The Prudential Regulation Authority (PRA) has issued its backing for reducing the amount of capital which life insurers have to hold to ensure they can pay out for claims.
The regulator was speaking just hours before economic secretary to the Treasury John Glen unveiled the plans to the Association of British Insurers annual dinner.
They include a substantial reduction in the risk margin for insurers, including a cut of around 60-70% for long-term life insurers.
And income protection and products that insure against morbidity risk will be included as liabilities eligible for the matching adjustment.
‘Too high and too volatile’
Giving evidence to the Treasury Select Committee of MPs, PRA executive director for prudential policy directorate Vicky Saporta (pictured) hinted at what changes might be coming.
“On the risk margin, we do think it’s too high and too volatile and we do anticipate that the reforms will lead to a reduction for life insurers, particularly those which offer long term products,” she said.
“We are looking at whether eligibility could be expanded to include assets that might have features that could be good for broader investment.
“But we are also concerned that currently the matching adjustment benefit – which at the moment stands at a staggering £81bn and is above the total for the capital requirement for the life industry of £76bn – might be too high.
“We would like to see an adjustment to the matching adjustment benefit for the sake of the annuitants and the policyholders.”
Safety and soundness
Labour MP for Bethnal Green and Bow Rushanara Ali pressed Saporta on whether the regulator could guarantee that policyholders would not loose out as a result of the changes.
Saporta did not give an unequivocal guarantee that would be the case, but stressed the regulator would be using policyholder protection as its main aim when consulting.
“Absolutely, we do want the reforms to ensure that policyholders can get back their money,” she said.
“Whenever we get the powers, when it is our time to consult we will be clear on the cost and benefit analysis, focusing on our primary objective which is the safety and soundness and policyholder protection.”
The government is expected to publish its consultation in April, with the PRA expecting to then consult around the middle of the year.
UK insurers can take advantage
Jonathan Drake, partner in the insurance team at DWF, noted the EU was also reviewing capital rules, but UK-based insurers would likely benefit more from the changes.
“Although being branded as the UK ‘slashing red tape’ the EU itself is also undertaking a review of a number of the features of Solvency II as EU and UK insurers had previously expressed dissatisfaction with its operation,” he said.
“However, UK authorised insurers will soon have the opportunity to take advantage of a revised insurance regulatory regime that should in principle give them advantages over EU authorised insurers, which is a tangible benefit to emerge from a Brexit process that has not been an easy one for the UK insurance sector.”