HM Treasury declares ultimate reform package deal following evaluate of Solvency II


A model of this text was first revealed on Thomson Reuters Regulatory Intelligence.

The Treasury’s plans to reform Solvency II have entered their subsequent part after it revealed the outcomes of its April 2022 session. This coincided with its Autumn assertion, signifying the significance attributed to Solvency II reforms throughout the Authorities’s wider plans to create a vibrant post-Brexit financial system.

A reassessment and loosening of sure points of the present regulatory framework are anticipated to launch important quantities of capital, enabling insurers to spend money on illiquid belongings in the actual financial system. Aviva estimates it may make no less than £25 billion price of capital funding over the subsequent 10 years throughout the UK if the reforms go forward. The ABI view is that the adjustments would permit business to take a position over £100 billion over the identical interval in productive finance, together with UK social infrastructure and inexperienced power provide.

The Treasury argues that post-Brexit freedoms to vary legal guidelines inherited from the EU imply that it will possibly create a Solvency II regime that’s higher tailor-made to the UK insurance coverage market.  Threat margin reforms undoubtedly mirror widespread settlement that the present guidelines are poor.

Modifications proposed by the PRA to basic unfold (FS) methodology haven’t, nevertheless, made it into the ultimate package deal.  PRA considerations that Solvency II reforms should preserve the general integrity of the regime have clearly been overruled by the Authorities on this event.  It is going to be attention-grabbing to see how the PRA reacts over the approaching months and years, together with in its interactions with future governments.

Whereas the Treasury’s proposals point out a transparent path for reform, it could possibly be a while till the element is thought. Some studies counsel it could possibly be the tip of 2024, or probably 2025, earlier than the adjustments come into drive.


There was long-standing debate on the suitability of sure points of the present Solvency II regime for the UK insurance coverage market. For instance, the present methodology for calculating the danger margin is broadly criticised for its unnecessarily burdensome impact on life insurers.

Nonetheless, while there’s normal settlement that reforms to Solvency II may assist set up a extra acceptable regime for UK insurers, there was much less settlement on how precisely it wants to vary. The PRA, particularly, has argued for warning in making adjustments to the Solvency II regime that launch capital for funding however don’t meet with the necessity for prudence, according to its security and soundness and policyholder safety goals. In a speech given in July 2022, Sam Woods of the PRA acknowledged as follows:

“Brexit provides us a possibility to rewrite the insurance coverage rules we inherited from the EU – and in doing so assist drive additional funding within the financial system. However we must be clear that this isn’t a free lunch. If adjustments merely loosen rules which had been over-cooked by the EU, with out tackling different areas the place rules are too weak, then we’re placing policyholders in danger.”

In an effort to construct consensus, the Treasury launched a session paper on 28 April 2022 calling for suggestions on 4 key areas for reform:

  • a considerable discount within the danger margin;
  • reforming the FS of the matching adjustment;
  • growing funding flexibility for matching adjustment portfolios; and
  • lowering pointless reporting and administrative burdens.

Concurrently, the PRA issued a dialogue paper (DP2/22) setting out its views on the Treasury’s proposed reforms to the danger margin and matching adjustment. In a suggestions assertion (FS1/22), additionally issued on the identical day as the federal government’s Autumn Assertion, the PRA notes its help for the goals of the Solvency II evaluate however stops in need of saying it helps the result.

HMT package deal of reform

The Treasury’s reform package deal carries over a lot of the proposals put ahead in its session paper, with some notable variations.

Threat margin

Unsurprisingly, adjustments to the danger margin are going forward, together with a 65% discount for long-term life insurers beneath current financial situations. The Authorities anticipates that this modification will, amongst different issues, unlock important quantities of capital, eradicating a barrier to decrease product costs and better annuity yields and cut back the volatility of life insurers’ stability sheets.

For normal insurance coverage enterprise, the discount shall be round 30%.

