Are the two largest pieces of regulation for the insurance industry today pulling in opposite directions?

By Yiannis Kotoulas

Consumer Duty and Solvency II are the twin pillars of regulation for the insurance sector currently.

The government’s Solvency II proposals, though yet to be finalised, would loosen financial restrictions on insurers by allowing them to hold less capital in reserve and represent a relaxing of regulations.

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Yiannis Kotoulas

On the other hand, the FCA’s Consumer Duty regulation, which is due to come into force for financial services companies in the UK from 31 July 2023, represents significant extra regulation for firms operating in the general insurance market and has created considerable extra work where reporting is concerned.

These two pieces of major regulation do seem to be pulling in opposite directions – but is this really the case?

The appearance of a tension between them is certainly there, but Consumer Duty and Solvency II largely target different areas.

Speaking to Insurance Times, HFW partner and insurance specialist Will Reddie said: ”You can deregulate solvency related requirements while increasing consumer protection.

“I don’t know that they are directly in contrast – perhaps at a high level in terms of objectives they could be conflicting, but the real meat of what’s there shouldn’t be in conflict, because one is very specifically about consumers, whereas Solvency II reforms are going to be focused at the higher level around capital that’s held.” 

Origins of regulation 

The different targets of these two pieces of regulation present separate areas of focus – while insurers operating in the UK will have to comply with both sets of regulation, insurance brokers will not have to contend with Solvency II reforms, for example. 

But just because the impacts of the regulation are not at odds, this does not mean that the tension between their intentions falls away. 

Consumer Duty represents the regulator’s ambition to – as the name may suggest to the eagle-eyed among you – stick up for the consumer.

Without making a value judgement of the new requirements, the genesis of the idea has been entirely regulator-driven. 

This presents advantages and disadvantages. Because of the lack of public or poltical scrutiny, Consumer Duty does not need to consider the reaction of the public and their general aversion to increased regulation. 

Meanwhile, reforms to the solvency regime in the UK have been driven almost entirely by the UK’s political sector and thus have been drafted with a political play in mind. 

Following the UK’s withdrawl from the European Union, the government has made repeated mention of its intention to liberalise financial regulations in the City. 

Solvency II represents one vector of attack along these lines, with its intention to “spur a vibrant, innovative and internationally competitive insurance sector” and “support insurance firms to provide long-term capital to support growth”, according to the Treasury’s response to a consultation on the reforms.

While there is near-uniform agreement in the market on the laudable intentions of Consumer Duty, the necessity of solvency reform has been questioned in a market where the majority of insurers operate at solvency capital ratios way above the minimums they are required to hold. 

The political will for deregulation could even be dangerous, added Reddie.

”[The financial crisis of] 2008 was only 15 years ago and I’m really surprised that there is such a push to deregulate over the safety we had from increasing regulation and the benefit that it provides to ordinary people,” he said.

For all of the complaints the industry has about the regulator, it is worth remembering the advantages of being overseen by largely competent sector experts. 

Reddie added that, during a conversation with a colleague based in Europe, he was told that the perception of the UK’s regulators was that they were “knowledgeable about what they do and quite business-focused” in comparison to their continental counterparts.

With the deadline for Consumer Duty fast approaching amid a maelstrom of complaints about the FCA’s approach to implementation, maybe the sector should appreciate a silver lining – at least the politicans haven’t got involved. 

Well, not yet.