On April 28th HM Treasury (HMT) published the consultation stage of their Solvency II review. The consultation intends to capitalise on post-Brexit reforms by simplifying the EU regulatory framework, in order to enable insurance firms to provide long-term capital to support growth.

HMT is seeking respondents from authorised UK insurance firms within the scope of Solvency II, any insurance firm intending to operate or provide services in the UK and views from the wider financial sector.

The consultation clarifies key details of the reform, with proposals including:

• A substantial reduction in the risk margin for long-term life insurers, including a cut of around 60-70%, and consulting on the appropriate level for general insurers.
• A more sensitive treatment of credit risk in the matching adjustment. The matching adjustment provides incentives for insurers to issue long-term life insurance products by ‘matching’ them against assets with similar characteristics, helping to increase the availability of this type of product on the UK market.
• A significant increase in flexibility to allow insurers to invest in long-term assets such as infrastructure.
• A meaningful reduction in the current reporting and administrative burden on firms, removing EU bureaucracy including by doubling the thresholds for the size of insurers before the Solvency II regime applies.
• Deliver further reforms to EU derived legislation, which will increase access to the market for new insurers and offer greater consumer choice. For instance, the government will introduce a new mobilisation regime to encourage new insurers into the market to boost competition, drive growth and create jobs.

The response period to the consultation is a 12-week period closing on 21 July 2022 and responses should be submitted to [email protected].

In response to HMT’s publication, the Prudential Regulation Authority (PRA) published their update on the consultation, as well as a discussion paper on potential reforms to risk margins and matching adjustment. The PRA is also seeking market feedback closing on 21 July 2022 and responses should be submitted to [email protected].

For further information please contact Nicholas Smith ([email protected])