29 October 2020

CRE: SII review could reduce capital burden for UK insurers in 2021, says Fitch

The UK could reform “burdensome aspects” of Solvency II (SII) as early as next year, said Fitch in response to a government review of Europe’s capital adequacy regime.

Fitch said while it is unclear how far the UK can, or will, diverge from the EU rules when the Brexit transition period ends on 31 December 2020, the greatest potential lies in risk margin.

“Reforming the risk margin, specifically its sensitivity to interest rates, could make compliance with SII less onerous from a capital perspective for many insurers, especially those with long duration liabilities,” Fitch said.

The government review will address the effects of very low interest rates on insurers and could open up investment to a wider range of assets. It offers the potential to reform some of the more onerous SII requirements, Fitch said.

Changes to the matching adjustment and capital requirement calculations could reduce the complexity of regulatory compliance for the UK insurance sector, it added.

The UK treasury’s call for evidence is open until January.

“The call for evidence asks for responses by 19 January 2021. This suggests a significant desire by the UK authorities to implement reforms rapidly, possibly as soon as next year, although disruption from the coronavirus pandemic could extend this timeframe,” Fitch said.

The review will look closely at the market’s perception of retaining equivalence with Europe’s SII directive, which Fitch said proved its worth during the outbreak of Covid-19. Some of the more fundamental aspects of SII are unlikely to change, to ensure the creditworthiness of UK insurers.

“The Solvency II regime helped UK insurers weather debt and equity market volatility during the onset of the global coronavirus pandemic. This provided the first macro field test of the regime, and UK insurers were largely able to maintain adequate short-term liquidity and capital ratios in excess of risk appetite, while avoiding pro-cyclical behaviour, such as selling securities at depressed prices,” said Fitch.

 

CRE

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