Bank of England proposes easing Solvency II burden

The Bank of England (BoE) has suggested easing EU capital rules for insurers. Industry lobbies have urged the Prudential Regulation Authority(PRA) , which sits under the BoE, to make more radical changes.

The PRA has published a consultation paper on the possibility of relaxing some reporting requirements under the bloc’s Solvency II rules, taking into account recommendations for reform made by the Association of British Insurers (ABI), and by parliament’s Treasury Select Committee (TSC).

“The PRA believes that these proposals would, in particular, reduce the reporting burden for smaller firms,” the PRA said.

Solvency II came into force in January 2016, nearly five years late, and has long been seen as controversial on several fronts – not least the harsh loading it places on equity investments and the soft loading that it places on the bonds of any EU country. At the time it was alleged that the loadings were as much in place to protect EU government bond issuers as to protect the consumer from an insurer’s collapse.

In a report last October the TSC said that the BoE and insurers needed to find common ground over proposed alterations to keep the £1.9trn sector in the UK competitive after the UK leaves the EU in 2019. It added that, in its opinion, the PRA had been too focused on capital levels and not enough on allowing insurers to compete.

The TSC is pushing for the PRA to relax significantly the risk margin, an add-on capital requirement to cover what a third party would need to safeguard policies if an insurer goes bust.  PRA chief executive Sam Woods has so far resisted making unilateral changes to the risk margin, in the hope that the EU would step in before Brexit to change the risk margin have faded.

Reuters reported that Woods was expected to respond to the TSC report when he addresses the ABI’s annual conference on February 27th.

The ABI said the PRA’s proposals were a “step in the right direction” after Solvency II increased reporting requirements by four to eight times compared with previous rules. ABI head of prudential regulation Steven Findlay said that “there still remains plenty of opportunity for the PRA to go further to ensure our insurance industry is able to fulfil a vital role in helping Britain thrive post-Brexit”.