However, the ongoing development of an international capital standard by the International Association of Insurance Supervisors will influence the direction of travel for both the UK and EU and keep them on similar paths.
UK: Solvency II review – a delicate balance
Post Brexit the UK government was quick to announce a review of the financial services regulatory framework and separately, a review of the Solvency II regime. The aim of this review is to ensure that the UK's prudential regulatory regime for the insurance sector is better tailored to support the particular structures, products and business models of the UK insurance industry. It is clear that there is no appetite for wholesale changes, although the scope of this review is broader than the Treasury Committee’s previous inquiry in 2016. Certain issues are being revisited such as risk margin, matching adjustment, calculation of the SCR and TMTP and reporting requirements. These are all areas where extra flexibility might be welcomed by UK insurers, but where using that flexibility might prejudice the chances of equivalence with the EU. New areas for review include branch capital requirements for foreign insurance firms, thresholds for regulation by the Prudential Regulation Authority (PRA) under Solvency II, mobilization of new insurance firms and the transition from LIBOR to OIS rates. In addition, industry participants and stakeholders were invited to provide comments and evidence on any other issues about the Solvency II regime.
Feedback from the government is due in June 2021. This will be followed by a quantitative impact study by the PRA of the effect of possible reforms to the Solvency II regime, leading to a formal consultation on proposals in 2022.
EU: Solvency II review - 'evolution rather than revolution'
The European Commission's review of the Solvency II regime is more advanced. The European Insurance and Occupational Pensions Authority (EIOPA) delivered its Opinion in December 2020. EIOPA concluded that overall the Solvency II framework is working well and consequently EIOPA’s approach to formulating its recommendations was to focus on improving the existing regulations considering prudential experience and economic changes – an approach EIOPA describes as ‘evolution rather than revolution’.
The Commission's proposals for changes are expected in July 2021. In a recent speech by John Berrigan, the Director General of the Commission’s department for financial stability, financial services and capital markets union, he indicated that the Commission’s priorities for post-pandemic recovery and transition to a green economy will influence the consideration of any changes to the Solvency II regime.
Resolution and recovery
Since the financial crisis in 2008, the idea of a recovery and resolution regime for the insurance sector has been mooted but not taken forward by the EU or UK. At an international level, the Financial Stability Board published in 2011 the Key Attributes of Effective Resolution Regimes for Financial Institutions which were supplemented by guidance – the Key Attributes Assessment Methodology for the Insurance Sector in August 2020. The UK is not fully aligned with these international standards and in May 2021, the UK government announced that alongside proposals to update the existing insurance insolvency arrangements, it will also be developing a proposal for a specific resolution regime for insurers. In the EU, EIOPA has recommended the development of a minimum, harmonized and comprehensive recovery and resolution framework for insurers which will need to be taken forward by the Commission. In addition, EIOPA has called for the development of national insurance guarantee schemes.
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Authored by Kirsten Barber.
