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Prudential could move base from UK due to Solvency II "uncertainty"

London-based insurance firm Prudential has refused to deny press reports that it is considering switching its headquarters to Hong Kong as a result of stricter capital requirements for European insurers.28 Feb 2012

In an announcement made to the Hong Kong stock exchange, Prudential said that "clarity on this issue is not expected in the near term". The insurer currently conducts around 45% of its business in Asia, according to press reports.

Solvency II (155-page / 3.7MB PDF) is a draft EU Directive which sets out stronger risk management requirements for European insurers and dictates how much capital firms must hold in relation to their liabilities. Once it is finalised, implementation of the Directive is expected to happen on a phased basis from 2013 to 2014.

As drafted, the rules could mean that European insurers will have to hold extra reserves against subsidiaries in countries where standards are less strict. No decision has yet been taken on whether capital rules for US insurers are compatible with the new regime, which could have an impact on Prudential's US subsidiary Jackson National Life.

"Prudential regularly reviews its range of options to maximise the strategic flexibility of the Group. This includes consideration of optimising the Group's domicile, including as a possible response to an adverse outcome on Solvency II. There continues to be uncertainty in relation to the implementation of Solvency II and implications for the Group's businesses," the insurer said.

Insurance law expert Bruno Geiringer of Pinsent Masons, the law firm behind Out-Law.com, said that although the release was surprising, the insurer would have undertaken a "very thorough cost benefit analysis" before announcing anything.

"The proposed Solvency II regulatory changes are about strengthening insurers' capital base and risk management, which is a strange thing to run away from. Whilst Solvency II would have featured heavily in their thinking there would also be the impact from other regulatory initiatives to consider on their life business, such as the FSA's with-profits review," he said.

"As a life insurer focused in the UK now on pensions and long-term savings products sold via independent financial advisers (IFAs), Prudential's future in the UK is currently very much tied to the continued support of the IFA distribution channel. The question is whether IFAs will feel safe, if a move out of the UK happens, recommending in future the products from a business run out of the UK and subject to an overseas lead regulator rather than the regulatory regime they know here," he added.

Earlier this month the chairman of regulator the European Insurance and Occupational Pensions Authority (EIOPA) wrote to the European Commission expressing his concern over continuing delays to the implementation of Solvency II. The European Parliament's Economic and Financial Affairs Committee (ECON) has pushed back its planned vote on the Directive, which has not yet been finalised, until 21 March 2012.

The new regime was originally planned from this year, however both EIOPA and UK regulator the Financial Services Authority (FSA) have announced that they are now working on the assumption that its requirements will come into force for individual member states from 1 January 2014.