The UK Government has received widespread approval from the insurance and reinsurance 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.
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.
Meaningful reform of the rules creates the potential for the industry to invest over £100bn in the next ten years in productive finance, such as UK social infrastructure and green energy supply, whilst ensuring very high levels of protection for policyholders remain in place.
More broadly, it will encourage a thriving and competitive industry which will ultimately benefit the UK economy, the environment and customers.
Planned reforms to Solvency II were “a step in the right direction for the insurance sector,” and estimated that they could unlock up to £35 billion of surplus capital.
The changes strike a sensible balance to enable additional investment and improve internal competitiveness, while ensuring the regulator has sufficient powers to scrutinise decision-making and the protection of policyholders.
Improvements to the Solvency II Matching Adjustment can help deliver greater investment for the future, as long as they go hand-in-hand with the right processes and oversight.
Analysts at RBC Capital Markets further concurred that the outcome of the reforms is “positive” for the UK life insurance sector, given the retained proposal for a 60-70% reduction in the risk margin, increased investment asset eligibility criteria and, crucially, no change to the calculation methodology of the fundamental spread.
While initial capital releases may not be material, the increased profit available to the sector on an ongoing basis is incrementally positive to already constructive view on the sector.
Insurers believes that having the lower capital requirement may result in insurers retaining incrementally more longevity risk (currently 90-100% is reinsured).
This is positive as it expects that longevity improvements in the UK is slowing, and insurers have not yet updated their models to reflect this.
by Yana Keller