UK Solvency II reforms likely to face “steep” implementation challenge, says PwC

"These are going to take insurers some time to work through"

UK Solvency II reforms likely to face “steep” implementation challenge, says PwC

Life & Health

By Terry Gangcuangco

PwC is suggesting that the ride towards Solvency II changes in the UK is likely to be a bumpy one.

“The proposed unleashing of investment from the insurance industry as part of the government’s Solvency II reforms may face steep implementation and governance challenges, according to new analysis by PwC UK,” the accounting giant said in an emailed release.

“The refresh of the Solvency II rules should unlock the insurance industry’s investment power, and for this to be used to fuel the UK economy. However, the planned adjustments, including a widening of the assets and liabilities that are eligible for the matching adjustment (MA), could see high costs of implementation and a potential reduction in the benefit of the MA for some assets that are used to back annuity business.”

PwC’s analysis comes following the publication of the Prudential Regulation Authority’s (PRA) consultation paper on reforms to the solvency regime for MA portfolios.

“Last month’s announcement provided some much needed clarity on what the Solvency UK rules are likely to entail for UK life insurers,” PwC UK life insurance leader Lee Clarke said. “There are some potential benefits through the expansion of the asset and liability eligibility criteria and a streamlining of the MA application process in some circumstances which will be welcomed by the industry.

“However, alongside these changes are a strengthening of the governance frameworks firms must adopt, through the fundamental spread attestation process, internal credit rating assurance, and substantial additional reporting requirements on asset and liability information. These are going to take insurers some time to work through, and investment will be required to develop the systems and processes capable of dealing with these new requirements.”

Clarke also cited uncertainty around the proposals’ capability to achieve the goal of the government to enable significant additional investment in the UK economy. The “very short” timetable for implementation was also highlighted.

“The proposals bring greater investment freedom and streamlined approval processes in certain situations,” Ross Evans, life insurance capital & investment partner at PwC UK, commented. “These are changes that the industry has been crying out for since the implementation of Solvency II, but firms will have to comply with extra requirements to make the most of these new freedoms.

“One of the PRA’s other proposals is the introduction of an attestation process, whereby CFOs (in most cases) will have to attest that the MA can be earned with a high degree of confidence. The PRA’s expectations in this area suggest we could see a reduced MA benefit for some assets.

“There are some important clarifications and questions that firms will need answers to through the consultation process, and it remains to be seen how much new investment in productive assets these proposals will help to unlock.”

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