Brexit may offer opportunity for UK to reduce cost and complexity of Solvency II
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.
In response to the UK Treasury Select Committee inquiry into Solvency II, Willis Towers Watson, a broker, has recommended a number of key amendments to reduce the complexity and cost of Solvency II without losing its overarching benefits.
Among the changes suggested by the broker are an improvement of the risk margin, a review of the Solvency II standard formula capital approach and a reduction of the asset and liability matching adjustment eligibility restrictions.
“Solvency II has led to certain life products having much higher capital requirements than might reasonably be considered necessary, reducing the viability of providing those products to consumers,” said Kamran Foroughi, director at Willis Towers Watson.
“There is a risk that, in future, consumers will lose out due to a reduction in the range of products,” he noted.
The UK Treasury Committee has launched an inquiry into EU Insurance Regulation in September.
At that time, the chairman of the Treasury Committee, Andrew Tyrie, said that "Brexit provides an opportunity for the UK to assume greater control of insurance regulation. He added that among the manifest shortcomings of the Jan. 1 introduced Solvency II regime was the failure to secure value for money over its implementation.
The Treasury Committee will take a look at the Brexit inheritance on insurance to see what improvements can be made in the interests of the consumer." The inquiry is therefore an opportunity to “take a look at the Brexit inheritance on insurance to see what improvements can be made in the interests of the consumer."
A number of the technical decisions underlying the measurement of the Solvency II balance sheet could be improved for UK life insurers, according to Willis Towers Watson.
One suggestion is to reduce asset and liability matching adjustment eligibility restrictions, and for business falling outside the matching adjustment, remove or reduce the focus on the swap market as the primary determinant of the risk-free rate.
Another helpful move could be to improve the risk margin. The current Solvency II risk margin is unrealistic and overly penal for certain products, affecting customer value for money and asset-liability matching, according to Willis Towers Watson.
Furthermore, Willis Towers Watson proposes a review of the Solvency II standard formula capital approach in order to make it a better fit for the UK insurance industry.
“The default standard formula capital requirement used under Solvency II was calibrated many years ago and designed for the EU insurance industry as a whole”, said Foroughi.
“With a few simplifications where possible and an improved calibration of risk, many UK insurers would no longer need internal models. For those that wish to develop and maintain internal models, we recommend a more streamlined approval process. These measures would help reduce the compliance costs of the regulatory regime.”
Willis Towers Watson also noted that certain information and requirements of the Pillar 3 asset reporting requirements are extremely and unnecessarily onerous for insurers, especially those relating to asset data. In response, Willis Towers Watson suggests a joint industry/regulatory working group review of the requirements to ensure data is not collected simply because a use might be found for it in the future.
