UK plots major solvency reductions on path to ‘UK-focused’ post-Brexit regulatory regime

The UK can slash solvency risk margins and rejig credit risk measures to provide “a material capital release” for insurers under a UK-friendly post-Brexit solvency regime, then channel some of the gain into long-term investments, the UK's Economic Secretary to the Treasury John Glen (pictured) said in comments to an industry lobby.

“The headline ambition is as follows: to replace what is an EU-focused, rules-driven, inflexible and burdensome body of regulation… with one that is UK-focused, agile and easily adaptable," Glen told a dinner assembly of the Association of British Insurers (ABI) ahead of their annual conference.

Pending changes should support “an innovative and vibrant” insurance sector, continue to protect clients and yet “allows the release of meaningful amounts of capital for productive investment,” he said.

Glen sees a “substantial” reduction of the industry's risk margin, including some 60-70% for long-term life insurers and believes the larger body of reforms could allow release of as much as 10 to 15% of the capital currently held by life insurers, he told delegates to the convention.

The current risk margin “exceeds the level needed to properly protect policyholders, especially considering how the risk margin has increased as interest rates fell, whilst the fundamental risk drivers were unchanged”. With luck, the industry will cut back on its need to place reinsurance of longevity risk abroad, he said.

The eventual capital release can put “tens of billions of pounds into long-term productive assets, with multiple benefits country-wide”. Increased flexibility can be put into investment rules to channel more money to such long-term assets, he indicated.

Prudential requirements around credit risk will also be tweaked to remove rigidities, he indicated. “The reforms we want to make will help ensure that credit risk is better measured in the fundamental spread … so that its level, and sensitivity, genuinely reflect an asset’s credit risk,” Glen said.

Unspecified reporting and administrative requirements inherited from the EU can further be round-filed, he noted.

The government of Prime Minister Boris Johnson intends to put forward a draft for consultation in April, Glen indicated.

“Leaving the EU means that the UK can now tailor the prudential regulation of insurers to our unique circumstances,” Glen told ABI representatives. “Regulation developed to reconcile insurance markets for 28 different countries in the European Union never worked well for us.”

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