The Prudential Regulatory Authority (PRA) is proposing to use post Brexit freedoms to further reform solvency regulations, in order to help life insurers invest more in the UK economy.
This is part of a wider government objective to boost productive investment in the UK from the financial sector.
The PRA, part of the Bank of England, is now consulting on these reforms. It says these proposed reforms to insurers matching adjustment portfolios — which should enable insurers to make investment more quickly and into a broader range of assets. The PRA says that as well as boosting investment into productive finances this can also help improve firms’ risk management strategies.
In last year’s Autumn statement the government outlined areas of MA reforms that it would implement through legislation, and the areas of MA reform that would be implemented by the PRA.
EY UK financial services regulatory capital lead David Burton adds: “The matching adjustment has been a key area of contention and debate in discussions about UK Solvency II reforms.
“Today’s announcement should give the industry greater clarity around how the MA will work in the new regime, however, some of the proposals do not go as far as many firms had hoped. While certain directional changes will be welcomed – such as the introduction of notching, the removal of the two-month MA elimination, and proposals to widen the scope of assets and liabilities to be included in the MA – many firms hoped to see greater flexibility and a wider range of assets with predictable cashflows included in the MA.
“Firms need to understand the practical implications of the proposals on their operations, which will likely lead to further discussions with the regulator. Whether this will result in any changes to the eventual rules, however, especially considering the tight implementation deadlines, is unclear.”
Hymans Robertson partner and risk transfer specialist Michael Abramson says: “The Government has previously made much of Solvency UK giving more flexibility to invest in long-term productive assets like infrastructure.
“Today’s PRA consultation puts meat on the bones of this flexibility, although insurers may feel that the meat is rather lean. The PRA proposals set out which types of assets would newly be eligible, along with a limit of such assets such that they cannot provide more than 10 per cent of the portfolio benefit and various other restrictions.
“However, with nearly £300bn of assets held in matching adjustment portfolios overall and plenty of demand for bulk annuities, this could provide a modest boost to certain sectors over time.
“Some pension schemes considering an insurance buy-out will have been hoping that these asset freedoms will allow insurers to take on their illiquid assets. There may be some instances where the proposals would facilitate this, but given the various limitations, it will be no panacea.”