Treasury consults on reforms to Solvency II

HM Treasury has published its consultation on post-Brexit reforms to the Solvency II regime which it hopes will unlock investment, increase market access for new insurers and offer greater consumer choice.

The reforms include:

  • a substantial reduction in the risk margin for long-term life insurers (including a cut of around 60-70%) and consulting on the appropriate level for general insurers, to release capital on insurers balance sheet;
  • a more sensitive treatment of credit risk in the matching adjustment, which provides incentives for insurers to issue long-term life insurance products by ‘matching’ them against assets with similar characteristics, helping to increase the availability of this type of product on the UK market;
  • a significant increase in flexibility to allow insurers to invest in long-term assets such as infrastructure;
  • a meaningful reduction in the current reporting and administrative burden on firms, removing EU bureaucracy including by doubling the thresholds for the size of insurers before the Solvency II regime applies; and
  • deliver further reforms to EU derived legislation, which will increase access to the market for new insurers and offer greater consumer choice.

The consultation closes on 21 July 2022. The PRA will publish its own consultation at a later date but it has released a statement confirming its support for the government’s review of Solvency II and setting out its initial views on some of the proposals.

Separately, the PRA has published a discussion paper setting out its current position on the potential reforms to risk margin and matching adjustment within Solvency II. The discussion paper closes on 21 July 2022.

Lucy Hadrill