This is part of Out-Law's series of news and insights from Pinsent Masons experts on the impact of the UK's EU referendum. Watch our video on the issues facing business and sign up to receive our 'What next?' checklist.
The directive consolidates and harmonises previous EU insurance directives including legislation on life and non-life insurance and the reinsurance directive.
Andrew Tyrie, chairman of the Treasury Committee, said: "Brexit provides an opportunity for the UK to assume greater control of insurance regulation. The Solvency II Directive came into force in January, only after a heap of concerns had been expressed about it. Among its manifest shortcomings was the failure to secure value for money over its implementation. The Treasury Committee will now take a look at the Brexit inheritance on insurance to see what improvements can be made in the interests of the consumer."
Insurance expert Bruno Geiringer of Pinsent Masons, the law firm behind Out-Law.com, said: "There is no doubt that the implementation of the Solvency II requirements was extremely long, very costly and hugely time consuming for UK insurers and any move away from these requirements will equally be very costly and distracting for UK insurers. While transitional arrangements have been introduced to ease the pain, UK insurers have been generally unhappy with the new capital requirements regime under Solvency II."
"There has been some sympathy with this sentiment from the PRA, firstly with comments made by Andrew Bailey, the former chief of the Prudential Regulation Authority, and more recently Sam Woods, the new chief who has admitted that the UK may have interpreted the rules too strongly," he said.
The general industry view after the referendum vote was that Brexit was unlikely to lead to a massive dilution of the Solvency II capital rules, Geiringer said. However, he said Brexit "does in theory at least offer an opportunity to revisit the insurance capital regulations".
"It may be that there is a case for developing two different regimes for UK insurers to meet their capital requirements, one for insurers transacting insurance business in the UK and in non-EU countries such as Asia and the US, and another for insurers transacting insurance business in the UK and in other EU countries," Geiringer said.
"The second would be similar to the Solvency II regime. A relatively small number of UK insurers do cross-border insurance business in the EU, so relief from the Solvency II requirements might be beneficial to a large proportion of UK insurers. Having two capital regimes in the UK would not be too different to now, because there are already two such regimes in place, one for the Solvency II firms and the other for the smaller non-Solvency II firms," he said.
The repercussions of freeing UK insurers from the Solvency II requirements could have other far reaching consequences, such as stifling any future ambitions to expand into EU markets, Geiringer said.
"The UK market is the third largest insurance market in the world and it is already over-crowded in some areas," he said. "It is struggling to meet the technological challenges of developing distribution channels via social media and apps and to design products that meet customers’ needs in a rapidly changing political and economic environment."
"Expansion outside the UK into the EU, particularly the east European states, may be attractive to some insurers but it would be less easy to achieve if the UK’s replacement capital requirements regime does not meet the equivalence standard for those EU markets. Many insurers will be harking back to the former UK capital regime but this may no longer be acceptable to regulators who have much stricter statutory objectives than before, and they may see the need to ensure the safety and soundness of the insurance market in the UK with tighter regulation," Geiringer said.
"That all said, it is good that the Treasury Committee is calling for submissions so it can really take a hard look at the impact of Solvency II in the context of competition in the UK, customer needs and the wider UK economy after the Brexit vote," he said.