The upcoming changes to the UK’s solvency regulations, expected to be finalised in November, are expected to bring positive impacts for UK insurers, according to a recent report by AM Best.
The reforms follow the Prudential Regulation Authority’s (PRA) review of Solvency II and will largely affect the life insurance sector.
In its report, AM Best highlights key elements of the PRA’s planned reforms, which include adjustments to the risk margin (RM) for life insurers, modifications to discount rates within the matching adjustment (MA) calculation, and revised eligibility criteria for assets and liabilities within MA funds.
Additional regulatory simplifications are planned, with changes tailored to smaller insurers, internal models, and recalibration of transitional provisions. The revised framework will be branded as Solvency UK, a regulatory structure intended to diverge gradually from EU standards.
In its analysis, AM Best suggests that the reforms could yield benefits for insurers, particularly life insurers, although it does not expect immediate major impacts. AM Best notes that expanded eligibility criteria within the matching adjustment could allow insurers to hold more unlisted investments, a move that may lead to a broader asset base while maintaining risk profiles.
Further, changes to risk margin and matching adjustment mechanisms could provide net gains for insurers, depending on the asset composition of their MA portfolios.
Over the long term, AM Best anticipates that partial matching adjustment treatment for previously ineligible assets and liabilities could foster product innovation, as insurers may explore new investment opportunities that align with regulatory adjustments.
Meanwhile, the European Union is pursuing a similar Solvency II reform programme that will also largely impact the life insurance sector, albeit with different priorities compared to the UK approach.
AM Best observes that the EU reforms include a slightly higher cost of capital in risk margin adjustments (4.75% compared to the UK’s 4%) and minimal changes to the matching adjustment, which is infrequently used in the EU. Instead, the EU is making modifications to the volatility adjustment to resemble aspects of the UK’s matching adjustment approach.
Further adjustments in EU capital requirements are also planned, with reductions for specific equity investments.
In addition, the EU and national regulators are addressing recalculations of transitional measures on technical provisions (TMTPs) to ensure they remain proportionate following interest rate increases. UK insurers have been recalculating TMTPs as of December 31, 2023, with a similar focus on maintaining balance in response to economic shifts.
AM Best notes that while these reforms represent a gradual divergence between UK and EU solvency regimes post-Brexit, the two frameworks remain closely aligned in many respects.
The rating agency’s Best’s Capital Adequacy Ratio (BCAR), which measures balance sheet strength against financial risks, typically uses inputs from financial reporting rather than regulatory submissions. This distinction has been emphasised by the adoption of IFRS 17, which has altered links between regulatory and financial reporting.
Insurers often operate with high regulatory solvency ratios, and AM Best expects that these ratios will continue to evolve under varying political and economic influences.
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