1st May 2022
The Prudential Regulation Authority(PRA) notes the publication by HM Treasury(HMT) of its consultation on the Solvency II Review.
The PRA supports the objectives of the Review and continues to work closely with HMT on the potential reforms. This statement and the accompanying Discussion Paper(DP) set out the PRA’s current views on some key aspects of the potential reform package.
The PRA's approach is grounded by its statutory objectives given by Parliament for safety and soundness, policyholder protection, and the secondary competition objective. The PRA also has regard to the range of matters it is obliged to consider when making policy, including the impact on sustainable growth, innovation, competitiveness, trade, and climate change. Many of these matters align closely with the Government’s wider objectives for the Review.
HMT’s consultation considers its proposed reforms to Solvency II could result in a release of possibly as much as 10% or even 15% of the capital held by life insurers. It proposes reducing the risk margin for long term life insurers by 60-70% and affirms that HMT is considering the case for reform to the fundamental spread(FS) used to calculate the matching adjustment(MA). It notes the link between the FS and other parts of its proposed reforms, including to the risk margin and the eligibility requirements for assets in insurers’ MA portfolios. The MA matters are primarily of relevance to the annuity sector.
In working with HMT, the PRA has explained its view on which potential combinations of reforms to the FS and the risk margin could be consistent with its statutory objectives, and which would not. The PRA has drawn on available evidence, its engagement with insurers and its assessment of the estimated reduction in aggregate capital levels for the insurance sector(and therefore safety and soundness and policyholder protection) that the reform options would imply. The data gathered in the 2021 Quantitative Impact Study(QIS) has provided useful insights in informing the PRA’s view.
Provided that satisfactory reforms to the FS and risk margin are achieved, the PRA considers there exist packages within the indicative ranges included in HMT’s consultation that would be consistent with its statutory objectives and that would also achieve the broader objectives of the review around competitiveness and long-term investment.
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