A number of senior insurance executives have spoken out against Solvency II and are calling for the regime to be eased. But, for risk managers, many of whom have spent months working on this onerous project, is there any likelihood of this and is it even desirable?
Speaking earlier this year, Sean McGovern, head of regulatory and government affairs at insurer XL Catlin, said: “There are lots of good things about Solvency II, but what started out as principles based and market driven got overtaken by the financial crisis and ended up more rules based.
I don’t think anyone is happy with where it ended up. There are 3,000 pages of rules. What we need to do with the PRA and the European commission is to work out what adds value and what does not.”
Meanwhile, senior figures for insurers such as Legal & General and Prudential also spoke at Treasury Select Committee hearings to criticise Solvency II and blamed it for potentially sending insurance business abroad.
Changes the ABI is seeking
The ABI director of regulation, Hugh Savill, said: “Solvency II has been part of the UK regulatory landscape and on UK insurers’ radars for almost a decade. Dismantling this regulation so soon after implementation means considerable time and money spent would have been wasted.”
However, the ABI wants to make the following changes on behalf of UK insurers:
- Risk margin: Its size and sensitivity to interest rate movements are higher than expected and reflect unintended consequences of its design. This makes the writing of new business, in particular annuities unattractive for insurers, and makes these products more expensive.
- Removing barriers to long-term investments: Solvency II should be reviewed to better enable the insurers’ role as long-term investors, ensuring there are not regulatory barriers to the industry’s ability to invest in socially useful projects, such as infrastructure.
- Reporting requirements: Solvency II reporting requirements are excessive and should be reduced, to minimise excessive reporting costs, which are disproportionately high for smaller insurers.
However, because of the General Election, the Select Committee has been disbanded and any government intervention is setto be some way off. Further, while the Prudential Regulatory Authority (PRA) has said it will look at ways to reduce reporting burdens, its overall view is that Solvency II is ‘fundamentally sensible.’
And according to David Rule, the Bank of England’s executive director for insurance supervision, “Solvency II is “broadly . . . working well, with only a few notable exceptions, such as the excessive sensitivity of the risk margin to interest rates”.
No matter how much insurer lobbying, it is regulators who call the tune and without government driving through change, Solvency II appears unlikely to be repealed any time soon.
According to Jacqueline Fenech, director with consultants Protiviti, Solvency II is “fast becoming an international insurance regulatory standard, with regulatory authorities outside the EU, for example the Monetary Authority of Singapore among a number of others, implementing Solvency II-type rules within their jurisdictions. As a result, Solvency II is not just an EU regime but, increasingly, a global one.”
She adds it would be “reckless” for UK insurers to walk away from Solvency II as it could have a negative impact on competitiveness and reputation. And she concluded that even if Solvency II were repealed, she believed it would be replaced by rules that have strong similarities.
With Brexit negotiations underway, pulling out of Solvency II may well be seen as a bridge too far. The UK’s insurance sector remains one of our most important assets and access remains a critical issue. Severing ties may well unsettle markets and while it looks possible the PRA may make some minor concessions, after 10 years and £3 billion spent on this regulation, it looks as though risk managers will continue to work within the confines of Solvency II.