Hugh Savill, Director of Regulation, ABIThe stroke of midnight at the end of this month marks an annual milestone that will be celebrated across the world. This year, it will also be a significant moment for insurers and reinsurers in the UK and across Europe, as it heralds the introduction of a new prudential regulatory regime.
Over 10 years in the making, the road to Solvency II has been long and winding. Over this time, ABI members have invested £3 billion to ensure the transition is smooth and successful, and the industry is well prepared for the new regime. This means that customers should not notice any change and can instead enjoy the New Year revelry.
But, customers are at the heart of Solvency II. It is intended to ensure a uniform and high level of policyholder protection, giving customers’ confidence in insurance products. Solvency II will also modernise supervision across the EU, shifting focus from solely compliance and capital, to include the evaluation of insurers’ risk profiles, risk management, and improved reporting and transparency.
The UK industry continues to support these objectives, and the UK industry is ready and well placed to make the transition. The PRA already oversees the Individual Capital Adequacy Standards, a sophisticated risk-based regulatory regime which acts as a bridge to Solvency II. Further to this, the PRA has been consistently clear in its view that the UK industry is already well capitalised.
Whilst the objectives of Solvency II are sound, an extraordinary amount of resource and management time has been invested in implementation. Some breathing space is now required to give time for Solvency II time to settle in. Whilst firms are focused on embedding the new regime into their business model, their risk management approach and their culture, it will also be vital there is supervisory and regulatory focus is on ensuring convergence of the regulation.
Solvency II is intended as a single rule-book that creates a level playing field for insurers operating across the European single market. For this to be realised, national supervisors need to interpret and apply the rules consistently. EIOPA, the pan-European supervisory authority, has a critical role to play in ensuring this.
The UK industry will also be a part of this conversation. Many UK firms operate across multiple European jurisdictions and therefore interact with different European regulators, so consistency in approach and interpretation would enhance efficiency. More importantly, convergence and consistency are essential to fully realise the intention of a level playing field, to ensure the competitiveness of the insurance industry in the UK as well as across Europe. In a range of areas, including the calibration of shocks for a variety of risk types, the treatment of sovereign exposure and the application of key concepts such as the volatility adjustment, it is clear there will not be a level playing field from day one. But, the New Year will provide an opportunity to review and address this.
The successful implementation of Solvency II has been a top priority this year for many ABI members and, with more UK firms having received internal model approval than in any other EU Member State, it is an achievement to reflect on as we near the end point – even if this milestone is unlikely to feature prominently in many New Year’s celebrations. When we wake up on January 1, 2016, it will be the start point of another journey for the industry. Firstly, embedding and adapting to Solvency II. Secondly, engaging with regulators and governments to ensure a convergent and consistent approach, which provides a high level of policyholder protection without impacting on the competitiveness of the UK industry.
For more information, see the recent ABI Think Piece, Growth and Regulatory Disruption in a Globalising Insurance Market.
Hugh Savill is Director of Regulation at the Association of British Insurers (ABI).