This will help smaller firms entering the market
The new Solvency II consultation published today (28 April 2022) is seeking views on proposed reforms that would double the threshold at which the regulations apply to the UK insurance industry.
Solvency II is the regime which governs the prudential regulation of insurance firms in the UK. It was initially introduced in the UK in 2016 to harmonise insurance regulation in the European Union (EU) and is primarily concerned with the amount of capital that companies must hold to reduce the risk of insolvency.
It also sets out requirements for the governance and risk management of insurers and sets out disclosure and transparency requirements.
Proposed changes to Solvency II include an increase in the threshold at which firms must comply with the regulation – firms with a premium income less than €5m and technical provisions less than €25m would be exempted by de minimis criteria.
Technical provisions are calculated by adding liabilities to risk margin, itself calcuated according to financial rules.
The consultation stated: “Doubling the thresholds for the size and complexity of insurers before the Solvency II regime applies should enable more of the smallest firms to enter the market under the less burdensome non-directive regulatory regime. It should enable existing small firms to reach a greater scale before needing to meet Solvency II requirements. As a result, competition should increase.
“Firms will continue to have the option to opt into Solvency II even if they are below the threshold for its application.”
This consultation provides further detail on the reforms that were previously announced on 21 February by the Economic Treasury of State.
The evidence and responses it generates will then inform the design of the final reform package.
The latest review is underpinned by three objectives:
- To spur a vibrant, innovative and internationally competitive insurance sector
- To protect policyholders and ensure the safety and soundness of firms
- To support insurance firms to provide long-term capital to support growth, including investment in infrastructure, venture capital and growth equity, and other long-term productive assets, as well as investment consistent with the government’s climate change objectives.
Speaking about these reforms, Matthew Francis, insurance director at KPMG UK, said they “present a once-in-a-generation opportunity to construct a regulatory regime which is better tailored to the UK insurance market”.
Francis explained: “Insurers will also want to consider how they can deploy released capital and how to utilise their balance sheets. These reforms could affect the types and pricing of the insurance products that they offer as well as the types of assets that they hold in their investment portfolios.
“Whatever the final calibration of these reforms, this will be the biggest set of changes for a decade and firms and boards will want to be confident that they have got them right.”
Thomas Lockley, a financial services Partner at law firm CMS, said: “These proposals follow the themes previously voiced by insurance market stakeholders, that reforms in these areas were needed but insurance regulation is complex and there are different priorities for the Government and the PRA.
“The challenge in making changes to the levers that drive insurer capital requirements is to encourage appropriate allocation and investment of capital, without capital leaving the system to the detriment of policyholder protection.”