Prudential Regulation Authority (PRA) chief executive Sam Woods (pictured) says the insurance regulation inherited by Britain from the European Union consists of areas that are either too strong or too weak for the UK market, and that a balance must be struck as changes roll on.
“The UK’s post-Brexit review of insurance regulation is entering a critical phase, with important decisions shortly to come for us, government, and Parliament,” stated Woods during a Bank of England (BoE) webinar. “With that in mind I thought it would be useful to highlight some of the key points from the Prudential Regulation Authority’s perspective, while HM Treasury’s current consultation on Solvency II is ongoing, with a particular focus on the main point of contention between us and parts of the industry.
“My main message is this: Following Brexit we have a once-in-a-generation opportunity to re-shape insurance regulation to work better for the UK. We can do this while loosening parts of the regime which were over-calibrated by the EU and making it easier for insurers to invest in a wider range of assets, but we also need to strengthen it in one area in order to avoid risks to the millions of current and future pensioners who rely on insurers for their retirement income.”
The PRA CEO and BoE deputy governor for prudential regulation said the combined effect of the reforms should support the government’s goals towards competitiveness, growth, and investment in the economy.
In his speech, Woods stressed that both the “over-cooked” and “too weak” elements of the EU insurance regime must be addressed; not doing so would put policyholders at risk, he said. The chief executive also highlighted the risk margin and matching adjustment components of the regulations, and what changes the regulator deems necessary.
Woods noted: “In our view our proposed package of reforms to insurance regulation will support all of the government’s objectives for the [Solvency II] review. But it is essential that we take forward all three elements: a major loosening of one important part of the regime (the risk margin); changes to cut bureaucracy, and to enable insurers to invest in a wider range of assets; and changes to put another part of the regime (the matching adjustment) on to a more sustainable footing.
“Industry views at this stage seem broadly to support the first two elements of the package, but not the third. In our view a package which did not tackle the issues we have identified with the matching adjustment would be seriously unbalanced. It would simply remove bits of regulation that insurers don’t like without taking proper account of risks to policyholders, and would not provide a solid basis for investment.”
“I worry that some might consider such a thing to be a free lunch,” he continued, “but in fact less capital, fewer checks, and fewer restrictions on assets, with no steps to strengthen the part of the regime where that is needed, means more risk for pensioners and other policyholders.”
It was pointed out that the matching adjustment is rarely used in the European Union, and thus the block has no need to consider the same reforms the UK should be looking at.
The CEO went on to state: “In our view leaving the EU should not lead us to lower standards of financial regulation in the UK. We should change regulations to work better for the UK, including by stripping away unnecessary bureaucracy we have inherited from the EU and taking steps to support investment, competitiveness, and long-term growth. But changing prudential regulations in the UK should not be simply a one-way street, particularly where that would mean weakening protections for business which serves groups such as pensioners.
“There are areas where the regulation we have inherited from the EU is too strong for the UK, and others where it is too weak. We should be willing to make changes in both directions where the evidence supports it. Industry will of course have strong views on any changes – we should attach significant weight to these and be willing to adapt our thinking in light of evidence provided. But regulation is there to serve the British public, and that should guide us as we aim to strike the right balance in this important set of reforms.”
