UK Govt: SII should be ‘more proportionate and flexible’ to boost investment in long-term productive assets

Written by Adam Cadle

02/07/2021

The UK Government wants to see a Solvency II regulatory regime that is more "proportionate and flexible", providing a "sound foundation" for insurance firms to provide long-term capital to the economy including investment in long-term productive assets.

In its response to the Solvency II review call for evidence, HM Treasury agreed that many aspects of Solvency II are overly rigid and rules-based, and a more flexible regime would also help investment consistent with the Government’s climate change objectives.

“Such a regime would ensure high standards of policyholder protection and the safety and soundness of insurance firms,” it argued. “The evidence is persuasive that reforms to Solvency II are required if the prudential regulatory regime is to be consistent with the Government’s objectives.”

HM Treasury also stated: “There are close interactions and dependencies between many of the areas of potential reform. The impact of potential changes to the Solvency II regime on the balance sheets, solvency positions and the actions of insurance firms in meeting the requirements of the prudential regulatory regime will need to be examined together rather than separately. The Government will work closely with the PRA to identify an optimal reform package that can be implemented as soon as possible.

“For example, there is consensus in the responses to the Call for Evidence that the risk margin is currently too high and too volatile. Unforeseen consequences flow from its design, particularly at current low interest rates. A reduction in the size, and sensitivity of, the risk margin to interest rates would diminish the incentive to reinsure longevity risk outside the UK. It would allow insurance firms greater flexibility to manage their balance sheets and the pricing and range of the products that they provide. Reforms to the risk margin would also affect, and inform, reforms to the Transitional Measure on Technical Provisions (TMTP).”

On the issue of the risk margin, the Government said it agrees that there is a strong case to reform the risk margin. It agreed that reform would free up resource on, and reduce the volatility of, insurance firm’s balance sheets. It also agrees that reform would contribute to a dynamic, prosperous and internationally competitive insurance sector.

Related Articles