Treasury Select Committee calls for Solvency II revamp

The Treasury Select Committee (TSC) has questioned whether the PRA has the right skills to regulate the insurance industry after discovering a “disconcerting disconnect” between the views of the regulator and insurers over Solvency II.

As part of a wide-ranging report calling for changes to the UK implementation of Solvency II, published this morning, the TSC said the disconnect may indicate “a breakdown in effective communication” and has also called on the PRA and insurers to review their approach to working together.

Necessary skills

The TSC said in its report: “The Bank of England can rely on an immense depth of experience in banking regulation. The PRA needs to assess whether it has the skills necessary for effective insurance regulation, particularly at the most senior supervisory and policy levels.”

It added: “The Committee encourages the PRA, in carrying out this review, to consider the skills and experience of its Insurance Directorate to ensure there is a genuine ‘feel’ for the insurance industry.”

“The Committee also suggests that the PRA and industry develop a higher level of staff exchanges so that each can appreciate the objectives of the other.”

The report highlighted the gulf between the PRA and the insurance industry by noting that the PRA only agreed with five of the 23 suggestions the ABI made for improving Solvency II.

The TSC said the PRA and the insurance industry should review their approach to working together “in order that there can in future be a better and more productive dialogue on issues like Solvency II.

“Each side may have a different perspective, but there should be more common ground, and greater confidence in each other than the Committee detected during this inquiry.”

The TSC added that the PRA should set out how it intends to achieve this.

While calling the PRA’s insurance skills and relationship with the industry into question, the TSC also noted in its report that the PRA “is highly respected internationally as an insurance regulator, both by the industry that it regulates and by other regulators”.

Solvency II revamp

The TSC also made recommendations for overhauling the UK implementation of Solvency II. As well as making insurance a priority in Brexit negotiations, the TSC recommended that the PRA should look at giving its competition remit equal weighting to its solvency objective.

The TSC report said: “While the PRA and a minority of industry voices argued in favour of the status quo, many respondents advocated a primary competition objective for the PRA to carry as much weight as its solvency objective. The Committee agrees.”

It added: “Competition was rightly subordinated to systemic risk in banking, but these circumstances do not apply in insurance.”