By Chris Finney, Partner at international law firm Cooley LLP.
The TSC will actively consider at least 4 options, including a complete withdrawal from the EU and EEA, and either (a) “retaining the effect of Solvency II as at the date of Brexit, but not incorporating any subsequent amendments to [it]“; or (b) “revert to the old ICAS regime, develop it unilaterally in any way which is considered desirable, or select the elements of the Solvency II regime which are considered desirable” instead.
Commenting on the inquiry, the TSC’s chair, Andrew Tyrie MP said, “Brexit provides an opportunity for the UK to assume greater control of insurance regulation. The Solvency II Directive came into force in January, only after a heap of concerns had been expressed about it. Among its manifest shortcomings was the failure to secure value for money over its implementation. [We] will now take a look at the Brexit inheritance on insurance to see what improvements can be made in the interests of the consumer“.
The TSC’s terms of reference include 4 objectives, and 7 groups of questions addressed to the insurance industry and other interested parties.
The TSC’s objectives are:
1. To consider the options that Brexit creates for the UK’s insurance industry;
2. To assess Solvency II’s impact on the industry’s competitiveness;
3. To examine the impact Solvency II has had on the role of insurance in meeting the needs of UK customers and the UK business economy; and
4. To assess any learning for regulators and industry from the introduction of Solvency II.
The 7 groups of questions explore:
1. The competitive implications of Solvency II;
2. The development of Solvency II;
3. The implementation of Solvency II;
4. (Re)insurer safety and soundness;
5. Proportionality;
6. Financial reporting; and
7. Solvency II’s wider implications.
The deadline for written submissions is Friday 11 November 2016.
* An inquiry of this type was first mooted on 30 April 2013, when Andrew Tyrie published his exchange of letters with Andrew Bailey. At that time, Bailey was a deputy governor of the Bank of England, and the CEO of the Prudential Regulation Authority; and Solvency II was widely regarded as having “ground to a halt“. In those letters, Bailey expressed concern about the “staggering” cost associated with the development and implementation of Solvency II; the “risk of over-reliance on complex models and of models being used to pare capital requirements” and “the risk that SII overloads supervisors with very detailed model approval requirements“. Towards the end of this correspondence, Bailey said “It would help if Parliament could cast light on a process which has gone on for … ten years, and in which the EU … has assumed that firms and regulators will spend very large amounts of money to prepare for something that [at least at that time seemed to carry] no promise in terms of when, or in what form, it will be implemented“. In his final reply, Tyrie said “The Committee takes your concerns very seriously and plans to examine them further“.
The difficulty now, of course, is that the industry and its regulators have invested “staggering” amounts of time and money preparing for Solvency II and – since 1 January 2016 – complying with the new regime. The industry generally believes (a) that it’s had some return on its Solvency II investment – even if it’s not been enough (yet); and (b) that Solvency II equivalence will be highly desirable in a post-Brexit world (if the UK leaves the EU and EEA, and equivalence can be secured), especially for the UK’s reinsurance industry and UK headquartered groups.
This development also comes with a terrible irony: although Solvency II was born in Europe, it drew heavily on the UK’s Tiner reforms and its ICAS regime. Solvency II was also heavily influenced by UK policy makers and legislators, who largely got what they wanted as the new regime took shape. To walk away now might therefore be regarded as both shameful,and a blessed relief.
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