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Government’s response on the Review of Solvency II

29 July 2021
Ricardo Melo

On 19 October 2020, the Government published a Call for Evidence as the first stage of its Review of Solvency II.

In early July 2021, the Government published the Response from life and non-life insurers, reinsurers, industry representative bodies, consultancies, law firms, and the public, alongside, with their next steps. The Call for Evidence and the following response was a wide-ranging process used by the Government to search and publish opinions on main concerns for reform of Solvency II.

On one hand, respondents considered that Solvency II could be enhanced by being more effective and efficient, including the removal of certain requirements. On the other hand, a small portion of respondents are concerned that reforms might create future discrepancy between EIOPA and PRA regimes.

Please see below a summary of the responses and the Government’s arrangements:

  • Respondents were strongly supportive of the Solvency II regime, they considered that it had improved the standard of risk management, reporting and regulation. There was little appetite for it to be replaced.
  • There was appetite for Solvency II to be improved while retaining the current framework.
  • The Solvency Regulations are rules-based and viewed as being excessively rigid. Therefore, the Government wants to see a more proportionate and flexible regime.
  • Any reformed regime would need to include a better mix of judgement and rules, to offer long-term capital to the economy including investments consistent with climate change related risk. Hence, the Government will work with the PRA to identify an ideal reform package.
  • The risk margin is currently too high and too volatile. Risk margin restructuring would also affect the Transitional Measure on Technical Provisions (TMTP) . Subsequently, risk margin reforms would free up reserves on insurance companies’ balance sheets.
  • Allowing a broader eligibility criteria of asset classes with different characteristics for the matching adjustment portfolio would help enable insurance firms to provide more long-term capital to the economy.
  • Any framework for solvency capital requirement calculation needs to operate efficiently and effectively. Accordingly, the Government approves that such requirements shall not place disproportionate burdens on insurance companies either by standard formula or internal model.

Next Steps from the Government and PRA:

  • The Government will work alongside the PRA to evaluate the 2021 quantitative impact study outcomes, in order to comprehend which combination of improvements would best meet the Governments’ objectives and what the total effect would be.
  • The Government will publish a second consultation on the Future Regulatory Framework Review later in 2021.
  • The Government will launch the scope and main features that the PRA must establish when changing the Solvency II components in its Rulebook.