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UK insurers will remain well capitalised under SII reforms – Moody’s

24th June 2022 - Author: Daniel Jackson

UK insurers’ solvency will remain robust under proposed post-Brexit regulatory reforms.

Moody'sThe proposals, subject to consultation until 21 July 2022, seek to amend the European Union’s Solvency II insurance capital rules so that they better reflect UK insurers’ risk profiles. 

Drawn up by the UK Treasury, they could allow some insurers to release surplus capital, which they would likely return to shareholders or use to take on more risk. 

Both options would reduce total capitalisation, a credit negative. However, Moody’s expects the overall impact for many groups to be modest. 

Moreover, the solvency of insurers that do release capital will remain strong, as their remaining capital will be more closely calibrated to the risks they bear. 

Stratumn, by SIA Partners

Reforms could trigger some capital releases. In their current form, the proposals would reduce UK insurers’ “Risk Margin” (RM), a layer of capital designed to fund the transfer of liabilities if the insurer fails, allowing for a capital release. This reduction would be partly offset by changes to the “Matching Adjustment” (MA) calculation. 

The MA allows insurers to apply a higher discount rate to their liabilities, with a corresponding reduction in their capital requirement. According to the UK regulator, these reforms could allow insurers to release as much as 15% of their capital. 

UK insurers will remain well capitalised. Moody’s say the overall capital impact will be relatively modest, and potentially neutral for insurers that are significant MA beneficiaries, such as annuity specialists. 

The redeployment of released capital towards new business opportunities, including investments in illiquid assets, is credit negative. 

But the reforms will ensure that insurers remaining capital is more closely matched to their risk profiles, and therefore resilient in a range of scenarios. Channelling capital into new business should also strengthen insurers’ future capital generation capacity. 

Released capital would go towards BPAs. Some insurers will use surplus capital to write more Bulk Purchase Annuities (BPAs), which allow them to assume UK corporates’ defined benefit (DB) pension liabilities in return for a premium. 

However, the supply of BPAs will still fall short of booming demand. Increased BPA activity will support demand for illiquid assets, which BPA writers use to match their annuity obligations. As the reforms also aim to broaden the range of assets insurers use to match annuity liabilities, some BPA writers could expand and diversify their illiquid asset holdings. 

Moody’s foresees no significant change in the sector’s overall asset allocation. Illiquid assets’ superior yield and liability matching characteristics relative to bonds or equities outweigh their higher risk. 

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