Solvency UK regime gathers steam in 2023

Reforms to the Solvency II regulatory regime in the UK could soon be moving from the debating phase into the implementation phase, a senior regulator has hinted.

Sam Woods, CEO of the PRA, and the Bank of England’s deputy governor for prudential regulation, spoke to the Association of British Insurers on 20 February on the new Solvency UK package (dubbed SUK by the UK Government), which is part of the government’s Financial Service and Markets Bill.

Timings are imprecise between the PRA and the Treasury, he emphasised, but there was “broad expectation” that the PRA would publish a first consultation on SUK reforms in June.

This would be followed by a second consultation in September “on those areas that will benefit from more time for industry engagement to make sure we can get the details right”.

These consultations would clarify how the new regime would operate, Woods said.

“It means firms will have a very good sense well before the end of 2023 of how we expect the new regime to operate, so that they can begin to adapt their investment plans as soon as they wish,” he said.

On 20 March, the Treasury Financial Services Regulations Sub-Committee published an update on its work in the first quarter.

Correspondence between the Sub-Committee and the PRA on SUK reform has focused on cost-benefit analyses of how the PRA reviews reporting requirements – one focus of Woods’ speech in February.

In his ABI speech, Woods initially set out to clarify the PRA position on a “well-aired and very public disagreement” between the regulator and the annuities sector on fundamental spreads for the capitalisation for annuities.

He said: “The government has been clear that it does not intend to make major changes to the fundamental spread, and intends to leave it very largely as it is while going ahead with a large cut to the risk margin and the rest of the reforms.

“Now while that is not the position we sought, we have accepted that that is the government’s final view on this issue. So if Parliament supports that position then we need to move on from the debate and into implementation,” he added.

Competitiveness and growth

The PRA chief executive was keen to move on to the efforts to cut reporting requirements and focus on “competitiveness and growth” – relating to Sub-Committee correspondence.

“First, we are making use of our exit from the EU to remove reporting requirements that we don’t think we need for the UK market. We have already cut reporting by up to 40% for small and medium-sized firms, significantly increasing the proportionality of the regime,” he said.

“We have also removed some reporting requirements for all firms on things like variation analysis, which had been overly complex to complete. We plan to follow these cuts with more reductions to be consulted on later this year.”

The PRA also plans to streamline its rules for internal model approvals, he explained.

“It is vital that the model approval process is very robust, given it leads directly to the setting of capital requirements. But the mandated process we have inherited from the EU is much too bureaucratic – we intend to do away with around 70% of the nearly 200 internal model tests and standards, alongside other changes,” said Woods.

“If necessary, we can clarify expectations via supervisory statements, but our starting point is that as a single national supervisor, we need fewer prescriptive requirements than the EU needs to ensure consistency across 27 supervisors,” he said.

The PRA plans to widen the range of assets eligible for Matching Adjustment (MA), to allow assets with prepayment options and construction phases. This means including assets with predictable cash flows, he said, and efforts to understand the consequences of removing the MA cap for assets below investment grade.

For small or start-up insurers, the PRA also proposes to raise the threshold at which firms are required to enter the Solvency UK regime.

“We plan to triple the threshold for gross written premiums to £15m and double the threshold for technical provisions to £50m. We also plan to introduce a mobilisation regime for insurers, which will lower barriers to entry for new firms by giving them a little extra time to build out their businesses,” Woods said.

The regulator also plans to remove capital requirements for UK branches of foreign insurers, “given that a branch cannot fail independently of the overseas insurer”, he revealed.

“We also propose to allow greater flexibility in the calculation of group capital requirements. This has the potential to lower merger and acquisition costs, increasing the UK’s competitiveness whilst maintaining capital adequacy,” he added.

Next steps

Woods said the PRA would like to implement reforms as swiftly as possible, consulting not just with the Treasury to ensure consistency but with industry consultation Subject Expert Groups on the most contentious topics, he suggested.

“Inevitably, the changes are more complex in some areas than in others. So rather than a ‘big bang’ implementation of the full reform package on a single date, we are looking hard at what we can do to ensure we deliver some reforms as quickly as possible, while also giving time for adequate consultation on others,” he continued.

“If Parliament passes the Financial Services and Markets Bill currently before it, then we will be taking forward all of these actions under a new secondary objective to facilitate competitiveness and growth.

“We very much support the proposal in the Bill and look forward to the significant shift it will require of us – while maintaining safety and soundness and policyholder protection as our primary objectives,” Woods added.