Solvency UK reforms gaining momentum

The Prudential Regulation Authority (PRA) has set out its determination to maintain the momentum of reform of the solvency regime for UK insurers following the passing of the Financial Services and Markets Act 2023 (FSMA).

Last week saw Gareth Truran, Director, Prudential Policy at the Bank of England, give a wide-ranging a speech on the reform agenda on the same day the PRA hosted a major international conference on the role of financial regulation in international competitiveness and economic growth, a key policy focus for the government. This shows that, despite some earlier misgivings about the scope and pace of reforms being demanded by the Treasury, the regulators are throwing their weight behind them, writes Contributing Editor David Worsfold.

The conference brought practitioners, regulators, academics and other stakeholders together to develop and deepen the understanding of, consider opportunities for, and discuss issues surrounding facilitating the UK’s international competitiveness and growth when making policy. It also provided an opportunity to discuss and explore the PRA’s proactive approach to implementing the new objective. Another important focus of the conference was on how the PRA can be held to account against the new objective. 

Conference objectives

  • What determines the contribution of finance to growth and international competitiveness of an economy?
  • What makes for a successful global financial centre, and how does it retain competitive advantage? 
  • How to measure the contribution of financial services to the economy?
  • How to measure the contribution of prudential regulation to the competitiveness and growth of the economy?

While regulators and practitioners were thrashing out some answers to these questions, Gareth Truran (pictured) used a speech to the Bank of America Financials Conference to set out the broader reform agenda.

Gareth Truran“This is a big year for the PRA. Parliament has given us new powers and a new secondary objective. Working with the Treasury, we will use these powers to delete, replace or amend retained EU law to adjust our prudential regimes to the UK’s needs. In doing so, we will seek to maintain strong standards in line with our primary objectives, while seeking to advance our secondary objective for competition, and our new secondary objective for growth and competitiveness”, said Truran.

He said that the consultation launched by the PRA after MPs passed the FSMA was “generally well received” and that his team was analysing the responses with a view to publishing detailed proposals early in 2024.

Before that the PRA will be turning its attention to the matching adjustment (MA), with a consultation due out soon and Truran was keen to give a detailed a preview of what to expect in that:

“First, we will set out how we intend to update the regime to improve life insurers’ investment flexibility within the MA. Under Solvency UK, life insurers will in future be able to include in their MA portfolios a wider range of assets, including some assets with ‘highly predictable’ cashflows. The government hopes insurers will respond to the incentives to invest more in long-term productive assets following these changes.

“Second, there are a range of areas where we aim to improve the operation of the MA, to simplify the processes we and insurers currently have to apply. Collectively, these can add cost and time on both sides. For example, we see opportunities to streamline parts of the MA approvals, and to introduce an accelerated pathway for new investments into the MA in certain circumstances. We will also set out how we propose to make more proportionate the current severe consequences for insurers who accidentally breach the MA requirements, and to make the regime somewhat more responsive to changes in credit risk by updating the MA calculation to use notched credit ratings. 

“And finally, we will explain our proposals to implement a range of supervisory measures which will help enhance firms’ responsibility for risk management and help the PRA monitor and control potential risks to safety and soundness and policyholder protection arising from the use of the MA.”

The objective will be to fashion a new regime that will enable insurers to obtain an MA benefit for a wider range of assets, and also for a wider range of liabilities. Insurers, led by the Association of British Insurers, have said this will allow them to enhance their investment in areas such as productive finance and infrastructure.

Truran also marked the industry’s cards on what to expect later in 2024 once these reforms have been implemented, setting out three key priority areas for attention.

  • Enhanced stress testing
  • Longer-term research work on the interaction between the prudential regime and the contribution insurers make to the economy
  • How the PRA’s domestic UK reforms dovetail with international developments.

Read Gareth Truran’s full speech


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