Rishi Sunak, UK Chancellor, has launched a consultation on radically changing the rules governing insurance companies, with the aim of allowing them to invest tens of billions of pounds more in infrastructure, including green energy.
The government argues that the reform of the EU’s Solvency II rules, and their replacement with a British regulatory regime, could trigger what Boris Johnson has called an “investment big bang”.
The industry has eagerly awaited the Treasury’s plans to change the Solvency II regime as the first major break between UK and EU financial rules since Brexit.
The consultation on the new regime, announced before markets opened on Thursday morning, is aimed at making it easier for insurers to invest in long-term illiquid assets such as offshore wind projects.
Solvency II, a 1,000-page EU piece of legislation, has long been considered by UK insurance companies to be too onerous. An industry report claimed they would have an additional £95bn to invest if the rules were relaxed.
But the prospect of watering down the scheme has raised warnings that it could create risks for policyholders.
The first big proposed adjustment would mean easing capital requirements, allowing life insurers to reallocate up to 15 percent of what they currently set aside by reducing so-called risk margin.
The second would be to reform what is known as the “matching adjustment” to allow more money to go to long-term projects such as offshore wind power.
The third reform is intended to reduce reporting and other administrative burdens for businesses.
City Minister John Glen said the reforms could unlock tens of billions of pounds for long-term investment.
“I am confident that these reforms will help maintain and grow the insurance industry while ensuring a very high level of protection for policyholders and the safety and soundness of UK insurers,” he said.
The Prudential Regulation Authority said that while the reforms “would imply an increase in the insurer’s risk of bankruptcy compared to the current position”, capital requirements could be eased “while continuing to ensure that the UK regime provides a adequate level of safety and solidity”. .
The PRA said a combination of reforms including further changes to the correspondence adjustment, which reduces insurers’ long-term liabilities, to better reflect credit risks would ensure the overall package was “within the risk appetite of the company.” PRA and should continue to advance its legal goals.” objectives”.
But consumer activists have warned that reforms to Solvency II could be detrimental to policyholders. In February, Mick McAteer, a former UK regulator who is now co-director of the Center for Financial Inclusion think tank, warned that the reform could weaken consumer protections while providing a windfall for shareholders.
In September, Brussels unveiled its own proposals to change Solvency II, which it said would create a short-term capital boost of up to €90 billion for European insurers and allow them to invest more in long-term investments.
This sparked concerns in Whitehall that the EU was moving faster than the UK. The Association of British Insurers, a trade body, warned last year of the risk that the reforms could prove a “Brexit penalty” rather than a “Brexit dividend” if they fell short.
Life insurers, which are expected to benefit most from the rule changes, have promised to invest billions more in long-term assets in the UK if the reforms are implemented.
In December, the FTSE 100 life insurer Phoenix Group urged ministers to relax solvency rules to help it free up up to £50bn in investment to revive the economy, boost infrastructure and deliver on climate change promises.
Phoenix, which has £300bn in assets under management and 13m clients, said that with the right policy and regulatory changes, it could invest up to £40bn to £50bn in sustainable, illiquid assets. to speed up the government’s “catch-up” plans to revitalize poorer regions and its efforts to decarbonize the economy.
Life insurers use liability compensation to make sure they don’t run out of money to pay pensioners. But under EU Solvency II rules, they are penalized for using certain illiquid assets in match-match portfolios because they are considered too risky.
Reference-www.ft.com