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UK calls for review of Solvency II over competition concerns in insurance industry

The UK Treasury and the Bank of England have both expressed concerns about the impact of Solvency II regulations on competition in the insurance market and called for an early review. 09 Feb 2016

This quick reaction to the legislation, which only came into force on 1 January, highlights the seriousness of the industry's concerns and some of the limitations of Solvency II, said insurance expert Rabbani Choudhury of Pinsent Masons, the law firm behind Out-Law.com.

The Solvency II regime is a Europe-wise legislation that specifies how much capital an insurance company must hold. Comprising 3,200 pages of text, the legislation aims to encourage good risk management and transparency, and to increase consumers' confidence when buying insurance.

In its submission to the Commission in response to a call for evidence on the framework, the UK Treasury said that, while an initial review is planned for 2018, "our experience of implementing Solvency II to date is already raising issues around the impact of the framework on long-term investment and competitiveness of the European insurance industry".  

As the Solvency II rules have only recently come into force, "the UK has had a limited time to see the regime working in practice and so does not yet have concrete evidence on the overall impact of the new regime", the Treasury said. "However, our experience of implementing Solvency II to date is already raising issues around the impact of the framework on long-term investment and competiveness of the European insurance industry."

Monitoring and peer review exercises are needed to make sure that Solvency II is uniformly implemented across Europe, and to identify any rules or guidance needed for harmonisation.

"An inconsistent application will undermine the principle of the European single market," the Treasury said.

"Finally, the impact of Solvency II on the EEA’s international competitiveness in the continuing absence of a global standard for insurance regulation should be considered," it said.

The Bank of England commented in its submission on the 'ultimate forward rate', which is used to calculate insurers' long term liabilities.

"In order to establish a truly harmonised approach to insurance regulation, it is essential that the valuation of the insurance balance sheet is done on a consistent basis. Solvency II represents an important step forward in achieving that. But differences remain in the way that discount curves are derived and applied under different currencies and in different national markets, which can lead to large differences in the solvency positions of firms according to where they are located in the EU," the bank said. 

Choudhury said: "I expect the insurance industry will welcome the Treasury and the Bank of England’s submissions to the Commission about changing key aspects of Solvency II. They will feel particularly reassured that the UK has reacted so quickly in trying to fix problems with the framework, which the industry has consistently raised, to properly fit in with their needs." 

"UK regulators have been discussing the ins and outs of the Solvency II regime since 2002. The fact that the UK is taking this opportunity so soon after the regime began applying to firms highlights the seriousness of the concerns and some of the limitations of Solvency II," he said. "It is worth noting that UK position is somewhat a dramatic turnaround given the number of statements that we have heard from both Treasury and the Prudential Regulation Authority (PRA), along with its predecessor the Financial Services Authority (FSA), over the years proclaiming the hours, days, weeks, months and years of negotiation that have gone in to perfect the detail of the regime."

"The regulators have also advised of the improved nature of the regime and sought to allay concerns around transitioning by stating that the regime incorporates many of the features of the existing ICAS regime. It is therefore surprising that barely one month into the new regime applying to firms, the UK is calling for such fundamental and rapid change," Choudhury said.

"It is clear that Treasury and the PRA view Solvency II as not applying to firms proportionately. Annuities are a prime example of a product that has unfairly bore the brunt of Solvency II’s unintended consequences. This has always been a basic product with the simple aim of making a long-term promise to pay out a certain amount of money. However, Solvency II has now made annuity suppliers subject to more stringent capital requirements leading to many annuity suppliers scaling back in their plans on providing this product. This cannot and should not be right.  Whatever steps the UK takes to correct this must be applauded, even if it means the government and regulators are inconsistent with their past approach," he said.

In December, the Association of British Insurers (ABI) said that the industry was well prepared for the new Solvency II rules. The industry had had 10 years to prepare and had invested £3 billion in ensuring it is ready, the ABI said.

An industry survey in the same month found that European regulators were increasingly choosing to impose additional last-minute requirements on insurers as part of their preparations for the new regime. Over two thirds of firms responding to an Insurance Europe survey reported that their regulators had chosen to 'gold plate' the new requirements. However, the vast majority of surveyed firms said that they would be ready to operate under the new regime from January. Firms covered by the research accounted for 92% of European insurance premiums.