Industry experts chime in on the advantages and risks of Solvency II reform

WE ASKED: “What are the opportunities and risks of the government’s planned reform of the Solvency II regime for general insurers?”

Huw Evans, partner, KPMG

I remain positive about the potential for Solvency II reform to improve UK general insurance regulation for the better.

Huw Evans KPMG

Huw Evans

The proposed changes that benefit general insurers are less controversial than on the life insurance side and cover a wider range of issues – risk margin, reporting and testing and branch capital requirements.

On the issue of risk margin, the overall reduction of 30% with a 65% reduction for periodic payment order (PPO) books will release capital unnecessarily used for reserving and support investment and international competitiveness.

On reporting, the Prudential Regulation Authority’s (PRA) plans to simplify reporting templates and reduce the volume of reports required are welcome, as are moves to remove many of the current tests required for internal models.

For international firms, the plan to remove branch capital requirements for insurers with well-capitalised and adequately supervised parent companies is important and sends a positive message about the UK’s desire to attract expertise and investment to the UK.

A note of caution – how these reforms are implemented will be finalised over the next 18 months, so the proof points remain in the future.

I also expect day-to-day regulatory supervision of major insurers to increase given the wider challenges in the market. Overall, however, Solvency II reform should be a positive.

Adam Winslow, chief executive for UK and Ireland general insurance, Aviva

Solvency II reform will mean our industry investing more than £100bn over the next ten years into the infrastructure and growth assets that this country needs.

Adam Winslow

Adam Winslow

At Aviva, we have committed to invest £25bn over the next ten years in these sort of projects.

The impact of planned Solvency II reform on general insurance is less significant than it is for life insurance, but the reforms are nonetheless very welcome and address the right areas for our sector.

For example, the targeted 30% risk margin reduction for general insurers is very welcome – this will remove the artificially high levels of required risk reserving in the original Solvency II agreement and related volatility.

Additionally, the intended reduction in reporting burden and streamlining of the approval requirements for firms’ internal models is also welcome – it will make the processes more efficient.

Overall, these reforms will free up resources that could be better used to serve our customers and remove unnecessary costs.

David Otudeko, assistant director and head of prudential regulation, ABI

The Treasury’s Solvency II reform package was widely welcomed by industry.

David Otudeko ABI

David Otudeko

While much of the debate centred around the fundamental spread used in the calculation of the matching adjustment – which applies to life insurers – general insurers are also set to benefit from reform.

It is worth highlighting that for health insurers, matching adjustment eligibility requirements for liabilities will be extended to include those that include morbidity risk, such as income protection products, making it possible for this group of insurers to benefit from this mechanism.

The risk margin’s existing cost of capital calculation methodology will be retained – although we expect the introduction of a time dependent parameter – coupled with a 65% reduction for long term life insurance business, including periodic payment orders and a 30% reduction for general insurers.

The PRA is consulting on reforms to regulatory reporting – reform here could be much more ambitious to fully embrace this opportunity to tailor reporting requirements for what is needed by the PRA to effectively supervise firms.

For general insurers with internal models, proposals to streamline the requirements for Solvency II internal model approvals were also announced.

These proposals must now be implemented meaningfully for industry to fully realise their benefits and to ensure that the government’s original reform objectives on competitiveness, policyholder protection and boosting investment are met.