17 March 2021

CRE: UK’s PRA says SII review won’t significantly reduce capital buffers

The Prudential Regulation Authority (PRA) has said the UK’s review of Solvency II will not tear up its principles or particularly lower capital requirements, and cast doubt on the amount of funds the insurance industry has suggested could be freed up.

In a speech to the Association of British Insurers (ABI), PRA CEO Sam Woods added that the regulator’s role could be expanded as the UK looks to new opportunities and reform of Solvency II post-Brexit. Mr Woods, who is also deputy governor of the Bank of England, said the Solvency II regime is “over-specified” and the UK will tailor the rules now it is outside of the EU. Last month, the ABI said the review could free up £35bn of capital that could be returned to shareholders. But Woods described these numbers as “speculative”.

 

“You will not be surprised to hear that I have some doubts about a reform package that materially decapitalises the insurance sector,” he said. Adding: “While it’s natural for the private sector to focus on private interests, it’s part of our job to keep an eye on the potential public costs of significant insurance failures.” Mr Woods also said he is cautious of encouraging specific forms of investment with regulatory incentives, such as in green assets, although he would be in favour of removing barriers. He added that the PRA would favour more powers over rulemaking post-Brexit, rather than placing rules in law as prescribed by the European Union. He said a regime held within the PRA’s rulebook would react more quickly to changes in the market or risk, support innovation and ensure rulemaking is informed by day-to-day risk assessments.

In jurisdictions outside of the EU, Mr Woods said this is the “norm” and it would allow the PRA to be a more flexible regulator, versus the alternative of a “sluggish regime” that imposes conservative calibrations on firms. “A changing world requires a tough but flexible regulatory regime that can adapt itself rapidly as needed – both to remove unnecessary barriers to innovation and to give policyholders reasonable protection from any new risks that arrive with it,” he said. Mr Woods said such a regime would allow the PRA to change rules that are not working. This would include Solvency II’s risk margin and internal models, which Mr Woods said he has long wanted to simplify from the 300 tests and standards set in law. Longer term, Mr Woods said the PRA has “aspirations to condense and reduce the volume of material that defines” the Solvency II regime. Solvency II filled nearly 1,000 pages of legislation. “Having a streamlined set of rules all in one place would substantially ease the burden of compliance on firms and on us, without reducing resilience,” Mr Woods said.

CRE

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