Post-Brexit solvency reforms could ‘trigger capital release’

The UK government’s post-Brexit proposal to amend the EU’s Solvency II insurance capital rules could “trigger some capital releases” from UK insurers,  Moody’s has said.

In a report, published by  Moody’s Investors Service, analysts said the regulatory changes were intended to revise insurance capital rules so that they better reflect UK insurers’ risk profiles.

Moody’s also said that UK insurers’ solvency will remain robust if the Solvency II reforms, championed by the UK Treasury, go ahead. The reforms are subject to consultation until 21 July 2022.

Moody’s said any insurers releasing capital in the event of reforms would be likely to return it to shareholders or use it to take on more risk.

“Both options would reduce total capitalisation, a credit negative. However, we expect the overall impact for many groups to be modest,” the report said. “Moreover, the solvency of insurers that do release capital will remain strong, as their remaining capital will be more closely calibrated to the risks they bear.”

Analysts added that in their current form, the proposals would reduce UK insurers’ ‘risk margin’, which is a layer of capital designed to fund the transfer of liabilities if the insurer fails, allowing for a capital release. The report found that this reduction would be partly

offset by changes to the ‘matching adjustment’ (MA) calculation.

“The MA allows insurers to apply a higher discount rate to their liabilities, with a corresponding reduction in their capital requirement. According to the UK regulator, these reforms could allow insurers to release as much as 15 percent of their capital,” the  Moody’s report said.

However, the report’s authors said: “We expect the overall capital impact to be relatively modest, and potentially neutral for insurers that are significant MA beneficiaries, such as annuity specialists. The redeployment of released capital towards new business opportunities, including investments in illiquid assets, is credit negative.

“But the reforms will ensure that insurers’ remaining capital is more closely matched to their risk profiles, and therefore resilient in a range of scenarios. Channelling capital into new business should also strengthen insurers' future capital generation capacity.”

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