In response to the Treasury Select Committee inquiry into Solvency II, the Association of British Insurers (ABI) noted Solvency II is broadly fit-for-purpose for the UK market and there is no appetite from its members to withdraw from or completely replace it. Following more than ten years of implementation, costing more than £3bn or equivalent to £140 per insured household, the focus should instead be on making changes that would help customers, support investment in infrastructure to grow the economy, and ensure the UK remains globally competitive and a leader in the insurance market.
There are a range of issues with Solvency II that need to be addressed. Some of these relate to the UK implementation; others would require change at the EU level.
While commending the Prudential Regulation Authority (PRA) for its work on the implementation of Solvency II, the ABI says the PRA has erred on the side of caution in some critical areas; this should now be reassessed.
ABI’s Director of Regulation, Hugh Savill, says: “Solvency II has been part of the UK regulatory landscape and on UK insurers’ radars for almost a decade. Dismantling this regulation so soon after implementation means considerable time and money spent would have been wasted.
“We believe much could be changed domestically in the short-term – still within the framework of Solvency II, and without the need to make changes to the EU-level text. This could be done now, is not contingent on leaving the EU, and would not affect the UK’s ability to seek equivalence at a later point.”
Further, the ABI proposes a number of changes to Solvency II to be reflected in the future UK regime. This includes:
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Risk Margin: Its size and sensitivity to interest rate movements are both significantly higher than expected and reflect unintended consequences of its design. This makes the writing of new business, in particular annuities and other long-term guarantee-based products, unattractive to firms, and makes these products less affordable for customers
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Removing barriers to long-term investments: Solvency II should be reviewed to better enable insurers’ role as long-term investors, ensuring there are not regulatory barriers to the industry’s ability to invest in socially useful projects, such as infrastructure, which help to grow the economy.
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Reporting requirements: The Solvency II reporting requirements are excessive and should be reduced, to reduce excessive reporting costs which are disproportionately high for small and mid-sized insurers.
When the UK leaves the EU, there will be numerous cross-references and gaps in UK legislation and regulation that will need to be addressed, including Solvency II. To avoid insurers being stuck in regulatory limbo, the ABI proposes that Government adopts the EU Solvency II text directly into UK law following Brexit, and supports the Prime Minister’s proposal for a Great Repeal Bill.
The ABI also says it is imperative that changes made to Solvency II and any replacement UK prudential regulatory regime should be supportive of UK competiveness, to ensure the UK retains insurance business and enhances it global position in the insurance sector following Brexit.
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