UK life insurers digesting regulatory announcement

Plans by the UK regulators to allow life insurers to dramatically reduce the amount of reserves they are required to hold to free up more capital will need to be balanced with the implication on ratings.

John Glen UK Economic Secretary to the Treasury, used the Association of British Insurers’ Annual Dinner to outline plans to redefine the UK’s regulatory system now Brexit has ended the need to adhere to Solvency II.

“Solvency II is something that has been mentioned to me every week of my almost 50-month tenure as Economic Secretary to the Treasury,” said Glen. “In the simplest terms, leaving the EU means that the UK can now tailor the prudential regulation of insurers to our unique circumstances.

“Put even more bluntly, regulation developed to reconcile insurance markets for 28 different countries in the European Union never worked well for us. Now we’re outside the EU, this Government is determined to fix that.”

He added: “We have a genuine opportunity, to maintain and grow an innovative and vibrant insurance sector, while protecting policyholders and ensuring the safety and soundness of firms and making it easier for insurance firms to use long-term capital to unlock growth, something the Prime Minister and Chancellor have rightly been outspoken about.”

“I am delighted, tonight, to be able to tell you more about those reforms and how we will make them a reality, thereby, we believe, supercharging the opportunities available to this, your industry, in this country,” Glen added. “The headline ambition is as follows: to replace what is an EU-focused, rules-driven, inflexible and burdensome body of regulation, with one that is UK-focused, agile and easily adaptable. A body of regulation which facilitates, not hinders, market developments, which encourages the emergence of new types of assets, which supports the entry of new and innovative firms and which, importantly, allows the release of meaningful amounts of capital for productive investment.

“There is a real opportunity to unleash what he described as ‘the benefits of Brexit and ensure that businesses can spend more of their money investing, innovating and creating jobs.’

“Our new Brexit Freedoms Bill will end the special status of EU law in our legal framework and ensure that we can more easily amend or remove outdated EU law in future. And the Treasury is developing specific proposals in relation to financial services through the Future Regulatory Framework Review.”

Glen said he was able to say what these changes will mean in practice for life insurers.

“Well, firstly, they will involve a substantial reduction in the risk margin, including a cut of around 60-70% for long-term life insurers.

“Secondly, there will be a reassessment of the fundamental spread used to calculate the matching adjustment, in order to better reflect its sensitivity to credit risk.

“Thirdly, we will introduce a significant increase in flexibility to allow more investment in long-term assets such as infrastructure, the hardware which makes economic growth possible.

“And, fourthly, we want a major cut in the EU-derived regulations which make up the current reporting and administrative burden.”

He added: “There’s work still to be done to fully estimate the impact of these reforms. But I expect there to be a material capital release, possibly as much as 10% or even 15% of the capital currently held by life insurers, allowing them to put tens of billions of pounds into long-term productive assets, with multiple benefits country-wide.”

However, Willem Loots, senior director in Fitch Ratings’ Insurance team said that insurers are unlikely to undertake a rapid reduction in its reserving.

“UK life insurers are likely to maintain strong capital commensurate with their ratings despite government proposals to reduce capital requirements under post-Brexit reforms of Solvency II,” he explained. “The high-level plans implied a capital release of more than £10 billion, which could incentivise insurers to invest more in long-term assets, such as infrastructure, to boost the economy.

“We expect insurers would deploy some of the capital, accordingly, seeking higher returns. But we believe they would stay within their risk appetites and avoid depleting capital to the point where it threatened ratings. Most of the insurers have strong capital headroom in their ratings.”

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