Solvency II is Still a Drag on Investment, Says ABI

The latest from the ABI;

The insurance and long-term savings industry has today submitted its response to the Government’s consultation on Solvency II, the insurance and long-term savings industry’s prudential regulatory regime, setting out how the current reform proposals would not realise the opportunity to release more capital for investment.

A key Government objective in reforming Solvency II includes the ambition to support insurance firms to “provide long-term capital to support growth, including investment in infrastructure.” Reform of Solvency II is a significant opportunity to tailor regulation to the specific needs of the UK. If we get reform right, it will benefit customers – upholding the highest levels of global standards to protect them – supporting the levelling up of our economy and boosting the transition to a greener UK.

Our own analysis, and that of independent technical experts, indicates the current proposals would not achieve the suggested release of 10 to 15% of capital for re-investment. Life insurance firms would have to hold more capital than currently required, preventing them from being able to provide the funds that are needed for investment across the UK. Increases in capital are also not costless. Rather they are paid for by customers through lower returns and by society through less investment in productive assets.

Changes to Solvency II would allow more insurers to invest in UK infrastructure like affordable housing for example.

We welcome many of the changes already proposed. Risk Margin reform and broadening the eligibility of liabilities and assets to benefit from the Matching Adjustment will widen the portfolio of projects that insurers can invest in. This will increase UK investment in much needed areas whilst also allowing more diverse investment portfolios which ultimately improve policyholder protection. However, any positive benefits will be more than offset by the adverse consequences of the proposed reforms to the Fundamental Spread.

We have listened carefully to the Prudential Regulation Authority on the crucial issue of the calculation of the Matching Adjustment. However, the burden of proof for reform which could increase regulatory capital requirements and operational complexity but reduce capital resources would need to be extremely strong, and we have seen no evidence that would justify taking such measures.

We remain committed to working with HM Treasury and the PRA to develop a final set of proposals that meets all of our objectives and enables the UK to seize this unique opportunity for the benefit of the UK economy, the environment and customers.

Hannah Gurga, ABI Director General, says: “We all want to see reform of the Solvency II regime that works best for the needs of the UK and enables investment at a crucial time.

“The insurance and long-term savings industry could invest more capital to help level up the UK, boost the economy and support the transition to Net Zero. The current proposals do not realise that opportunity and would risk penalising pension customers as a result of the increased costs associated with the proposed reforms. We are committed to working with the Government and the PRA to find a solution that meets all of our objectives.”

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