The government pledged to "slash red tape lingering from the EU".
The government has set out its final reform package for the regulation of insurance companies in the UK following its consultation on the review of Solvency II.
In its consultation response, published by HM Treasury today (17 November), the government said it would introduce a "simpler, clearer, and much more tailored regime".
In particular, it said it would cut the required risk margin significantly, with a 65% cut for long-term life insurance business.
It said it would also increase investment flexibility by overhauling eligibility rules for the matching adjustments.
And the government pledged to "slash red tape lingering from the EU", which it said imposes "unnecessary burdens on firms, restricting innovation in our vibrant market".
The government said it had decided not to take forward the Prudential Regulation Authority's (PRA) proposals for reform of the so-called "fundamental spread" and would maintain the existing methodology and calibration, while allowing for the use of notched ratings, for example, different allowances for assets rated AA+ or AA- compared with AA.
The government's response said: "[This package of measures] will enable insurers to invest tens of billions of pounds in long-term productive assets and will help to spur an internationally competitive insurance sector, while retaining high standards of policyholder protection."
The government noted the most challenging element of the debate had been about the matching adjustment - including its eligibility requirements and the fundamental spread component.
It said that, having considered a wide variety of different views, it has concluded that the eligibility requirements for the matching adjustment should be broadened to allow the inclusion of assets with highly predictable cashflows, subject to a number of safeguards which the PRA will implement.
Reaction
Aviva group chief executive Amanda Blanc said the reforms were "a very welcome boost for UK investment".
She said: "We estimate reforms to Solvency II will allow Aviva to invest at least £25bn over the next ten years across the UK, including in critical areas such as social housing, schools, hospitals and green energy projects."
Phoenix Group chief executive Andy Briggs agreed: "The proposed reforms to Solvency II announced today present a very significant opportunity to ensure more private sector capital can be directed by insurers into the real economy and ensure we better mobilise the UK's £3.4trn of pension wealth.
"These regulations are an important component of the changes needed to the wider UK investment landscape which will enable Phoenix to meet its ambition to invest more in the future. Phoenix plans to invest £40-50bn in illiquid assets and sustainable investments over the next five years to support house building, green energy, and local communities across the country without compromising policyholder protection in any way."
The consultation
The government originally published its Solvency II consultation on 28 April 2022, a consultation which closed on 21 July 2022.
It sought views on the following proposals:
- releasing capital by changing the calculation of the risk margin and cutting the risk margin substantially, including by 60-70% for long-term life insurers in recent economic conditions;
- reforming the fundamental spread of the matching adjustment
- unblocking long-term productive investment by making it easier to include a wider range of assets in matching adjustment portfolios
- reforming reporting and administrative requirements to reduce EU-derived burdens.
In total, the consultation received 67 responses. These included responses from life insurers, general insurers, and composite insurers, as well as consultancies, industry groups, and members of the public.
