In support of HM Treasury’s review of the Solvency II regime following the expiration of the Brexit transition period, re/insurance broker Willis Towers Watson (WTW) has recommended a number of key changes to ensure relevance for the UK insurance sector.
HM Treasury is considering areas of Solvency II that could better reflect the particular structures, products, and business models of the UK insurance sector following Brexit.
The purpose of the review is to ensure that the UK’s future regulatory regime supports an internationally competitive insurance sector, protects policyholders, and supports carriers to provide long-term capital to support growth.
“There is little appetite for significant upheaval given how much UK re/insurers have already invested in implementing the regulatory regime,” said Kenny McIvor, Director in WTW’s Insurance Consulting and Technology business.
“Instead, changes should be targeted at aspects of Solvency II that are poorly designed or imperfectly calibrated for the UK. Essentially, any reforms should also meet the needs of three main stakeholders: consumers, capital providers and government working on behalf of society,” he added.
In response to HM Treasury’s call for evidence on its review, WTW has submitted a detailed response which includes five key recommendations: Improvements to reporting and disclosures; Transition to Sterling Overnight Index Average (SONIA) swaps for the basic risk-free rate; Asset eligibility criteria and design of the Matching Adjustment; Underlying principle and calibration of the Risk Margin; and Standard Formula suitability and the operation of Internal Models.
On the first point, WTW states that public disclosures should continue to be improved in the areas of sensitivities and analysis of movement, with unnecessary information requirements reduced.
Additionally, the transfer to SONIA swaps, according to WTW, is a missed opportunity to allow Gilts as an option for the discount rate basis.
The broker also calls for greater flexibility and balance when setting criteria for the eligibility of assets that can be used to back insurers’ long-term liabilities.
While a revisit of the Risk Margin principle, reflecting that liabilities and backing assets are managed and transacted as blocks of business, is also welcomed by WTW.
On the final point, the broker states that an improved tailored Standard Formula approach is required to reduce pressure to adopt an Internal Model. The firm feels that the PRA should also be able to give a capital add-on without triggering a disproportionate requirement for a firm to develop an Internal Model.
“Our response is based both on Willis Towers Watson’s role as an advisor and as a leading provider of actuarial technology and actuarial outsourcing. The latter of these responsibilities puts us in the unique position of having to implement regulatory requirements ourselves, meaning we have a direct insight into the needs and interests of our insurance clients.
“We believe that our recommendations to improve the prudential regulatory framework will help the UK Government meet its objectives, and will ensure that the rules are appropriately tailored for the UK re/insurance market,” said McIvor.
