Proposed changes to Solvency II up for consultation include removing the external audit requirement for smaller insurers

Smaller insurance firms could more than halve their costs on auditing under new Solvency II amendments put forward by the Prudential Regulation Authority.

The changes, which are up for consultation, would mean up to 150 smaller insurers would no longer have to go through an external audit under new Solvency II amendments. Consultation documents showed that the past two years of auditing these smaller firms had a disproportionate effect on them.

The costs were found to be higher for smaller firms than previously estimated in 2015, and made up a higher proportion of GWP than in larger firms.

The documents stated that after two years of external audit the benefits within these firms had been largely realised, although for larger firms it continued to serve as a “valuable source of assurance”.

Views of stakeholders, such as audit firms, investors, insurers and insurance trade bodies were all sought. The ABI were among those who had called on the PRA to make the amendment.

Steven Findlay, Assistant Director and Head of Prudential Regulation at the ABI said: “The PRA’s external audit requirement led to a significant increase in the audit costs for smaller firms – more than 2.5 times higher than they had been before Solvency II. The removal of the requirement for these firms is both proportionate and pragmatic.” 

A separate consultation is also being held on a proposal to allow internal model firms that include the use a dynamic volatility adjustment when calculating their solvency capital requirement.

Mr Findlay added: “It is encouraging to see these draft proposals from the PRA. We have called for both the changes proposed, and will be responding to each consultation.

“The use of a dynamic volatility adjustment is permitted in many other parts of the EU, so this change in approach by the PRA will now put UK insurers on a more level playing field.”

Consultation on both proposals ends on 11 July this year, with a view to implementing the changes to external audits for smaller firms from November.