The UK government will need to ‘encourage’ or ‘incentivise’ firms to invest more capital if it decides to relax regulations, says senior insurance analyst
Current solvency capital requirements for UK insurers are not restricting further investment from the sector’s major players, data analytics and consulting firm GlobalData has revaled.
GlobalData’s Solvency II database showed that leading general insurance firms currently operate with solvency ratios above what is legally required, meaning they could invest further capital into the economy while remaining within regulated limits if they wished.
While the current Solvency II financial regulations require insurers to hold a solvency capital requirement (SCR) ratio of at least 100%, five of the top 10 general insurers in the UK – Aviva, Axa, Allianz, AIG and Admiral – all operated with ratios of at least 145.7% in 2021.
A regulation requiring a SCR ratio of 100% means that insurers are required to hold eligible assets in reserve to the value of 100% of what they could be liable to lose over the next year.
GlobalData also found that only two of the 139 insurers covered in its database had solvency ratios between the existing 100% requirement and 110% last year, with the rest holding higher amounts of capital in reserve.
However, as part of the UK government’s mini-budget – revealed in September – the government could soon lower the required SCR level by 30% for general insurers in a move to free up capital for investment.
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GlobalData’s senior insurance analyst Ben Carey-Evans said: “Rules that allow [insurers] to invest even more of their capital are not an urgent requirement, as insurers could invest considerably more than they are at present if they wanted to.”
Since the mini-budget was announced in September, the UK government has changed both its chancellor and prime minister, so adjustments to the SCR ratio requirements may no longer be brought into law.
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If Solvency II is replaced or its capital requirements are relaxed in the UK, Carey-Evans said “there may still be some advantages” as “insurers will be allowed to take more risk”.
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He continued: “This could allow them to focus on more long-term investments, as well as more high-risk, high-profit options, since the further they are away from the limit, the more capital they can set aside for a number of years. This reduces the need for shorter-term and more risk-free investments.”
GlobalData noted that areas that insurers could invest in to provide a boost for the economy included long-term commercial real estate, renewable energy and infrastructure.
Carey-Evans added: “Overall, looking at the current data and how much of their capital insurers are willing to invest, the government simply lowering the SCR ratio requirement to below 100% is unlikely to have a significant impact.
“Most insurers are not close to the limit at present, so the government would need to encourage – and possibly incentivise – insurers to trigger the increased investment it is hoping for.”