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Solvency II: Independent analysis of proposed reforms

The ABI has today published our response to the Government’s consultation on Solvency II, the insurance and long-term savings industry’s prudential regulatory regime, setting out how the current reform proposals would not realise the opportunity to release more capital for investment.  We have also published our response the Prudential Regulation Authority’s Discussion Paper DP 2/22 on potential reform to the Risk Margin and Matching Adjustment in Solvency II.

A key Government objective in reforming Solvency II includes the ambition to support insurance firms to “provide long-term capital to support growth, including investment in infrastructure.”

The ABI’s consultation and discussion paper responses includes analysis from WTW which indicates the current proposals would not achieve the suggested release of 10 to 15% of capital for re-investment. Life insurance firms would have to hold more capital than currently required, preventing them from being able to provide the funds that are needed for investment across the UK.

The findings from WTW show that:

  • Quantitative analysis of the proposed reforms of the Matching Adjustment and Risk Margin show a wide range of impacts across firms.
  • For the majority of annuity writers, the proposals would result in lower available capital and not provide the types of release indicated to meet HMT’s Solvency II review objectives.
  • For firms focussed on writing material volumes of bulk purchase annuity business, a 60-70% reduction in the Risk Margin combined with the proposed significant reduction to the Matching Adjustment benefit, more capital would be required.

David Otudeko, ABI Assistant Director, Head of Prudential Regulation, says: “The analysis from WTW has formed an important contribution to our response to the Government’s Solvency II consultation, showing the current proposals would not create the desired opportunity to release more capital for investment. This is a significant opportunity to tailor the insurance and long-term savings’ regulatory regime to the specific needs of the UK and to benefit our economy, the environment and customers. We will continue to work closely with the ABI’s members, the Government and the PRA to find an outcome to the Solvency II reform which meets all of our objectives.”

Notes to editors:

The analysis contained in WTW’s report is based on year-end 2020 QIS data that WTW has not independently audited or verified. This data will not reflect the material changes on insurers’ balance sheets that will have resulted from the significant rises in risk-free rates (c. 200bps) since that date. WTW’s analysis should be considered in its entirety as individual sections are not intended to be considered in isolation.

Further information, please contact the ABI Press Office

Last updated 21/07/2022