The Proposals

HM Treasury’s consultation paper provides more detail about its proposals for reform which were previously headlined by John Glen, MP, Economic Secretary to the Treasury, in his speech at the ABI annual dinner on 21 February 2022.  The consultation asks for feedback to proposed reforms to the risk margin, matching adjustment (including reform of the fundamental spread, broadening the range of eligible assets/liabilities and streamlining the process for reviewing MA eligibility applications), internal model framework, capital requirements for foreign insurers, threshold requirements, calculation of consolidated group capital requirements and calculation of the TMTP.  The government also intends to amend legislation to enable the PRA to introduce a new mobilisation regime for insurers.  The government has noted criticism of the UK’s lengthy and burdensome authorisation process and it hopes that with lower regulatory requirements (but with proportionate restrictions on the firm’s activities), new entrants will find the UK a more welcoming regulatory environment.  

The government’s main headline is that efforts to reduce the risk margin has the potential for the release of ‘possibly as much as 10% or even 15% of the capital held by life insurers’ -  but also note question 2.5 – ‘How could the Government be assured that resource that becomes available following a reduction in the risk margin would not be distributed to shareholders or used to increase remuneration to parties within the insurance firm?’.  The government wants to see this extra capital used to support its wider economic, ESG targets.

The PRA’s statement sets out the PRA’s views on key aspects of the proposed reforms and gives broad support for the Treasury’s proposals.  The Discussion Paper (DP2/22 – Potential Reforms to Risk Margin and Matching Adjustment within Solvency II) which will be of particular relevance to annuity providers, sets out the PRA’s current views on reform of the risk margin and matching adjustment (including the fundamental spread) and the impact of reforms on overall capital levels, safety and soundness and investments.  The PRA has also published a summary of the Quantitative Impact Study (QIS) engagements covering the feedback from the QIS and technical discussions with industry participants.

Meanwhile, in the EU

The European Commission published its proposals for revising the EU’s Solvency II regime in September 2021 (see our Engage article for further details) and discussions between the Commission, European Parliament and Council are progressing. 

Recovery and resolution

The European Commission has chosen to address the introduction of a recovery and resolution regime for insurers at the same time as dealing with changes to the Solvency II regime.  Proposals for a draft directive were published together with the Solvency II amendments.  In the UK, the government announced last year that it intends to also introduce a resolution regime for insurers aligned to internationally agreed standards.  Discussions with the regulators on this are ongoing and in the meantime the government has been consulting on amendments to the current insolvency arrangements for insurers in the Financial Services and Markets Act.  Following a consultation, HM Treasury published its response to the consultation in April 2022 and will be moving forward to legislate when parliamentary time allows.

Next Steps

The deadline for the Treasury’s consultation and the PRA’s Discussion Paper is 21 July 2022.  No timeframe has been given for when the Treasury and the PRA will respond.  The timetable to some extent will be driven by the progress of the government’s Future Regulatory Framework Review (see our Engage article for more details of the Review).  On this, the consultation closed on 9 February 2022 and a response from HM Treasury is awaited.  In the meantime, the PRA are currently working on Phase 2 of its review of reporting requirements for insurers and publication of a consultation paper is expected in late summer 2022.

Authored by Kirsten Barber