Francis, insurance director at KPMG UK, said, “These proposed regulations are in line with the level of reductions in the Government’s consultation last year.
“We expect the anticipated changes will reduce the level of risk margin that life insurers hold in respect of annuity business by around 65%. Non-life insurers will also see a reduction by a third in their risk margin from the planned lowering of the cost of capital from 6% to 4%.
“We also expect to see further details on how the changes to the matching adjustment will operate in practice when the PRA publishes amendments to its rulebook.
“The PRA has previously indicated that it would issue two consultations, one this month, and a further consultation in September.”
