Solvency II reform plans get cautious industry backing

Call for government to overhaul internal model approval process as part of reforms

Jonathan Stapleton
clock • 2 min read
LCP)partner Charlie Finch says reforms must not undermine policyholder security
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LCP)partner Charlie Finch says reforms must not undermine policyholder security

Solvency II reforms to be introduced by the government have been broadly backed by the industry.

This morning, chancellor Kwasi Kwarteng announced that, as part of its growth plan, the government would replace Solvency II regulations with "rules tailor made for the UK" in a bid to free up billions of pounds of investment.

ABI director general Hannah Gurga said: "As the chancellor recognised, more can be done to unlock investment and the insurance and long-term savings industry has a vital role to play as institutional investors.

"We have long called for regulatory change to enable our sector to invest more in infrastructure that supports growth and the transition to net zero, and we look forward to hearing from the government on Solvency II reform later in the autumn."

Lane Clark & Peacock (LCP) partner Charlie Finch welcomed the plans but said they must not impact policyholder security.

He said: "We fully support changes that will allow insurers to be more competitive and make the Solvency II rules better fit for purpose. However, it is vitally important that, in the rush to promote growth, the reforms do not undermine policyholder security.

"In just the past three years, over £100bn of money has been put into annuities by defined benefit pension plans through buy-ins and buyouts. This was on the grounds that the UK insurance regime is one of the most robust in the world providing a safe, long-term home for people's pensions."

LCP insurance partner Charl Cronje was excited by the prospect of Solvency II reform but said it all "depends on the detail".

Cronje also had a clear wishlist for what the government should change. He said: "When the UK adopted Solvency II, the internal model approval process (IMAP) made it impractical for many firms to use internal models to set regulatory capital.

"So, at the top of my wish-list for a post-Brexit UK regulatory regime would be the reintroduction of the ability for all firms to use models that appropriately reflect their risk profile and help with real world risk management, rather than a rigid standard formula. As in the pre-Solvency II era, discretionary regulatory loadings could be used to bridge any gaps in model sophistication and encourage ongoing improvements in modelling over time."

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