Insurance Investor Live Europe: Solvency II changes welcomed
The potential £100 billion of capital freed-up by Solvency II changes could drive insurers to embrace social projects.
Andrew Putwainposted on Friday, January 27, 2023
UK insurers from both the life and pensions and P&C sides of the industry are cautiously optimistic about any proposed Solvency II regime changes by the UK government.
In a lively panel discussion, several senior leaders in the insurance market said they hoped the changes would actually do what they were intended to do: release billions of pounds into the economy with the primary aim of creating social good.
In the first panel discussion of the day at Insurance Investor Live Europe, titled “What are the economic drivers and what are the pitfalls: inflation versus stagflation, new geopolitical risks post Russia/Ukraine, and the Covid pandemic”, moderator Wick Egan, Vice President at Egan-Jones, was joined by James Sproule, Chief Economist, Handelsbanken, Patrick Saner, Head of Macro Strategy, Swiss Re Institute, Aileen Mathieson, Group Chief Investment Officer, Aspen, and Tom Sumpster, Head of Private Markets at Phoenix Group.
Mathieson and Sumpster – who represented two UK insurers – were quick to highlight Solvency II changes as revolutionary for the industry and eager to discuss the topic.
In November 2022, The Bank Of England moved forward with its plans to make changes to the stipulations around Capital-at-Risk portions of Solvency II rules.
Chancellor of the Exchequer, Jeremy Hunt, also announced changes in his autumn statement after a consultation concluded that it was fiscally possible and desired by the industry.
Some of the key proposals for reform were:
- A 60-70% reduction to risk margin for long-term life insurers
- A 30% reduction in risk margin for general insurers.
- A modification to the cost of capital methodology as the preferred approach to calculating risk margin (as opposed to the margin over current estimate approach)
- Fundamental spread metric update to include a credit risk premium (targeting 35% of spreads on matching adjustment [MA] assets)
- More assets eligible for the MA
- More insurance products eligible for the MA
- Removal of the BBB 'cliff edge' for MA assets that are downgraded
- Simplifying the internal model approval process, and building more flexibility into the MA approval process, removing branch solvency capital requirements, increasing thresholds for non-directive firms and reforming reporting requirements
The Association of British Insurers said that it welcomed the proposed reduction to the Risk Margin by 65% for life insurers and 30% for non-life insurers. “We agreed with the PRA’s view that the Risk Margin was too large and sensitive to interest rates and consider that the changes proposed address both these issues,” it said in a statement.
The changes were part of the UK government’s flagship plan to draft independent financial services policies – with the intention of leaving a lasting mark post-Brexit. The restrictions from Solvency II have long grated the industry, with many saying that the capital requirements were too high.
"Solvency II changes will be a rethink of how government and institutional investors can work together."
“Solvency II changes will be a rethink of how government and institutional investors can work together on big projects, especially for green and ESG projects,” said Mathieson, noting areas where this could be beneficial, such as post-pandemic recovery plans in local communities and the UK government’s ambitious – and controversial – levelling up project.
She gave the example of the Scottish government calculating that it needed £6bn to get its communities “back on track” post-lockdown, but only £600m was offered by government, which meant public-private partnerships and other sources of funds were desperately needed. This situation, along with the wider ‘Just transition’, she said, was exactly the way easing Solvency II restrictions could be beneficial.
"Fiduciary responsibilities mean institutional investors can’t get involved primarily because returns are too long. [It's] hindering investment in the charity sector."
Mathieson also highlighted the issue of the return and investment cycle sometimes being out of sync, saying that measures should be incorporated to address this issue too. “This is also the case where fiduciary responsibilities mean institutional investors can’t get involved primarily because returns are too long,” she said. “This is hindering the investment in the charity sector as well and ways to help the ‘just’ economy.”
Sumpster said his company welcomed the potential Solvency II changes. “It gives us predictable cash flows rather than certain cash flows and more ability to go into markets. The devil is in the detail, but we hope it’ll allow us to diversify.”
He added, like Mathieson, that Phoenix hoped it would free more cash to be socially responsible. “We want to work closely with government and provide pensions with better return. We want to go more into the sustainability environment, which has been very heavily bank-financed for the past few years and offer different renewable opportunities.”
Mathieson said that P&C insurers have slightly less skin in the game than life insurers do when it comes to Solvency II changes due to their different business models, but noted that opportunities were still present. “One of the biggest challenges I hope it addresses will be provision of retirement and savings products; making them more competitively priced,” she said. “We need to think about how we get this £100bn deployed successfully.”
"The past six years have been worse for P&C insurers [for cat losses]."
She also highlighted that the extremes of catastrophe (cat) risk losses were increasing and more cash on hand for insurers was needed to be able to adequately respond. “The past six years have been worse for P&C insurers [for cat losses],” she said.
Mathieson added that if extreme cat risk losses continued there could be a need to rethink where insurers can operate and to what extent – which would mean more vulnerable communities could be left underinsured.