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05

Rationale for Solvency II

Open-access content Tuesday 3rd May 2016 — updated 5.50pm, Wednesday 29th April 2020

Cathal Rabbitte’s letter (The Actuary, March) was interesting reading for someone who describes Solvency II as yesterday’s solution to the previous day’s problem.


Cathal Rabbitte's letter (The Actuary, March) was interesting reading for someone who describes Solvency II as yesterday's solution to the previous day's problem.

For decades, much of the UK life assurance industry has pursued a business model around products that transfer risk to policyholders. Consequently, most of the industry's investment risks threaten possible legitimised policyholder detriment but without direct first-order solvency implications. This, unlike detriment from insolvency, is not mitigated by compensation schemes.

In the UK now, life company insolvency is no longer the major potential cause of poor policyholder outcomes. 

The risk transfer business model has arguably removed much of the rationale for Solvency II.

This inevitably calls into question whether resources devoted to Solvency II were really proportionate to the scale of its relevance within the bigger picture.

Perhaps complex mathematical models of factors affecting solvency are more exciting than considering how to contain the worst aspects of potential policyholder detriment inherent in the risk transfer business model. But the latter challenge, however seemingly mundane, might be more significant in the overall scheme of things.

Ironically for a designated consumer protection measure, some who worked on Solvency II maintained that less diligence was needed for risks to policyholders than for those falling on the firm. This concept exists at least once in the final product.

Lastly, a possibly naïve question on market-consistent valuations. How to operate the £1 trillion-ish existing UK unit-linked business, including tracker funds, with a different asset valuation methodology?


Peter Morris 

15 March 2016

This article appeared in our May 2016 issue of The Actuary.
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