BoE praises SII measures against COVID-19; operational challenge response highlighted

Written by Adam Cadle

02/06/2020

A number of measures contained in Solvency II (SII) have “effectively mitigated” the pro-cyclical effects caused by the disruption to financial markets from COVID-19, and the insurance industry as a whole has responded “extremely well” to the operational challenges that have arisen from the pandemic, Bank of England executive director of insurance supervision Charlotte Gerken has said.

In a speech delivered at the ABI’s prudential regulation webinar recently, Gerken said certain SII measures “have helped to filter out the noise in financial markets, supporting the PRA in assessing that insurers are adequately capitalised for fundamental risks in their business and protecting policyholders”.

“The Matching Adjustment (MA), is for UK life insurers, the most material SII long-term guarantee measure, and has been the most significant in the current crisis,” she said.

“The MA has worked as expected and has shielded insurers from the market dislocations that occurred in March of this year. The point of MA is to separate the noise from the signal, the signal being represented by an asset’s rating: if the rating is unchanged, then changes in spreads are identified as noise and absorbed by the MA. If assets are downgraded, then the decrease in rating is reflective of increased risk borne by insurers, and which we expect to be appropriately capitalised.”

Gerken also said the transitional measure on technical provisions (TMTP) and the PRA inviting firms to apply to recalculate their TMTP through a symmetric adjustment in light of significant changes in interest rates allowed insurers to build capital buffers when markets were rising, and then allowed them to be released when markets fell.

The Volatility Adjustment (VA) has also been praised by Gerken.

“The VA is another explicitly countercyclical element of Solvency II that aims to mitigate the effect of exaggerations of bond spreads,” she stated. “While the VA provided some cushion against the rise in spreads, a significant amount of the market stress would have been passed through to insurers’ balance sheets. The information we have from the largest UK insurers shows the industry was well-capitalised going into this crisis and has so far remained so, with aggregate solvency ratios around 150%. But given the uncertainty generated by the current crisis, we expect insurers to increase their monitoring of the additional risks presented by COVID-19, and where necessary to update their risk and capital assessments accordingly.”

Gerken said the insurance industry has responded extremely well to the operational challenges that have arisen from the COVID-19 pandemic but “there are still challenges for all of us as we move from immediate crisis management to medium term sustainability”.

“This includes reassessing the impact on cyber and other-IT-related risks, whilst at the same time recognising the need for technology-driven solutions to support certain activities.”

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