UK launches post-Brexit overhaul of insurance rules

Rishi Sunak, UK Chancellor, has launched a consultation to radically change the rules governing insurance companies, with the aim of allowing them to invest tens of billions of extra pounds in infrastructure, including green energy.

The government argues that reforming the EU’s Solvency II rules – and replacing them with a UK regulatory regime – could trigger what Boris Johnson has called an “investment big bang”.

The consultation on the new regime, announced before markets open on Thursday morning, aims to make it easier for insurers to invest in long-term illiquid assets, such as offshore wind projects.

Solvency II, a 1,000-page EU law, has long been considered too cumbersome by UK insurance companies. An industry report claimed they would have an extra £95billion to invest if the rules were relaxed.

The first big adjustment would mean a relaxation of capital requirements, allowing life insurers to redeploy up to 15% of what they currently set aside by reducing the so-called risk margin.

The second would be to reform the so-called “corresponding adjustment” to allow more money to be spent on long-term projects, such as offshore wind.

The third reform aims to reduce reporting obligations and other administrative burdens on businesses.

City Minister John Glen said the reforms could unlock tens of billions of pounds for long-term investment.

“I am confident that these reforms will help maintain and grow the insurance industry while ensuring both a very high level of protection for policyholders and the safety and soundness of UK insurers,” he said. .

The Prudential Regulation Authority said that although the reforms “would involve an increase in the risk of default by the insurer compared to the current situation”, capital requirements could be relaxed “while still ensuring that the UK scheme provides a appropriate level of security and soundness”.

The prospect of relaxing the regime, welcomed by the industry, has been controversial in some quarters. In February, Mick McAteer, a former board member of the Financial Conduct Authority, warned that the reform could weaken consumer protections while providing a boon to shareholders.

Treasury plans to change the Solvency II regime were eagerly awaited as the first major break between sets of financial rules since Brexit, heralded by senior politicians as an opportunity to make UK businesses more competitive.

In September, Brussels unveiled its own proposals to modify Solvency II, which it said would bring a short-term capital increase of up to €90 billion to European insurers and allow them to invest more in long-term investments. term.

This sparked concerns in Whitehall that the EU was advancing faster than the UK. The Association of British Insurers, a trade body, warned last year that the reforms could turn out to be a “Brexit penalty” rather than a “Brexit dividend” if they fail.

Life insurers, who stand to benefit the most from the rule changes, have pledged to invest billions more in long-term UK assets if the reforms are implemented.

In December, FTSE 100 life insurer Phoenix Group urged ministers to ease solvency rules to help it unlock up to £50bn of investment to revive the economy, boost infrastructure and meet climate change commitments.

Phoenix, which has £300 billion in assets under management and 13 million clients, said that with the right regulatory and policy changes it could invest up to £40-50 billion in illiquid assets and to accelerate the government’s “levelling” plans for the revitalization of the poorest regions and its efforts to decarbonize the economy.

Life insurers use liability matching to ensure they don’t run out of money to pay retirees. But under EU Solvency II rules, they are penalized for using certain illiquid assets in so-called matching-adjustment portfolios because they are considered too risky.

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