HM Treasury has revealed plans to slash Solvency II requirements for insurers that dictate how much capital they must hold and the types of assets they can use.
The proposed Solvency II reforms have been developed by Treasury alongside the Prudential Regulation Authority (PRA).
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.
Economic secretary to the Treasury and City minister John Glen (pictured) outlined the proposed changes at the Association of British Insurers (ABI) annual dinner last night.
Speaking at the trade body’s annual conference today, ABI president and Royal London group CEO Barry O’Dwyer applauded the move.
“We very much welcome these announcements from John Glen, which will unlock far greater investment into jobs, infrastructure and green finance to drive the UK’s post-pandemic recovery,” he said.
Release 10-15% of insurer capital
The UK’s insurance sector has been subject to the Solvency II rules since 2016 after they were introduced to harmonise insurance regulation across the EU.
Delivering his speech last night, Glen noted that the ambition of the overhaul was “to replace what is an EU-focused, rules-driven, inflexible and burdensome body of regulation with one that is UK-focused, agile and easily adaptable.”
He claimed the changes would encourage the emergence of new types of assets, support the entry of new and innovative firms and allow the release of meaningful amounts of capital for productive investment. This could be as much as 10% or 15% of the capital currently held by life insurers.
“Very importantly, we’re also confident that these reforms will safeguard policyholder protection,” Glen continued.
“The overall level of policyholder protection will remain very strong. Moreover, the PRA already has extensive powers to address individual firm risks, which provide an additional layer of protection against firm failure.”
The four key amendments will see:
- A substantial reduction in the risk margin, including a cut of around 60-70% for long-term life insurers;
- A reassessment of the fundamental spread used to calculate the matching adjustment, in order to better reflect its sensitivity to credit risk;
- A significant increase in flexibility to allow more investment in long-term assets such as infrastructure;
- And a major cut in EU-derived regulations which make up the current reporting and administrative burden.
Included in the second point, Glen said: “We will also broaden the liabilities eligible for the matching adjustment to include income protection products and products that insure against morbidity risk.”
Government will formally consult on the package in April.