The submission recognises a key advantage of Solvency II is improved risk management. However, Willis Towers Watson suggests a number of changes to the EU regulation that should be considered in a post-Brexit review of UK insurance legislation.
Kamran Foroughi, Director at Willis Towers Watson, said: “Solvency II has led to certain life products having much higher capital requirements than might reasonably be considered necessary, reducing the viability of providing those products to consumers. There is a risk that, in future, consumers will lose out due to a reduction in the range of products.”
Willis Towers Watson highlights a number of the technical decisions underlying the measurement of the Solvency II balance sheet could be improved for UK life insurers, in particular: Reduce asset and liability matching adjustment eligibility restrictions, and for business falling outside the matching adjustment, remove or reduce the focus on the swap market as the primary determinant of the risk-free rate and Improve the risk margin. The current Solvency II risk margin is unrealistic and overly penal for certain products, affecting customer value for money and asset-liability matching.
Further, Willis Towers Watson proposes a review of the Solvency II standard formula capital approach in order to make it a better fit for the UK insurance industry.
“The default standard formula capital requirement used under Solvency II was calibrated many years ago and designed for the EU insurance industry as a whole”, said Kamran Foroughi. “With a few simplifications where possible and an improved calibration of risk, many UK insurers would no longer need internal models. For those that wish to develop and maintain internal models, we recommend a more streamlined approval process. These measures would help reduce the compliance costs of the regulatory regime.”
Willis Towers Watson also notes that certain information and requirements of the Pillar 3 asset reporting requirements are extremely and unnecessarily onerous for insurers, especially those relating to asset data. In response, the consultancy suggests a joint industry/regulatory working group review of the requirements to ensure data is not collected simply because a use might be found for it in the future.
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