PRA could push for Solvency II changes

The Prudential Regulation Authority has said that changes to the Solvency II regime could be needed in response to the pandemic, Brexit and climate change.

In a wide-ranging speech to an Association of British Insurers’ webinar last week, Charlotte Gerken, executive director of insurance supervision, said among the regulatory changes that could emerge in response the COVID-19 pandemic could be to require insurers "to hold additional regulatory capital during more benign times, buffers which the PRA could then allow to be released during a market downturn".

She stressed that this was not a response on any immediate stresses the sector might be experiencing  "The information we have from the largest UK insurers shows the industry was well-capitalised going into this and has so far remained so, with aggregate solvency ratios around 150%”.

There were specific areas the PRA was monitoring, however, including illiquidity risks

“UK life insurers have been incentivised to invest in long-term, illiquid assets with higher yields for some time, given the low interest rate environment. As a result, exposure to credit and other risks (eg property) has been increasing. This is further exacerbated by Covid-19 as wider economic disruption has impacted the underlying creditworthiness of some of these assets”.

She scoped out the areas that the PRA might look at as the transitional phase following Brexit unwinds but cautioned against expecting dramatic changes:

“Ultimately, the extent to which the UK’s regulatory framework is similar to or different from EU regulation after the implementation period is a political choice. But as Solvency II is based on the same principles as the preceding UK regime, revolution is less likely than evolution.

“And the pace of policy reform – in the UK, but also in the EU and globally through the International Association of Insurance Supervisors – is likely to be on a longer timetable due to Covid-19 being a shared and pressing priority”.

The full speech is available on the Bank of England’s website.