David Gray

Government publishes responses to the call for evidence as part of the Solvency II review

Solvency II

07 July 2021

On 1 July 2021, the UK government published responses to the call for evidence as part of the Solvency II review.  The review is being undertaken, following the UK’s withdrawal from the EU at the end of January 2020, to tailor the prudential regime to the UK rather than the EU insurance sector.  This is a somewhat factual document, providing their summary of the answers to the questions on specific aspects as posed in the October 2020 publication. 

In general, there is good support for reforms whilst maintaining the Solvency II regime although there are concerns about regulatory divergence.  Such concerns are more likely to come from firms operating outside the UK market.   

There appears to be general agreement on reforming the risk margin although most did not express a preferred method to achieve a reduction.  There were a wide range of comments regarding the matching adjustment which is primarily of relevance to large annuity providers.  Firms calculating their solvency capital requirement using an internal model were critical of the approval process.  With other firms using the standard formula, there was a call for recalibration to reflect the UK profile.  More than half of the respondents pushed for less onerous reporting requirements.  

Running alongside the reform of rules, the Government’s second consultation on the Future Regulatory Framework (FRF) Review will be published later in 2021.   

The quantitative impact study (QIS) to be launched by the PRA this summer will be used to investigate the impact of various reforms and support the review of Solvency II.  A package of reforms will be released for consultation in early 2022. 

David Gray commented:  “Phase II of the FRF Review is expected to result in regulations designed and set by the PRA to meet government policy.  Whilst listing respondent’s views, this report also contains the government’s views and there is no doubt that reforms will be made within the existing regime.  The expected reduction in risk margin and increased proportionality in reporting requirements will be welcomed by firms who recognise that this is only part of the package of supervisory measures, intended to protect policyholders.  I would expect the PRA to conduct a careful and objective assessment of any reforms. 

The regime should best reflect a firm’s risk profiles (assets and liabilities) and the potential transfer of that risk.  This should be done in a proportionate manner and applied consistently to allow adequate oversight by regulators.  Whilst raising the threshold to exclude smaller firms might seem a good idea, this might do more harm than good for the sector and increasing the application of proportionality of the Solvency II regime may be more beneficial.  Incentives to invest in green assets should follow only from the relative value of other assets subject to physical and transition risks.   

Without differentiation, it will be difficult to balance the interest of firms solely in the UK market and those in both UK and EU markets.  With the UK outside the EU but with a strong voice within the International Association of Insurance Supervisors, the UK may be more closely aligned to the wider market and perhaps there is some scope for future European reforms to then follow the UK?” 

David Gray

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David Gray
Consultant Actuary

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