Publishing responses to a consultation on potential reforms launched last year, HM Treasury said it agrees Solvency II’s risk margin is “too high and too volatile”.
The UK government said it has collected “compelling”
and “extensive” evidence to change “overly rigid” Solvency II rules, which the
country adopted as part of the European Union to regulate insurers since 2010.
Publishing responses to a consultation on potential reforms
launched last year, HM Treasury said it agrees Solvency II’s risk margin is
“too high and too volatile”. Evidence collected from more than 60 respondents
also indicated changes are needed to the matching adjustment in order to
streamline reporting, as well reform of risk-free rates used by firms to
discount liabilities and calculations for solvency capital requirement (SCR).
The document also says it will reconsider branch capital requirements for
foreign insurance firms.
A quantitative impact study will follow this summer,
fronted by the UK’s Prudential Regulation Authority, before reforms are put out
for consultation in early 2022 and implemented “as soon as possible”, the UK
Treasury said.
Respondents to the call for evidence were “strongly
supportive” of the Solvency II regime, which they said has improved standards
of risk management and reporting in the insurance sector. “No respondents
argued that Solvency II should be replaced by a different regime,” the paper
says.
It adds that “respondents stressed that Solvency II
should be retained not least because of the cost and disruption to replace it
in full”.
The UK government said reforms to the risk margin
would reduce volatility in insurance firms’ balance sheets and be a crucial element
in creating “a dynamic, prosperous and internationally competitive insurance
sector”, as it carves a path outside of the EU. HM Treasury said reforms to the
SCR calculation should not place disproportionate burdens on insurance firms.
“The government wants to see a prudential regulatory
regime that is more proportionate and flexible, so that it works more
effectively and outcomes can be delivered more efficiently,” the paper says. It
adds that a new regime would combine a mix of judgement and rules, and free up
insurers more to invest in the UK economy.
UK Chancellor of the Exchequer Rishi Sunak said this
week the UK will be driving competition in the financial services and insurance
sectors through changes in regulation and tax, after failing to win over Europe
on financial services equivalence.
Backing changes to Solvency II rules is an early test
of the new relationship with Europe, which remains concerned about how far the
UK will diverge from its own policies.
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