Brexit and Solvency II: The Story So Far

Although 2016 was better known for the UK’s Brexit referendum, 1 January 2016 was the ‘switch-on’ date for Solvency II. Even on its introduction, there was the expectation that the new insurance prudential regulatory framework would evolve after it bedded-in. However, not long after the Brexit referendum, the influential House of Commons Treasury Committee opened an inquiry into the operation of Solvency II in the UK. The inquiry looked to understand the strengths and weaknesses of Solvency II in its then form, together with exploring the options open to the UK wider insurance industry following the Brexit vote.

The IFoA promptly submitted a comprehensive and pragmatic response to the Treasury Committee in late 2016, with our perspective framed by what was in the public interest. We were subsequently invited to provide supplementary oral evidence, which was the start of deepening IFoA engagement with the Committee, as their Solvency II inquiry progressed.

Along the way, political developments at Westminster including the 2017 General Election saw the Treasury Committee’s inquiry paused. Post re-boot, reform of Solvency II remained a priority for the Committee, and they subsequently concluded their inquiry in late 2017. Amongst others areas, they called for revamp of some of the more contentious aspects of regulatory regime, including the risk margin, matching adjustment, internal model processes and transitional measures on technical provisions.

Whilst Solvency II was on the political radar at Westminster, evolution and clarification on the operation of Solvency II was emerging, from both the PRA and EIOPA, much through consultation with industry. Topics tackled through consultation – and on which the IFoA responded - included the matching adjustment, its application to equity release mortgages, the volatility adjustment and reducing the burden of financial reporting.

Fast forward to late 2020, and the UK’s transitional arrangement with the EU post-Brexit is about to draw to a close. Amongst the many aspects of the UK’s future post Brexit trajectory to be determined, and despite the wider turmoil arising due to the COVID-19 pandemic, Solvency II had returned to the UK Government’s radar. This time, HM Treasury (HMT) have opened a Call for Evidence on their review of Solvency II in the UK.

The HMT review builds on the work of the earlier Treasury Committee inquiry, and revisits aspects of Solvency II which featured prominently in that earlier work, but also debated much more widely; the risk margin and matching adjustment amongst others. Given the close of the transitional period is now a near-reality, HMT’s review has a strong flavour of making the UK’s insurance regulation fit for UK specifics, but also as an enabler of competition and innovation. Interestingly, HMT’s inquiry also seeks to understand how Solvency II can facilitate capital investment in infrastructure, without losing sight of the need for adequate policyholder protection. And in a sign of our times, the inquiry also has a strong green dimension, and is interested in how Solvency II can support UK government climate change objectives.

The IFoA will also be building on our past work on the evolution of Solvency II. We are drafting a cross-practice, comprehensive and pragmatic response to HMT’s call for evidence, at the time of writing. As before, this will have the public interest as its reference point, and we also plan to develop our engagement with HMT in this key area as 2021 unfolds.