WTW has Issued a Statement on Solvency II Insurance Reforms

Willis Towers Watson has issued a statement on Solvency II reforms, saying that the package of reforms under consultation has the potential to create clear winners and losers if the “parametrisation” of the Matching Adjustment (MA) provisions indicated by the Prudential Regulation Authority is not recalibrated in line with SII.

In particular, for those firms focussed on writing material volumes of bulk purchase annuity business, a 60-70% reduction in risk margin (RM) combined with the proposed significant reduction to the MA benefit, more capital would be required.

This is not only a reduction in the 10-15% level of capital release that has been targeted by Government, but a movement in the opposite direction.

To determine whether the treasury’s objectives are met it is most relevant to consider these long-term annuity writers, the company says, who are the long-term investors capable of supporting the growth of the UK economy (see Global Economic Outlook and Market Forecast). WTW says its quantitative analysis of the proposed reforms of the MA and RM shows a wide range of impacts across firms.

For the majority of annuity writers the proposals would result in lower available capital and not provide the types of release indicated to meet the treasury’s Solvency II review objectives.

The treasury has set out three key objectives for its proposals at the outset of the review. Spurring a vibrant, innovative and internationally competitive insurance sector, protecting policyholders and ensuring the safety and soundness of firms, and supporting firms to provide long-term capital to drive growth consistent with the Government’s climate change and productive finance objectives.

WTW believes it is detrimental to the UK economy and future policyholders to have overly prudent protection for existing policyholders as this will drive up future prices, likely increase the use of overseas reinsurance and reduce the capital for UK Government climate change and productive finance objectives.

To provide an outcome closer to the 10% to 15% release of capital currently held by life insurers that the Government is targeting, a more balanced package of reforms is required which avoids significant change to the level and volatility of MA and results in a less polarised outcome for different types of insurers.

by Nataly Kramer