It looks like risk margin rules are here to stay, as is, despite opposition from the UK insurance industry.
Prudential Regulation Authority chief executive Sam Woods has sent an update to Treasury Committee chair Nicky Morgan MP on the issue surrounding European Union Solvency II, saying effecting changes isn’t likely. Woods cited a lack of significant immediate concerns.
“In the context of the ongoing uncertainty about our future relationship with the EU in relation to financial services we do not yet see a durable way to implement a change with sufficient certainty for firms to be able to rely on it for pricing, capital planning, and use of reinsurance,” said the deputy governor in his letter published by the Bank of England.
Woods reiterated that the regulator has been examining its supervisory approach to the use of future risk mitigation and transfer mechanisms in several contexts, and this includes the risk margin calculation. “We have looked at this option very carefully, and think it has some merit as a solution to the problem the risk margin is causing,” he noted, but went on to cite Brexit – as mentioned above – for the non-change view.
“Broadly speaking, transitional measures offset the risk margin for business written before Solvency II, and for new annuity business firms have responded to the level of risk margin by reinsuring a substantial proportion of the longevity risk offshore,” wrote Woods. “This build-up of the stock of offshore reinsurance is an unintended consequence and, if left unconstrained, would become a significant prudential concern.
“Our supervisory reviews of firms’ reinsurance activities have not, however, brought to light significant immediate concerns about the way in which that reinsurance is being conducted. Similarly, it does not appear that Solvency II is having a detrimental impact on policyholders via annuity prices, the dominant drivers of which continue to be risk-free interest rates and corporate bond spreads.”
The message, however, did not sit well with the Association of British Insurers (ABI).
“The Prudential Regulation Committee have chosen not to take action to address an issue which they themselves have said is having a highly damaging impact on the UK insurance industry and its customers,” The Telegraph quoted ABI director general Huw Evans as saying. “While it is a step forward for them to confirm a technical solution to the problem exists within the current Solvency II framework, that only makes it more frustrating to hear that uncertainty about Brexit has prevented the regulator acting in a way that makes sense for UK plc.”
In his letter, Woods said they will keep their position under review and will let the Committee know as soon as “a clear way forward” emerges.
