5 December 2016 Insurance

UK deviation from Solvency II could adversely impact ratings

The UK regulatory should be wary of deviating too far from Solvency II in the way it regulates UK insurers, despite having the potential flexibility to do so following its exit from the European Union, S&P Global Ratings has warned.

The rating agency has made an official response to the findings of an inquiry into Solvency II by the Treasury Select Committee designed to assess options for UK insurers.

Some firms have suggested that the exit from the EU may offer the UK an opportunity to adapt Solvency II rules to better suit the needs of the country's re/insurers. Willis Towers Watson, for example, has recommended a number of key amendments to reduce the complexity and cost of Solvency II without losing its overarching benefits (click  here).

S&P Global Ratings acknowledges that the Prudential Regulatory Authority (PRA) would have increased flexibility to develop its own regulatory regime independent of Solvency II and to construct a solvency regime that more appropriately reflects the risk profiles of UK insurers.

But it has stressed the risks that would be associated with such a move.

“We believe that any significant deviation from Solvency II could put the UK's equivalence with Solvency II at risk. This would present a problem for UK-based insurers with operations in the EU as they may be required to implement the Standard Formula (SF) or develop an IM for use in their European operations,” the rating agency said.

“This could lead to higher capital requirements or additional operational and expense burdens that might make these subsidiaries uncompetitive in the EU. In addition, although we consider this unlikely given our positive view of the PRA's regulatory framework and track record, any development in the UK's solvency framework that was believed to be a significant departure from economic principles, or weakening of ERM and disclosure requirements could lead us to reassess our opinion of the UK's institutional framework or IICRA (insurance industry country risk assessment).

“This could have an adverse impact on the ratings of UK-based insurers.”

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