Economic Undertakings

Government confirms Solvency II reform to provide “more proportionate and flexible” regulation | Latest news

HM Treasury published today (July 1, 2021) its response to the Solvency II regulatory review call for papers – based on written comments from 64 companies, it believes that “many aspects of Solvency II are too rigid and rules-based “and that the regime must be” more proportionate and flexible so that it operates more effectively and results can be achieved more effectively “.

On June 23, 2020, the government announced its intention to review some features of the UK insurance industry’s prudential regulatory regime, known as Solvency II. The call for contributions around this work, which would constitute the first stage of the review, was launched on October 19, 2020 and closed on February 19, 2021.

The call for papers specifically requested feedback around 10 circumscribed review topics, which include the risk margin, the corresponding adjustment, the calculation of the solvency capital requirement, the calculation of the solvency capital requirement of the consolidated group using several internal models, calculation of the transitional measure on provisions, reporting obligations, branch capital requirements for foreign insurance companies, regulatory thresholds by the Prudential Regulation Authority (PRA) under Solvency II, mobilization of new insurance companies and risk-free rates, which refers to the transition from London interbank offered rate to overnight indexed swap rates.

HM Treasury said that “respondents were strongly in favor of Solvency II” and that the industry felt that it had “improved the standards of risk management and reporting in the insurance industry as well as the global standard of prudential regulation. “. Therefore, “interviewees stressed that Solvency II should be retained, especially given the cost and disruption of its full replacement”.

However, respondents agreed that improvements could still be made while retaining the current framework. Suggestions included:

  • Better reflect the structures and processes of UK insurance companies.
  • Be more efficient and effective, including removing requirements that provide little benefit.
  • Be more flexible and agile, and less rule-based and prescriptive.
  • Enable the supply of a wider choice of more affordable products.
  • Strengthen competition and better support small insurance companies and entities that may wish to become insurance companies.
  • Reduced complexity of supervision.

HM Treasury noted that this feedback aligns with the general objectives of the Solvency II reform, which are:

  • Stimulate a dynamic, innovative and internationally competitive insurance sector.
  • Protect policyholders and ensure the security and soundness of businesses.
  • Help insurance companies provide long-term capital to support growth.

Lots of evidence

After reviewing the responses, the UK Treasury confirmed that “the government will work closely with the PRA to identify an optimal reform package that can be implemented as soon as possible” because “Solvency II reforms are needed if the prudential regulatory regime must be consistent with government objectives ”.

The report said: “Overall, responses to the call for papers provided ample evidence that many aspects of Solvency II are too rigid and rules-based. The government agrees with this evidence.

“The government wants to see a prudential regulatory regime that is more proportionate and flexible so that it works more effectively and results can be achieved more effectively.

“Such a regime would include a better combination of judgment and rules so that it can be better enforced by the PRA, as well as by insurance companies.

“This would better support a dynamic, prosperous and competitive insurance industry. It would also provide a solid foundation for insurance companies to provide long-term capital to the economy, including investments in long-term productive assets as well as investments consistent with the government’s climate change goals.

“Such a regime would ensure high standards of protection for policyholders as well as the safety and soundness of insurance companies.”

Areas particularly ripe for change, according to the government’s response, include reforming the risk margin to “free up resources and reduce the volatility of insurance company balance sheets”, change “the adjustment demand process. equalizer ”and ensure that the framework for calculating the solvency capital requirement“ does not impose disproportionate burdens on insurance undertakings ”.

The report also referred to “streamlining of reporting requirements” and “technical changes to the risk-free rates used by insurance companies to discount their liabilities”.

Focus on investing in climate change

HM Treasury received written evidence from 64 companies, including 25 responses from insurance and reinsurance companies and 14 responses from representative industry bodies.

Speaking in the news, Charlotte Clark, director of regulation at ABI, said: “We welcome the government’s confirmation that it will reform Solvency II as soon as possible so that our industry can meet the ambitions of the government. government and maximize our contribution to climate change investments.

“Solvency II reform will be key to increasing the UK’s competitiveness, boosting investment in the green economy and supporting economic growth across the UK.

“We are pleased that the government recognizes our risk margin reform proposals, so that the corresponding adjustment is less burdensome and for reduced reporting requirements. This will make it much easier for our leading global long-term insurance and savings industry to invest in long-term assets and to use capital more efficiently.

“We look forward to working with the government and the Prudential Regulatory Authority on the details of these reforms. It is vital that reforms are not delayed so that our sector can do more to stimulate the economy, support growth and the transition to a green economy.

As for next steps, the PRA will launch a quantitative impact study this summer and work with the government to analyze its results. This study will inform a full set of reforms for consultation in early 2022.

In addition, the government will publish a second consultation on the future review of the regulatory framework later in 2021.

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