“Critical to our ambitions is reform of Solvency II.”
That was among the main points highlighted by Association of British Insurers (ABI) chair Jon Dye (pictured) during his keynote address at yesterday’s (February 23) virtual ABI Annual Conference 2021. Dye, the chief executive of Allianz in the UK, said Solvency II need not be scrapped but sensibly reformed.
A European Union law directive, Solvency II is currently being assessed locally by HM Treasury. As part of the government’s review, a call for evidence was initiated last October and closed on January 19. At the time, Economic Secretary to the Treasury John Glen MP stressed the importance of having an appropriate prudential regulatory regime for the UK insurance industry.
“We are undertaking this review to ensure that Solvency II properly reflects the unique structural features of the UK insurance sector,” said Glen in October 2020. “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.”
Referring to the planned reform, Dye told conference attendees yesterday: “Not to scrap it, nor to seek huge capital reduction at the expense of policyholder protection – nobody wants that.
“Our ambition is for sensible reforms [of Solvency II] that ensure the balance sheets of insurance and long-term savings providers are used in the most effective way to help us invest for the long-term in the renewable energy, infrastructure, and economic recovery we need to see.”
The ABI chair’s keynote address was followed by a Q&A session with Glen himself.
Meanwhile, coinciding with the ABI event is the release of the trade body’s 58-page consultation response, in which it proposes changes to the matching adjustment and risk margin mechanisms. Produced by KPMG on behalf of the association, the analysis found that £95 billion could be freed up for re-investment.
“At the moment, the directive forces insurers to invest in an A-rated mining company rather than a 30-year investment in a wind farm,” noted Dye in his speech. “It relies on a risk margin mechanism that is fundamentally flawed in an era of low interest rates and results in poor customer outcomes on annuity prices and unnecessary capital that could be working in the real economy.
“And it requires voluminous reporting designed for a single market of 28 countries rather than the appropriate regulatory requirements of one market. The independent KPMG report published today makes clear the scale of the opportunity.”
Separately, ABI director general Huw Evans said the industry “can do so much more” in helping the economy and society if Solvency II is made “fit for purpose” for the British market.
Evans illustrated: “Our sector can invest an amount equivalent to the budgets of 11 UK government departments in renewable energy, economic recovery, and infrastructure investment if these reforms are made – with policyholders still having one of the best protected systems in the world.”