Britain says insurer capital rule changes

Britain’s finance ministry said on Thursday that the first batch of post-Brexit reforms to ‘Solvency II’ capital rules for insurers, which it hopes will unlock billions of pounds to boost growth, will be implemented by the end of this year, according to Reuters.

The original rules were introduced when Britain was part of the European Union, and reforming them to reap a “Brexit dividend” has become a test of how far the UK is willing to go to help the City of London remain globally competitive post-Brexit.

The government and Bank of England had clashed over how far to ease the rules, and industry has repeatedly called for the changes to be implemented speedily.

The risk margin refers to the potential cost for a failing insurer to transfer its policies to a third party to avoid disruption to customers.

UK Government promises that scrapping of certain EU rules for insurers in Solvency II reforms.

Britain says insurer capital rule changes

The government’s long-awaited Autumn statement, following a tumultuous period for the UK economy, saw the Chancellor commit to making the country into the world’s “most innovative, dynamic and competitive global financial centre.”

Part of this goal, he added, would involve unlocking billions of pounds from insurance firms by adapting the financial services regulatory framework to the UK’s new position outside of the EU.

This will include changes to the risk margin for long term life insurance firms and a broadening of the ‘matching adjustment’ eligibility criteria.

These plans were welcomed by leaders at the Association of British Insurers (ABI), among others, with ABI Director General Hannah Gurga noting that the changes to Solvency II would enable UK insurers to play “an even greater role” in the government’s levelling up agenda, and in transitioning to net zero.

Parliament is finalising a new financial services bill to amend rules inherited from the EU, giving the ministry and regulators powers to make changes.

The Government expects that reform of the risk margin will be in force in legislation by year end 2023.

To help speed up reform, the ministry published draft measures to make the actual changes to Solvency II, once the new financial services bill is on the statute book.

It is considering options to enable reforms to the matching adjustment to come into force by the end of June 2024, and the remainder of the new regime will come into force by year end 2024.

The reforms will boost economic growth by delivering a more tailored, clearer and simpler regulatory regime.

S&P Global Ratings suggest that the government’s announcement of its proposed change to Solvency II is likely to be neutral for the creditworthiness of rated insurers in the UK as it expects them to broadly maintain their capital positions.

The report comes following the UK Government receiving widespread approval from the re/insurance industry after Chancellor Jeremy Hunt promised that scrapping of certain EU rules in Solvency II reforms will unlock tens of billions of pounds of investment across a range of sectors.

S&P suggests that the government’s decision to keep its existing approach to fundamental credit spreads instead of its original proposal will provide some stability for UK life insurers’ capitalisations and business positions, notably for annuity writers that may have been the most negatively affected by the original proposal.

The proposed 65% reduction in the size of risk margins will materially improve the solvency ratios of UK life players, especially those with significant long-term exposure.

Nataly Kramer    by Nataly Kramer