Rather than replacing Solvency II entirely when the UK leaves the European Union, regulators need to refine EU’s insurance regulation to make it more appropriate for the UK market and customers, according to the Association of British Insurers (ABI).
Following more than 10 years of implementation, costing more than £3 billion ($3.7 billion), or the equivalent of £140 ($174.40) per insured household, the ABI noted Solvency II is broadly fit-for-purpose for the UK market and there is no appetite from its members to withdraw from or completely replace it. (The ABI offered its comments in response to the UK Treasury Select Committee inquiry into Solvency II.)
“Solvency II has been part of the UK regulatory landscape and on UK insurers’ radars for almost a decade. Dismantling this regulation so soon after implementation means considerable time and money spent would have been wasted,” said ABI’s Director of Regulation Hugh Savill.
“We believe much could be changed domestically in the short-term—still within the framework of Solvency II, and without the need to make changes to the EU-level text. This could be done now, is not contingent on leaving the EU, and would not affect the UK’s ability to seek equivalence at a later point.”
There are a range of issues with Solvency II that need to be addressed, the ABI said in a statement, noting that some of these relate to the UK implementation while others would require change at the EU level.
Accordingly, the ABI proposes several changes to Solvency II, which include:
- Risk margin: Its size and sensitivity to interest rate movements are both significantly higher than expected and reflect unintended consequences of its design. This makes the writing of new business, in particular annuities and other long-term guarantee-based products, unattractive to firms, and makes these products less affordable for customers
- Removing barriers to long-term investments: Solvency II should be reviewed to better enable insurers’ role as long-term investors, ensuring there are not regulatory barriers to the industry’s ability to invest in socially useful projects, such as infrastructure, which help to grow the economy.
- Reporting requirements: The Solvency II reporting requirements are excessive and should be reduced, to reduce excessive reporting costs which are disproportionately high for small and mid-sized insurers.
When the UK leaves the EU, the ABI said there will be numerous cross-references and gaps in UK legislation and regulation that will need to be addressed, including Solvency II.
“To avoid insurers being stuck in regulatory limbo, the ABI proposes that Government adopts the EU Solvency II text directly into UK law following Brexit…,” the association said.
The ABI went on to say that it is imperative that changes made to Solvency II and any replacement UK prudential regulatory regime should be supportive of UK competitiveness, ensuring that “the UK retains insurance business and enhances it global position in the insurance sector following Brexit.”
Source: Association of British Insurers