Solvency II UK: MA change ‘would have negatively impacted’ Treasury’s other objectives
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The Government Actuary has defended the Treasury’s decision to keep the Solvency II matching adjustment largely unchanged following publication of the government’s final approach to reforms of the insurance capital regime on 17 November.
The Prudential Regulation Authority had raised concerns over the fundamental spread, a key component of the matching adjustment, and recommended changing its design and calibration - only to be ignored by the Treasury.
However, the government said the fundamental spread approach will be more sensitive due to different notched allowances to be made within major credit ratings.
The Government Actuary’s Department formally advised the Treasury on the review’s latter stages and was involved in “exploring and balancing” the views of the regulator and industry respondents to proposed changes to the matching adjustment.
GAD said: “The proposed changes were intended to improve policyholder protection but would have negatively impacted HM Treasury’s other objectives for the review.”
The department explained this would have been due to “increased capital requirements for life insurers, increased volatility of life insurers’ financial positions and other perceived negative consequences”.
According to GAD, the matching adjustment allows life insurers, who match their long-term liabilities with eligible long-term assets, to hold less capital against future liabilities.
“Less capital is required to be held since insurers that match their asset and liability cashflows are less exposed to liquidity risk,” GAD said.
What are the Treasury’s objectives?
During the government’s consultation of Solvency II UK, which closed in July, the Treasury weighed the impacts on its objectives for the review:
· to spur a vibrant, innovative, and internationally competitive insurance sector;
· to protect policyholders and ensure the safety and soundness of firms; and
· to support insurance firms to provide long-term capital to support growth.
One major decision cheered by insurers was to lower the Solvency II risk margin - a capital buffer that insurers must hold – by 65% for life insurers and 30% for general insurers. This is because the government is keen to allow insurers to invest in productive assets with the aim of boosting the UK economy.
This comes as chancellor of the exchequer Jeremy Hunt on Friday unveiled the so-called 'Edinburgh Reforms' of financial services to “unlock investment and turbocharge growth in towns and cities across the UK”.
Speaking in Edinburgh on Friday, Hunt said: “The government set out its plans to reform Solvency II at Autumn Statement, unlocking more than £100bn for UK insurers to invest in long-term productive assets.”
The chancellor has also issued new remit letters to the Financial Conduct Authority and PRA emphasising the new secondary competitiveness objectives. Regulators will have a duty to facilitate, subject to aligning with relevant international standards, the international competitiveness of the UK economy and its growth in the medium to long term.
Various stakeholders are backing the Edinburgh Reforms.
Various stakeholders are backing the Edinburgh Reforms.
Hannah Gurga, director general, Association of British Insurers, said the trade body supports the move to encourage economic growth and to promote the UK “as a place to invest and innovate”.
Chris Cummings, chief executive officer of the Investment Association, stated that competitiveness should be a focal point for the FCA and the PRA.
He said: “It is essential that the FCA and PRA hone their focus on competitiveness and economic growth if the UK is to retain its position as the preeminent international financial centre and continue to attract high levels of investment."
Stephen Bird, CEO of asset manager abrdn, acknowledged the importance of regulation as a protection for all but added: “It has to be simpler and more thoughtfully designed to deliver the right outcomes with less bureaucracy.”
Do you agree with the government that regulators should facilitate the international competitiveness of the UK economy?
