It will not have escaped the attention of our members working in insurance in the UK or Europe that Brexit has an insurance dimension. In particular, the future path of insurance regulation in the UK, and how it evolves from ‘mainstream Solvency II’ will be of no little interest. While so much of the UK’s interaction with the EU post-Brexit is still shrouded in uncertainty, the UK House of Commons Treasury Committee took the lead last year in attempting to shine a light on how Brexit could affect insurance regulation in the UK, and specifically Solvency II.
The then Chair of the Committee, Andrew Tyrie, set out the terms of the enquiry in September 2016, commenting that:
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.
The IFoA, drawing on the expertise of members from across all relevant practice areas, submitted a comprehensive written response in November last year. We were then delighted to be invited to provide oral evidence to the Committee: on 17 January, Andrew Chamberlain, Chair of our Life Board, gave evidence on behalf of the IFoA, together with representatives from PWC and KPMG.
Late last month, after much anticipation, punctured by the small matter of a UK General Election, and the appointment of new Chair, Nicky Morgan, the Committee released its final report: ‘The Solvency II Directive and its impact on the UK insurance industry’.
The IFoA is cited throughout the report, with a number of our response’s key recommendations and suggested improvements mirrored in the Committee’s. Their report notes:
A well-argued case has been made in evidence to the previous Committee, by individual insurers as well as the ABI and the Institute and Faculty of Actuaries, for a remedy to some of the defects that have been identified. Their views have been supported by industry experts.
Most of the Committee’s key recommendations were clearly influenced by the IFoA’s evidence:
- the calibration of the risk margin should be improved
- there should be regulatory ‘forbearance’ to deal with procyclicality at a national level
- a more principles-based approach should be taken with the matching adjustment and volatility adjustment
- in particular, there should be less reliance on complex structures
- firms should be allowed to use a ‘dynamic’ volatility adjustment
- more pragmatism is necessary around the treatment of illiquid assets and the removal of barriers to insurers investing in long term assets
- data requirements on firms should be reduced to a level the PRA can demonstrate is necessary and proportionate
- rules for contract boundaries should reflect their economic substance rather than their legal form
- the calculation of TMTP and their approval should be simplified
- limitations in the standard formula for both new and existing firms should be removed
- there should be greater proportionality applied in the internal model approval and change processes.
The Committee also suggested that the PRA and industry should consider, where possible, how Solvency II could be aligned with IFRS 17 after Brexit. They also stressed the importance of developing a solution for firms whose contracts might lose legal validity once the UK leaves the EU.
And perhaps most notably from a political perspective, the Committee also urged the PRA to consider the end goal for the UK industry after Brexit “rather than confining its thinking to what can be accomplished within the parameters of Solvency II”. It also calls for a regulatory structure that meets the current and future needs of consumers, with prudential regulation that does not stifle competition or innovation.
The Committee has requested a progress report from the PRA by 31 March 2018, in particularly setting out “how the PRA’s implementation of the directive ensures proportionality and meets its secondary competition objective”.
The IFoA will continue to monitor the progress of this debate as a priority. Our thanks to all the Boards, Committees, Working Parties and individual members who contributed to this important debate.