Solvency II – the post-brexit Remix

5 May 2022

Last week’s consultation on how the UK might reform its application of Solvency II makes for interesting reading. 

Stripping away the politics which naturally pervades the backdrop for the rationale for the possible changes, it represents an interesting sort of remix to the existing (if not all that old) risk-based capital regime applicable to insurers across Europe.A regime which the UK, of course,has belonged to since its introduction and indeed was a very influential and innovative contributor to the design of, albeit whilst not necessarily getting its optimal calibration in every aspect. 

There will clearly be continuing speculation as to where it ends up, post consultation, but last week’s document is worth reading.  

Not least to get a sense of the spectrum of impact it could have for the capital positions of some insurers, through this more UK-centric remix 

The scene being inevitably set and appetite wetted in this by John Glen’s forward, as below: 

The UK has one of the most vibrant and innovative insurance sectors in the world. The sector is a world leader in the provision of complex and bespoke forms of insurance and reinsurance. This consultation sets out further details on the Government’s package of proposed reforms to the prudential regulatory regime for insurance firms known as Solvency II. 

I first set out these proposals in my speech at the Association of British Insurers Annual Dinner on 21 February 2022. I made clear that policyholder protection is a top priority and will be safeguarded through these proposals. The reforms are:  

• a substantial reduction in the risk margin of around 60-70% for long-term life insurers; 

• a reassessment of the fundamental spread used in the calculation of the matching adjustment; 

• the introduction of a significant increase in flexibility to allow more investment in long-term assets; and 

• a major reduction in the EU-derived regulations which make up the current reporting and administrative burden. 

I am confident that these reforms will help maintain and grow the insurance sector whilst ensuring both a very high standard of policyholder protection and the safety and soundness of UK insurers. The reforms could result in a material release of possibly as much as 10% or even 15% of the capital currently held by life insurers and unlock tens of billions of pounds for long term productive investments, including infrastructure. 

It is also important to note that this review is not taking place in isolation. The Government is making huge strides to capitalise on newfound freedoms and restore the UK’s status as a sovereign and independent country, including through the recently announced Brexit Freedoms Bill. The Treasury has also proposed important changes to the UK’s financial services regulatory framework more generally, so that we have a coherent, agile, and internationally respected approach to financial services regulation that is right for the UK. 

This consultation is the next step in the review of Solvency II. I invite all interested stakeholders to use this an opportunity to share their views on this important package of reforms. 

John Glen MP, Economic Secretary to the Treasury 


Related Links

Contacting AKG

Call us on +44 (0)7765 446438 for more information.

Click here to email us »