Solvency II Review – second time round

Second time round?

In September 2016, as part of its work on the relationship the UK might seek with the EU following the Brexit vote, the Treasury Committee of the House of Commons established an inquiry into EU insurance regulation.  From the written and oral evidence provided to the Committee by a wide range of industry participants, it was clear then that there was little appetite to abandon Solvency II.  However there were identified clear areas where change was considered desirable – see our articles – The Treasury Committee inquiry into EU insurance regulation – what have we learnt so far (March 2017) and The Treasury Committee’s Report on EU insurance regulation – what’s next for the PRA and the UK insurance industry? (November 2017).  The Treasury’s report set out a series of recommendations to the Prudential Regulation Authority (PRA) to which the PRA responded in it’s report published in March 2018 – see our article – The PRA response to the Treasury Committee’s Inquiry into Solvency II (March 2018).  In its report, the PRA highlighted those areas where it had been able to give flexibility but it was clear that overall the PRA was hampered from making unilateral changes in other areas until such time as there was more clarity about the future UK/EU relationship post Brexit.

The new review

The aim of this new 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.  The scope of this review is broader than the Treasury Committee’s inquiry in 2016.  Certain issues are being revisited such as risk margin, matching adjustment, calculation of the SCR and TMTP and reporting requirements.  New areas for review include branch capital requirements for foreign insurance firms, thresholds for regulation by the PRA under Solvency II, mobilisation of new insurance firms and the transition from LIBOR to OIS rates.  In addition, the Treasury has invited industry participants and stakeholders to provide comments and evidence on any other issues about the Solvency II regime.

Other areas that may be of interest to the insurance industry may include:

• an adjustment to the capital requirements for sustaintable investments, to incentivise  investment in those investments by insurers (similar to the adjustments to the capital requirements for infrastructure investments introduced by the European Commission in 2016);
• a change to the treatment of acquisition financing debt in group regulatory capital calculations, which would facilitate smoother M&A activity in the UK insurance sector; and
• a simplified process for changes to internal models and matching adjustment permissions (these processes are currently very bureaucratic).

Next steps

The deadline for responses is 19 January 2021.  The government will then publish its response which may lead to further consultation by the government and/or the PRA.

Authored by Kirsten Barber, Senior Knowledge Lawyer