Potential Solvency II relaxation “not urgent” for UK insurers, GlobalData says

Written by Michael Griffiths

04/11/2022

The solvency capital requirements for insurers in the UK may be relaxed in the near future following the September 2022 mini-budget, although UK insurers are not coming close to the existing limits, according to analysis by GlobalData.

As part of the government’s mini-Budget, the current Solvency Capital Requirement (SCR) Ratio could be lowered, including a 60 to 70% reduction in risk margin for life insurers and 30% for general insurers.

However, the UK has changed both its Chancellor and Prime Minister since Liz Truss and Kwasi Kwarteng’s fiscal announcement which sparked turmoil across financial markets, so GlobalData also stated it is not guaranteed that this move will still occur.

Senior insurance analyst at GlobalData, Ben Carey-Evans, said: “The current limits require insurers to have a SCR Ratio of 100%, which effectively means insurers and reinsurers have to hold in eligible assets 100% of what they could be liable to lose over the next year.

“Yet, leading players have ratios of around 150% and often upwards of that. Rules that allow them to invest even more of their capital are thus not an urgent requirement, as insurers could invest considerably more than they are at present if they wanted to.”

GlobalData’s Solvency II Database shows that five of the top 10 general insurers in the UK – Aviva, AXA, Allianz, AIG, and Admiral—all had SCR Ratios of at least 145.7% in 2021.

Furthermore, the company found that only two of the 139 players covered had ratios between the 100% limit and 110% in 2021, which it said emphasises how far the majority of insurers are from the limit currently.

“If Solvency II is replaced or its capital requirements are relaxed in the UK there may still be some advantages for insurers,” Carey-Evans added. “Despite GlobalData findings suggesting insurers and reinsurers are not using up their limit at present, insurers will be allowed to take more risk if some relaxation occurs.

“This could allow them to focus on more long-term investments, as well as more high-risk, high-profit options, since the further they are away from the limit the more capital they can set aside for a number of years. This reduces the need for shorter-term and more risk-free investments.”

GlobalData also said this could allow insurers to invest in areas they are currently unable to, and thus make more profit over the long-run. This could include areas such as long-term commercial real estate, renewable energy, and infrastructure, which could also help provide a boost for key sectors within the economy.

Carey-Evans concluded: “Overall, looking at the current data and how much of their capital insurers are willing to invest, the government simply lowering the SCR Ratio requirement to below 100% is unlikely to have a significant impact.

“Most insurers are not close to the limit at present, so the government would need to encourage, and possibly incentivise, insurers to trigger the increased investment it is hoping for.”

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