PRA warns of insurance rule shake-up 'increasing risks'

Written by Adam Cadle

17/01/2023

An overhaul to insurance rules “increases risk” and could result in a corporate failure that ultimately hits the public purse, the Bank of England (BoE) has warned.

The changes to Solvency II, in particular, have been the most contentious element of the government’s reform package. In November last year, the government confirmed it would push forward with reforms to the insurance sector aimed at releasing billions of pounds of investment into the economy.

The changes to Solvency II, which the UK inherited from the EU, will be added to the UK’s Financial Services and Markets Bill and will cut insurers’ capital buffer, or risk margin, by 65% for life insurers and 30% for general insurers.

PRA head Sam Woods told the House of Commons Treasury select committee that the proposed relaxation of insurance regulations increased the risk that a pension provider would run out of capital to back their promise.

“The reform package as a whole increases risk,” he said. “That’s a trade-off that the government has made. The way it comes home to roost is if there is not enough capital backing pensions. I would say it is highly likely that comes back to the public purse if that occurs.”

Woods also cited concerns from some insurance executives that regulators would use their new powers to ensure a more conservative approach from companies via the “backdoor”. “I don’t think we should or we can use those tools to reverse-engineer the same effect that we were trying to get.”

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