The Bank of England will focus on the soundness of insurers and protection of policyholders while supporting the industry to invest in the UK economy and the green transition, according to its governor Andrew Bailey.
Setting out the central bank’s priorities to the Institute and Faculty of Actuaries (IFoA) last week, Bailey said that leaving the EU offered an opportunity to review the financial services regulation framework.
He described Solvency II as “an omnibus-type regulation” that seeks to cover many different national markets with different product mixes. UK life insurance is quite “heavily annuity focused” in products, he said – which is not the case in many EU markets.
“This might sound like a recipe for a free-for-all – in fact, it is anything but that,” he said. “The public interest objectives across countries have a lot in common, even where the products used do not.
"In the case of insurance, the essential public policy objectives for prudential regulation are the safety and soundness of insurers, and the protection of policyholders. These are the bedrock of public policy in terms of prudential insurance regulation.”
However, Bailey said that stating the objective “doesn’t tell us how much or what levels of safety and soundness and policyholder protection should be delivered, in what form and how”. Nor does it preclude other secondary or subordinate objectives that also meet a suitable public interest test.
The governor said two particularly material items are under review in the reform of Solvency II – the risk margin, part of the balance sheet value of a firm’s insurance liabilities, and the matching adjustment, which allows insurers to recognise upfront as-yet unrealised returns on eligible assets.
“The current calibration of the risk margin is too sensitive to interest rates and, in particular, is too high when rates are low. The case for reducing it is well made, though I should caution that doing so has elements of both art and science to it – in other words, there isn’t an unambiguous answer.”
As for the matching adjustment, Bailey acknowledged concerns that Solvency II “as a negotiated compromise has created risks to our primary objectives”.
The governor said that the Prudential Regulation Authority and the Treasury are “working intensely” on these issues, and pledged that the Bank of England will engage with the insurance industry on solutions that meet statutory objectives.
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Author: Huw Morris