Out-Law News | 28 Oct 2020 | 11:34 am | 2 min. read
The UK government has signalled its intention to update insurance regulations that have their root in EU law once the Brexit transition period has expired.
The Treasury has opened a call for evidence on the 'Solvency II' regime, seeking views on "how to tailor the prudential regulatory regime to support the unique features of the insurance sector and regulatory approach in the UK". The Solvency II framework came into force across the EU on 1 January 2016. The rules set out broad risk management requirements for European insurers and reinsurers and require firms to hold enough capital to cover all their expected future insurance or reinsurance liabilities.
The government is giving a clear signal of its intention to tailor the regulatory framework for the UK insurance sector in a move that is likely to see some significant departures from the EU Solvency II model
In its consultation paper, John Glen, economic secretary to the Treasury, said: "By design, the current regime is tailored to the EU insurance sector as a whole but, in several important ways, the UK insurance sector is different. The review will be guided by our objectives: to ensure a vibrant and prosperous insurance sector, to provide long-term capital to support growth, and to uphold high standards of policyholder protection and promote the safety and soundness of firms."
The objective to support insurance firms to provide long-term capital to underpin growth includes "investment in infrastructure, venture capital and growth equity, and other long-term productive assets, as well as investment consistent with the government’s climate change objectives".
The call for evidence is an initial step towards reform, forming part of a review the government is undertaking of features of the Solvency II regime.
Insurance regulation expert Iain Sawersof Pinsent Masons, the law firm behind Out-Law, said: "With the transition period set to end on 31 December 2020, the government is giving a clear signal of its intention to tailor the regulatory framework for the UK insurance sector in a move that is likely to see some significant departures from the EU Solvency II model. The focus of the review is on enhancing the existing regime, which many insurers will have spent a significant amount of time and resource to comply with since it came into operation in 2016."
"The call for evidence seeks feedback on specific areas under Solvency II that will be of real interest and importance to insurers that operate in the UK. In addition, this call for evidence also encourages more general responses and includes an open question on other areas of Solvency II that should be considered for review. It will be interesting to see how any evidence obtained in this first stage of the review will be used to shape the UK prudential regulatory landscape in the insurance sector," he said.
Specific areas of reform being considered include in relation to the risk margin insurers in the UK are obliged to maintain on their balance sheets, as well as around the type of assets insurers can leverage to meet their obligations around 'matching adjustments'. The Treasury also said it is amending solvency capital requirements to make them "less prescriptive, less complex and increase the ability of regulators to apply supervisory judgement". It hinted that future reforms to the prudential regulatory framework applicable to insurers operating in the country will reflect the government's broader objectives in relation to climate change.
Sawers said: "Responses from the UK insurance sector are likely to be mixed. For many long term insurers this will be welcomed as an opportunity to review the often criticised rules on capital requirements. For others, with a focus on international business, any risk that this might undermine the UK rules’ equivalence with those of the EU will be a concern."
The European Commission opened its own review of the 'Solvency II' regime in July, enabling stakeholders to complete a questionnaire on elements of the prudential framework. The EU consultation ended last week.
Co-written by Juanita Morrison of Pinsent Masons.
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