UK regulator warns insurers on Solvency II capital reforms

The head of the Prudential Regulation Authority has warned insurers that he would have doubts about rule changes to allow them to release a big chunk of capital that could be returned to shareholders.

The government is reviewing the Solvency II insurance capital rules, and is likely to make changes to them in what would be the first big post-Brexit shake up of UK financial regulation. Proposals are expected later in the spring.

The insurance industry has been pushing for the rules to be diluted, with the Association of British Insurers arguing for cuts to the capital buffers they are required to hold.

But in a speech to the ABI on Tuesday, Sam Woods, PRA chief executive, said that while he was “interested” in the association’s view that £35bn of capital could be freed up and potentially returned to shareholders, he did not support it.

“Some big numbers are being bandied about in lobbying for an overall weakening of prudential standards. I have to say that I think these numbers — being based on multi-decade forecasts — are a little speculative,” he said, adding: “I have some doubts about a reform package that materially decapitalises the insurance sector.”

Woods said the PRA had not seen any “persuasive evidence” that the amount of capital in the insurance sector was either too low or too high.

UK insurers have long complained about Solvency II, a 1,000-page piece of EU legislation that took over a decade to create before it came into force in 2016.

In particular they argue that some parts of the rules — known as the risk margin — require them to hold too much capital when interest rates are low, as they are now, and that other parts make it too hard to invest in long-term assets such as infrastructure.

Woods said he supported some changes to the system. “The regime is in my view somewhat over-specified, and it also does need tailoring in places — particularly on the life [insurance] side,” he said, suggesting that there would be changes to the risk margin as part of the government’s reforms. However, he was more cautious on a shake-up to the so-called matching adjustment, which influences how insurers invest in long-term assets.

He also made a pitch for the PRA to take much closer control of future rulemaking in the insurance sector. The Solvency II rules are laid down in legislation, which makes it difficult for regulators to adjust them. Woods said he wanted that to change.

“It seems clear that, for our market, putting the details in the regulator’s rules rather than in statute (as the EU typically does) is a better approach,” he said, arguing that this approach would make it easier to update rules.

“A changing world requires a tough but flexible regulatory regime that can adapt itself rapidly as needed,” he said. “The alternative is a more sluggish regime, more conservatively calibrated to compensate for its lack of manoeuvrability.”

Charlotte Clark, director of regulation at the ABI, said: “Improvements to the Solvency II regime for the insurance and long-term savings sector could free up billions of pounds for investment in key infrastructure projects and the green economy, while upholding a high level of protection for customers. The ABI proposals try to balance all the objectives of the Treasury review.”