“The probability that a life insurance firm would hold sufficient capital to withstand the solvency standard stress level will be 99.4% when compared to the current level – a relative increase in the probability of failure of around 20%.”
Those were the words of Bank of England governor Andrew Bailey in a letter that was published by the Treasury Committee this week. In the correspondence, Bailey pointed to the increased likelihood of UK life insurers collapsing under the Solvency II reforms put forward by the government.
“We think that over a one-year period, it is likely that the estimated capital release of £14 billion (or 14% of the own funds at end-June 2022) could lead to an increase in the annual probability of failure for this sector of approximately 0.1 percentage points,” he told Harriett Baldwin MP in the letter seen by Insurance Business.
“This means that over a one-year period (if a firm just met the minimum regulatory standard), the probability that a life insurance firm would hold sufficient capital to withstand the solvency standard stress level will be 99.4% when compared to the current level – a relative increase in the probability of failure of around 20%.”
Under the proposed changes, the risk margin – which, as Bailey summed up, represents an estimate of the cost of transferring an insurer’s liabilities to a third party in the event of default – for life insurers would be reduced by 65%.
The BoE governor also highlighted: “Translating any increase in the probability of failure into potential future costs to the Financial Services Compensation Scheme (FSCS) and on public funds has further challenges.
“In the first instance, the failure of a large insurer would be likely to result in compensation being payable to eligible policyholders through the FSCS. The costs of funding these compensation payments would be expected to be borne at least in part by increased FSCS levies on surviving insurance firms in subsequent years.”
Bailey’s letter was made public by the Treasury Committee ahead of today’s 10am evidence session, which will feature Prudential Regulation Authority (PRA) chief executive Sam Woods.
“In the session, MPs are likely to discuss the government’s proposed reforms to Solvency II, as well as changes to financial services regulations, including the ring-fencing regime, which separates a firm’s retail banking services from the rest of their business, and the senior managers regime, through which regulators hold individual senior managers to account,” noted the Treasury Committee in its online post.
“The government is also proposing that regulators are to be given a new secondary objective to promote ‘growth and competitiveness’. Witnesses’ views are likely to be sought on how this will change the operation of the PRA and whether financial regulation currently constrains the UK’s growth.”
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