AM Best reports that upcoming changes to the UK’s solvency regulations, expected to be finalized in November, are likely to positively impact UK insurers. The revised framework will be branded as Solvency UK.
The reforms, following the Prudential Regulation Authority’s (PRA) review of Solvency II, will primarily affect the life insurance sector.
AM Best outlines key elements of the planned reforms, such as adjustments to the risk margin (RM) for life insurers, changes to discount rates in the matching adjustment (MA) calculation, and revised eligibility criteria for assets and liabilities in MA funds.
Simplified regulatory measures are also planned, aimed at smaller insurers, internal models, and recalibrating transitional provisions.
While these reforms will benefit insurers, particularly in the life insurance sector, major impacts may not be immediate.
Expanded eligibility criteria for the matching adjustment could enable insurers to hold more unlisted investments, broadening their asset base without increasing risk.
Changes to the risk margin and matching adjustment could yield net gains, depending on the composition of insurers’ MA asset portfolios.
The European Union is pursuing its own Solvency II reforms, also focused on the life insurance sector but with different priorities.
The EU’s proposals feature a higher cost of capital at 4.75% versus 4% in the UK and only minimal adjustments to the matching adjustment, which is less commonly used in the EU.
Instead, the EU is modifying the volatility adjustment to incorporate elements of the UK’s approach. Additional proposals include lowering capital requirements for specific equity investments.
The EU and national regulators are also revising transitional measures on technical provisions (TMTPs) to prevent them from becoming overly generous amid rising interest rates. UK insurers have been recalculating TMTPs as of December 31, 2023.
The Prudential Regulation Authority (PRA) is a United Kingdom financial services regulatory body, formed as one of the successors to the Financial Services Authority (FSA).
The authority is responsible for the prudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms. It sets standards and supervises financial institutions at the level of the individual firm.
Although it was initially structured as a limited company wholly owned by the Bank of England, the PRA’s functions have now been taken over by the Bank and are exercised through the Prudential Regulation Committee. The company has since been liquidated.