Elementary unfold

The “most difficult factor of the talk” was on the assemble of the FS. The PRA needs to vary the present methodology to mirror numerous considerations, together with that the FS doesn’t, in its view, permit totally for uncertainty round credit score danger. The Treasury has rejected the PRA’s proposals on the premise that it has been inconceivable to achieve a consensus, deciding to go away the design and calibration of the FS because it stands. It’s going to, nevertheless, permit the

PRA to make use of three new measures aimed toward safeguarding policyholders:

  • the introduction of recent stress check necessities;
  • requiring nominated senior managers with formal regulatory duties beneath the SMCR to signal an attestation that the agency’s willpower of the FS, as recognised in its accounting data, correctly displays all retained dangers; and
  • permitting insurers to use the next FS on a voluntary foundation (which might presumably be performed in response to a senior supervisor having considerations about signing the attestation).

The sting within the tail for corporations of preserving the present FS methodology would be the introduction of a brand new formal attestation requirement. There isn’t any affirmation but of how usually this attestation shall be wanted and of what it might want to cowl. Nonetheless, the private legal responsibility that attaches to the senior supervisor who’s chargeable for giving the attestation implies that processes will must be established to safeguard their place and that of the agency. Cautious consideration will must be given, for instance, to how the attestation is drafted and acceptable diligence must be carried out to acquire the requisite degree of consolation within the statements which can be being made.

Additionally it is potential that the present reforms are introducing political danger into the system. Particularly, if a brand new authorities had been fashioned, can anybody say with certainty that the PRA wouldn’t persuade them that the present reforms have unduly weakened the regulatory regime general? Given its clear stance on this situation, it’s not tough to think about the PRA no less than elevating the problem.

Growing funding flexibility

The Authorities is taking ahead proposals to carry a few of the present restrictions on belongings that may be introduced into corporations’ matching adjustment portfolios. Particularly, necessities that money flows from matching adjustment portfolios should be fastened shall be changed by a requirement that money flows are “extremely predictable”. Further flexibility to incorporate belongings with prepayment danger or development phases will even broaden matching adjustment eligibility.

These adjustments, along with the adjustments to the danger margin, are anticipated to unlock capital that could possibly be used to extend insurer funding in long-term productive belongings, most notably in infrastructure. Certainly, some main UK life insurers have already publicly mentioned that that is what they intend to do. Additionally it is hoped that there shall be much less want for asset restructuring to satisfy matching adjustment standards.

Decreasing reporting and administrative burdens

As a part of its efforts to “slash crimson tape lingering from the EU”, the Authorities is introducing sure adjustments aimed toward lowering the executive burden on corporations and making a extra beneficial atmosphere for smaller insurance coverage corporations.

These embrace eradicating necessities for UK branches of abroad insurers to calculate department capital necessities and to carry belongings regionally to satisfy these necessities. This is a matter that got here to the fore as a consequence of teams restructuring to mitigate the influence of Brexit. The argument in help of this modification is {that a} department capital requirement is just not wanted if the “mum or dad” agency is correctly capitalised beneath its residence state’s regulatory regime. Extra typically, the PRA has additionally indicated, following its session earlier this yr, that it expects to have the ability to cut back the reporting burden for insurers considerably as a part of the reforms.

The Treasury additionally intends to extend the thresholds for the dimensions and complexity of insurers earlier than they change into topic to the UK’s on-shored model of Solvency II.

Additional observations

Further factors raised by the Treasury’s package deal of reforms embrace the next:

  • Regardless of recommendations in April’s session paper that the Authorities may look to limit using some belongings which can be launched from the matching adjustment beneath these reforms (eg, to require their funding in infrastructure), nothing in its response suggests this may occur.
  • Till the drafted guidelines and rules have been launched, we don’t have an in depth image of what the ultimate reforms will appear to be. As at all times, the satan could also be within the element (for instance, is a few elaboration of what “extremely predictable” means to be supplied?) though it appears unlikely that important inroads shall be made into the commitments made by the Treasury.
  • What does appear clear is that the Authorities is just not content material to let the PRA make all the foundations wanted to implement these reforms, and subsequently it intends to legislate on sure points of the proposed reforms that it feels strongly about, reminiscent of the danger margin.
  • It’s going to nonetheless be attention-grabbing to see how the PRA responds to the Treasury’s package deal of reforms given its clear reservations over a few of the adjustments.


Geoffrey Maddock

Grant Murtagh

Alison Matthews



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