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The Bank of England has unveiled the first tranche of changes to rules governing the UK insurance sector, in what it presented as a significant reduction in bureaucracy compared with the regime inherited from the EU.
The overhaul of the so-called Solvency II regime, which dictates where insurers invest and how much capital they need to hold, has been the first significant rewrite to UK financial regulation since Brexit.
The government has promised to slash red tape for the sector and unlock tens of billions of pounds of investment in UK infrastructure in a new set of rules branded “Solvency UK”.
The Prudential Regulation Authority, the arm of the central bank that oversees insurers, on Thursday issued the first of three consultations as part of this work. It included simplifications to the so-called internal models that firms use to calculate their capital requirements, as well as other proposed changes including removing separate capital requirements for UK branches of global insurers.
PRA chief executive Sam Woods said the measures would “reduce bureaucracy, facilitate competition, and support UK economic growth and competitiveness without lowering prudential standards or weakening policyholder protection”.
Huw Evans, partner at advisory firm KPMG and former director-general of the Association of British Insurers, a trade body, described the changes as “sensible and welcome”. He said the implementation timeline “would see the UK introducing its Solvency II reforms ahead of the parallel process in the EU”.
The PRA said the changes would be implemented by the end of next year, in line with a timetable issued last week by the government, which said other elements of the reform would arrive earlier.
In relation to the internal model, the regulator will apply a “principles-based” approach to its supervision of companies’ capital calculations, removing most of the requirements set by the EU in a reflection of the differences across member states. Insurance executives had voiced concern over the costs of and time demanded by current rules.
The consultation also set out new safeguards to ensure the soundness of firms, including circumstances where the watchdog could require a capital add-on to approve the internal model.
Other proposals included removing any reliance on models from Solvency I, the previous regime that some insurers still have to refer back to when making certain solvency calculations.
The government’s position on Solvency II was first announced in November last year after a row between the regulator, which had pushed for some of the capital requirements to be tightened, and the industry, which saw the rules as excessively conservative.
Ultimately, chancellor Jeremy Hunt sided with the industry. The PRA expects to consult in September on other elements of the Solvency II changes, which are aimed at freeing up investment in UK infrastructure and other productive long-term assets.
