Battle lines drawn over Solvency reforms

Just hours after Bank of England executive director Vicky Saporta warned MPs on the Treasury Select Committee of the dangers of weakening regulation in pursuit of competitiveness, City Minister John Glen stood up at the Association of British Insurers annual dinner and outlined plans to slash bureaucracy and relax regulation in a move the Treasury says will unlock growth and unleash investment in UK infrastructure.

With political pressure for faster relaxation of the Solvency II regime in the UK growing, it appears that regulators and government could be on a collision course, writes Contributing Editor David Worsfold.

Glen’s announcement follows the new Brexit opportunities minister Jacob Rees-Mogg complaining that the UK solvency reform plans were moving too slowly: “Solvency II puts the UK market at a competitive disadvantage and it is ripe for reform”, he said this week. He fears the European Union is moving faster on its own Solvency II reform plans, the details of which were outlined last September.

Glen told the insurers’ dinner “EU regulation doesn’t work for us anymore and the government is determined to fix that by tailoring the prudential regulation of insurers to our unique circumstances. We have a genuine opportunity to maintain and grow an innovative and vibrant insurance sector while protecting policyholders and making it easier for insurance firms to use long-term capital to unlock growth”.

He outlined the key elements of the Treasury’s proposals:

  • A substantial reduction in the risk margin, including a cut of around 60-70% for long-term life insurers.
  • More sensitive treatment of credit risk in the matching adjustment.
  • A significant increase in flexibility to allow insurers to invest in long-term assets such as infrastructure.
  • A meaningful reduction in the current reporting and administrative burden on firms.

He also offered some fresh detail on the Treasury’s latest thinking on the treatment of different assets that insurers might hold in their investment portfolios.

“We will broaden the range of assets eligible for the matching adjustment portfolio to include assets with the option to change the redemption date.

“For example, assets with construction phases and callable bonds will become eligible for matching adjustment portfolios.

“We will also broaden the liabilities eligible for the matching adjustment to include income protection products and products that insure against morbidity risk.

“We will remove the disproportionately severe treatment of assets whose ratings fall below BBB in matching adjustment portfolios. although we would still expect firms to comply with the Prudent Person Principle on their investments.

“Finally, we want to speed up the assessment and approval of applications for assets to be eligible for the matching adjustment… providing greater flexibility for how assets without historical data are treated, such as new or innovative assets.”

Earlier in the day Saporta had sounded markedly less enthusiastic about rushing into wholesale reform of Solvency II.

She agreed that there are clear benefits of the UK getting back rulemaking powers but warned “we also have the possibility of pressure to lower standards". Prioritising competitiveness and growth could eclipse the key roles of regulators to protect consumers and ensure market stability. Regulators have to ensure the UK does not move towards "weak or inappropriate standards or supervision", she told MPs.

All eyes will now be on the Treasury which has promised to publish its detailed proposals for consultation by Easter. This will be followed up by another round of consultation by the Prudential Regulation Authority, ahead of another Financial Services Bill, expected to be announced in the Queen’s Speech later in the year.


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