UK must match EU Solvency II ambitions or face 'Brexit penalty'

Written by Sophie Smith

10/12/2021

The UK government must embrace reforms of at least a similar ambition as the EU Commission’s Solvency II Risk Margin or face a less competitive regime than its continental neighbours, the Association of British Insurers (ABI) has warned.

In a blog marking his final day (9 December) as ABI director general Huw Evans explained that there is already a baseline as the EU has published its Solvency II reform plans, suggesting that if the UK does not match this, there will be a “Brexit penalty”, alongside the "large-scale transfer of insurance hubs and contracts already seen since 2016".

He said: “Having seen the UK’s role as the insurance capital of Europe diminished by Brexit, do we at least take the opportunity to reform Solvency II that is presented?

"Or, to use a rugby metaphor, do we fumble the ball on the try line in the 80th minute, gifting our competitors (who had the sense to score earlier) the win?”

Evans also said that a fundamental test for Solvency II reform will be whether there are any changes in the push to net-zero, warning that if the UK is serious about this objective, it would be a “massive mistake” not to use the “immense” investment power of the UK’s long-term savings and insurance sector.

More broadly, Evans warned that there “seems to be a degree of confusion between the Prudential Regulation Authority (PRA) and the UK government about whose reform this is, particularly when it comes to the scope”.

“HM Treasury has published two key documents on this in October 2020 and in July 2021, both of which put reform of the Risk Margin, enabling of productive finance through reform of the Matching Adjustment and simplification of processes and reporting as the key objectives,” he explained.

“Yet in its Quantitative Impact Study (QIS) exercise launched in July and in the Andrew Bailey speech last week, the Bank of England has framed its recently discovered concerns about the fundamental spread mechanism of the Matching Adjustment as a key reform objective in its own right.

“While nobody could argue the PRA should not have its own views, it is surely an important principle of post-Brexit decision-making that the scope of a government review and ultimately the decisions that come from it are taken by democratically elected politicians."

Evans also stated that it was "regrettable" that the QIS commissioned by the PRA chose only to model the fundamental spread reforms it wanted, while not including the reform options put forward by the industry.

He concluded: “The technical details can be complex but the realities are really very simple.

"The UK’s version of Solvency II will either be fit for the decarbonising future we will inhabit or it will remain trapped in the psychological architecture of the post-2008 period, leaving us at a competitive disadvantage to the EU.

“I hope our political leaders are determined enough to choose for the future and that 2022 sees a renewed determination by regulators, insurers and the Treasury to agree an ambitious way to achieve this.”

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