Treasury presses on with Solvency II reform plans

The Treasury wants to loosen Solvency II rules, to release capital held by insurers and boost economic activity.

The plan is expected to release significant amounts of capital, enabling insurers to invest in illiquid assets in the real economy.

The UK Government is pushing ahead with its plans, publishing the results of a consultation that took place in April 2022 alongside the Treasury’s Autumn Statement.

“This is a very welcome boost for UK investment,” said Amanda Blanc, Aviva Group CEO.

“We estimate reforms to Solvency II will allow Aviva to invest at least £25bn over the next ten years across the UK, including in critical areas such as social housing, schools, hospitals and green energy projects,” Blanc added.

The Association of British Insurers (ABI) welcomed the planned reforms, with a much higher estimate for the amount of investment the industry could provide as a result.

“We strongly welcome these changes to the Solvency II regime which will allow the UK insurance and long-term savings sector to play an even greater role in supporting the levelling up agenda and the transition to Net Zero,” said Hannah Gurga, director general, ABI.

“Meaningful reform of the rules creates the potential for the industry to invest over £100bn in the next ten years in productive finance, such as UK social infrastructure and green energy supply, whilst ensuring very high levels of protection for policyholders remain in place,” said Gurga.

“More broadly, it will encourage a thriving and competitive industry which will ultimately benefit the UK economy, the environment and customers. This meets the objectives that HM Treasury set out to achieve and which the industry has supported throughout,” she added.

The ABI highlighted some aspects of the plans as particularly positive.

Firstly, the industry body welcomed the proposed reduction to the Risk Margin by 65% for life insurers and 30% for non-life insurers. This agreed with the view of the Prudential Regulation Authority’s (PRA) that the Risk Margin was too large and too sensitive to interest rates.

Other changes proposed by the PRA, such as to the Fundamental Spread (FS) methodology, have not, however, made it into the final package.

“PRA concerns that Solvency II reforms must maintain the overall integrity of the regime have clearly been overruled by the Government on this occasion,” said a comment from legal firm Herbert Smith Freehills.

The ABI said it was pleased to see proposals to broaden the asset and liability eligibility criteria for the Matching Adjustment. This would allow industry to invest in a wider array of assets and also enable relevant insurers to include morbidity liabilities in Matching Adjustment portfolios, according to the ABI.

“We support the Government’s announcement that the design and calibration of the fundamental spread will remain as it is today. This will lead to less volatile annuity prices and ultimately provide a more stable income for UK pensioners,” the ABI added.

The comment from Herbert Smith Freehills anticipates the PRA’s response to the Treasury’s package of reforms “given its clear reservations over some of the changes”.

The legal firm added: “While the Treasury’s proposals indicate a clear direction for reform, it could be some time until the detail is known. Some reports suggest it could be the end of 2024, or possibly 2025, before the changes come into force.”