A 75-page independent report examining Solvency II reforms and the Prudential Regulation Authority’s (PRA) quantitative impact study (QIS) has been released by broking giant WTW.
Prepared by WTW’s UK insurance practice for the Association of British Insurers (ABI), the document aims to demonstrate to policymaker and regulatory stakeholders the potential consequences of methodological choices being considered in the 2021 QIS.
It reads: “The QIS framework does not satisfy the collective objectives of the HM Treasury review of Solvency II, as it would lead, if implemented, to material reductions in, and increasing volatility of, insurers’ own funds, prioritising increased prudence to the detriment of competition and growth.
“The resulting reduced own funds and balance sheet volatility will create a more challenging environment for insurers to make long-term investment decisions and to write new long-term business. All else being equal, we would expect plans for future new long-term business volumes to downsize.”
The abovementioned changes, said WTW, could force UK insurers to transfer more risk off balance sheet and outside the UK to less onerous regimes, rather than stimulate growth and investment in the country.
“A significant limitation of the QIS data,” the report also asserted, “is the lack of information on how the capital that firms are required to hold might be impacted by the updated MA (matching adjustment) methodology which the PRA did not test through the QIS. Solvency capital implications of the scenarios have therefore not yet been analysed; however, for the sample at year-end 2020 the aggregate ratio of own funds to the capital required to be held is 145%.
“Without a corresponding reduction in required capital, the reductions in own funds would have possible implications for customer prices, firms’ credit ratings, and their ability to raise capital. Any knock-on detrimental impacts on capital requirements would further impact the health and competitiveness of the UK insurance market.”
In WTW’s view, a more holistic approach should go beyond the balance sheet and include governance, risk management, and reporting considerations, to satisfy the review objectives.
“The QIS has naturally focussed on the level of insurer capital; however, some of the apparent concerns of the PRA are already addressed through risk management, governance, and disclosures in Pillar 2 and Pillar 3, with a much lower level of cost and disruption to the industry,” highlighted the brokerage.
“We strongly support working together in a constructive dialogue between policymakers and industry that progresses development on these important areas.”
Commenting, ABI prudential regulation head David Otudeko called Solvency II reform a once-in-a-lifetime opportunity that has the potential to allow the industry to do much more, not only in providing peace of mind to customers but also in supporting economic growth and the net zero transition.
“Our analysis demonstrates that increased volatility and a material reduction in the funds held by insurers to withstand shocks are a likely outcome of any reforms to Solvency II that resemble those explored in the quantitative impact study,” stated Anthony Plotnek, a director at WTW’s insurance consulting and technology unit and co-author of the report.
“Commitment to a constructive dialogue between industry and regulatory stakeholders is a necessity in finding a way forward that increases UK competitiveness internationally, supports insurers as providers of long-term capital, and protects policyholders.”
