The Institute and Faculty of Actuaries (IFoA) has welcomed the UK government's plans for reforms to Solvency II regulation, but has recommended an alternative approach to the fundamental spread methodology.
In its response to the Treasury’s review of Solvency II, which closed last week, the IFoA acknowledges “justifiable concerns” over aspects of the current fundamental spread methodology, such as limited risk sensitivity.
However, it said that the “revolution” in approach proposed is not appropriate, and has published accompanying research considering how adjustments could be made to the existing methodology, in an “evolution” of the current regime.
These seek to address some of the Prudential Regulation Authority's concerns around risk sensitivity, and to better reflect the characteristics of different asset classes.
The IFoA also said that it broadly supports the Treasury's ambition in removing unnecessary restrictions in the use of the matching adjustment.
“It is really important to find an appropriate fundamental spread methodology if the new Solvency regime is to meet the government’s ambitions to increase the insurance industry’s investment flexibility,” said IFoA president Matt Saker.
“We believe our response and our research address the Treasury’s wider objectives to provide a prudent regulatory regime, foster innovation and competitiveness, provide policyholder protection and release long-term infrastructure and green investment.
“Actuaries have a range and depth of expertise in this specific and highly technical area. For this reason, the IFoA has an important role to play in the debate on the future evolution of this Solvency II review and we look forward to engaging further with Treasury in the development of this regulation.”
The Treasury launched its review of Solvency II in April, which aims to boost the competitiveness of the insurance sector, and support insurers to invest in infrastructure, venture capital and growth equity after Brexit.
However, new analysis by Willis Towers Watson (WTW) suggests that the current proposals would not realise the opportunity to release more capital for investment.
The firm argues that, for the majority of annuity writers, the proposals would result in lower available capital and not provide the types of release indicated to meet the Treasury'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, would require more capital.
Anthony Plotnek, director at WTW, said: “It is detrimental to the UK economy and future policyholders to have overly prudent protection for existing policyholders as this will drive up future prices, likely increase the use of overseas reinsurance and reduce the capital for UK government climate change, and mean less investment in productive assets.
“A more balanced package of reforms is required to avoid significant change to the level and volatility of the matching adjustment and result in a less polarised outcome for different types of insurers.”
Image credit: Shutterstock / Giulio Benzin
Author: Chris Seekings