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News Brief: Bold Reforms to Insurance Sector Regulation Planned

Economic Secretary to the Treasury and City Minister John Glen has outlined plans to slash red tape through bold reforms to Solvency II, a 1,000-page EU legislation. His proposals—announced at the Association of British Insurers (ABI) Annual Dinner on the 21st February—will overhaul the insurance sector regulation. More tailored and dynamic, the proposed regime should unlock billions of pounds of investment for UK infrastructure.

About Solvency II

Solvency II was introduced in 2016 to harmonise insurance regulation across the EU. It covers financial resources, governance, risk assessment and management. Additionally, it includes restrictions on insurers’ investment portfolios.

The 6-year-old regulation has long been seen as too burdensome by some UK insurance companies. The investment portfolio restrictions can cause companies to hold more capital than necessary, restricting them from taking on longer-term illiquid assets, such as infrastructure projects. According to a 2021 report commissioned by the ABI, a relaxation to the Solvency II regulation could create an extra £95 billion in investment potential for the UK insurance sector.

The government’s announcement of the Solvency II reform follows its desire to seize post-Brexit freedoms and become one of the best-regulated economies in the world.

Planned Changes

Developed by HM Treasury alongside the Prudential Regulation Authority, the proposed reforms include:

  • A substantial reduction in the risk margin—an extra layer of capital that reinsurers and insurers must hold against long-term business, such an annuities—including a cut of around 60 to 70 per cent for long-term life insurers
  • Increased flexibility for insurers to invest in long-term assets, such as infrastructure
  • More sensitive treatment of credit risk in the matching adjustment
  • A meaningful reduction in the current reporting and administrative burden on firms

Reaction

The regulation reform aims to facilitate rather than hinder market developments, support the entry of new and innovative firms, and allow for the release of capital for productive investment.

Glen was keen to stress that protection for policyholders remains a top priority, stating, ‘We have a genuine opportunity to maintain and grow an innovative and vibrant insurance sector while protecting policyholders and ensuring the safety and soundness of firms’. Additionally, the reform will make ‘it easier for insurance firms to use long-term capital to unlock growth’.

The proposals have been welcomed by the ABI. ‘Solvency II reform is a once-in-a-lifetime opportunity [that] could enable our sector to do much more to support economic growth and the transition to NetZero and provide our customers with the peace of mind they need’, said ABI Head of Prudential Regulation David Otudeko.

Next Steps

The government will publish a full consultation document on the proposed Solvency II reform in April 2022. This will be followed by a more detailed technical consultation by the Prudential Regulation Authority later in the year.

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