Out-Law News 3 min. read

Treasury Committee calls for more proportionate application of EU insurance regulations


Regulation of the UK insurance industry should not come at the expense of effective competition and innovation, a committee of MPs has said.

The Treasury Committee has urged industry regulator the Prudential Regulation Authority (PRA) to work with the insurance industry on a proportionate approach and potential amendments to the current EU regulatory framework, Solvency II. Adopting the new requirements, which came into force last year, has "come at a considerable cost" to the industry, according to committee chair Nicky Morgan.

The committee began an investigation of the impact of EU regulation on the insurance industry in September 2016, shortly after the UK voted to leave the EU. However, the report is focussed on the implementation and effect of the rules, irrespective of Brexit.

Publication of the report coincides with the first in a series of PRA consultations on potential "targeted improvements" to the rules, which deals with the matching adjustment (MA). Two additional consultations, on the model change process and firm reporting requirements, will follow in December and January respectively, the PRA said.

“Any change to the application of Solvency II in the UK will need very careful thought to ensure that the balance is right for the insurance industry as changes are usually very costly to implement, as was seen in the case of the introduction of the Solvency II regime at the start of 2016," said insurance expert Bruno Geiringer of Pinsent Masons, the law firm behind Out-Law.com

"Striking the right balance is not at all easy at the moment with no clear direction about what the post-Brexit position will be. It may be that the UK will need to maintain equivalence with the EU’s Solvency II regime after leaving the UK or there may need to be a UK-only capital regime to replace Solvency II if we fall out of the EU altogether at the end of March 2019 with no transitional deal," he said.

"Moving away from Solvency II might go some way to assuaging the insurance industry’s current concerns with Solvency II but it is by no means clear whether the right thing is to do more now to move away from Solvency II or whether it will mean rolling back any changes made now so as to maintain equivalence with the Solvency II regime post-Brexit. The impact also differs if the insurer here is a pure UK domestic player or an insurer with pan-European operations," said Geiringer.

Commenting on the committee report, Nicky Morgan called on the insurance industry and the PRA to "agree what is best for UK industry and consumers as a matter of urgency".

"Industry and the PRA do not appear to be aligned on some key issues, including the impact on consumers," she said.

"They should develop a roadmap that provides a prudent regulatory structure without stifling competition and innovation. Such a roadmap should both inform the Brexit negotiations and reflect the opportunities afforded post-Brexit to develop the international competitiveness of the UK insurance industry," she said.

Solvency II came into force across the EU on 1 January 2016, after various delays. The rules, which apply to more than 400 UK retail and wholesale insurance firms as well as to the Lloyd's insurance market, set out broader risk management requirements for European insurers and require firms to hold enough capital to cover all their expected future insurance and reinsurance liabilities.

The general view from the industry is that Brexit is unlikely to lead to much dilution of EU-imposed financial regulatory rules, while PRA director of insurance supervision David Rule pointed out in February that some of the "most important parts" of the new regime had been developed from UK experience. However, the PRA has now identified "a number of areas where we can improve our implementation", according to its chair, Sam Woods.

The matching adjustment, which is the subject of the PRA's first consultation, is designed to make it easier for insurers to invest in long-term assets such as infrastructure. Insurers can set less capital aside to cover these liabilities, provided that they can demonstrate to the regulator that the cash flow of a designated portfolio of assets is matched to the underlying liabilities. The PRA is proposing additional guidance around the eligibility of assets for the MA, among other improvements.

The Treasury Committee is calling for a more in-depth review of the matching adjustment as part of its recommendations to the PRA, asking it to develop proposals "which allow more flexibility and a more principles-based approach, and which reduce the requirement for insurers to develop complex structures in order to achieve the regulatory treatment that they warrant". It has asked the PRA to provide it with a progress report by March 2018.

The committee has also recommended a more fundamental overview of the PRA's objectives. The PRA is currently subject to a general objective to promote the safety and soundness of the firms it regulates and to contribute to the securing of an appropriate degree of protection for those who are or may become insurance policyholders, with promoting effective competition treated as a secondary objective. The committee is calling for these objectives to be given equal importance.

We are processing your request. \n Thank you for your patience. An error occurred. This could be due to inactivity on the page - please try again.