SII reform to drive investment portfolio restructuring – AM Best

Written by Adam Cadle

23/11/2022

The UK’s Solvency II reform is likely to drive investment portfolio restructuring, AM Best has said, with the agency also emphasising that the expansion of asset options for UK annuity writers should assist the industry in sourcing assets to meet expected high demand for pension risk transfer (PRT) solutions over the coming years.

On 17 November 2022, the UK Treasury published its response to an earlier consultation exercise on Solvency II reform, describing its plans as part of a wider reform programme “to tailor financial services regulation to UK markets in order to bolster the competitiveness of the UK as a global financial centre and deliver better outcomes for consumers and businesses”.

“Recent investment turmoil related to defined benefit schemes’ use of the liability-driven investment (LDI) product has had a range of consequences but appears to have had little overall impact on the annuity transaction pipeline,” AM Best stated. “The events may even have a positive influence on the pipeline over the longer term as the risks for defined benefit pension fund sponsors are highlighted.”

AM Best added that broadening the assets eligible for the matching adjustment moves the prudential system incrementally away from cliff-edge product classifications towards a more economic approach. The ABI has suggested the reform could allow the industry to invest more than £100bn over the next 10 years across a more diverse range of assets.

On the issue of the risk margin reduction, AM Best said the proposed risk margin reduction is unlikely to change UK annuity writers’ longevity reinsurance purchasing decisions in the near term. However, AM Best said it believes the lower risk margin should enhance annuity writers’ options and negotiating position with reinsurers.

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