While questions remain, firms should act now to understand the impacts, influence future direction of technical consultation, and identify opportunities.
On 17 November 2022 "Solvency UK" was born as Chancellor of the Exchequer, Jeremy Hunt, gave his Autumn Statement alongside the release of the highly awaited response to the Solvency II reform consultation.
The revised Solvency UK package signals a significant departure from that consulted upon and the direction set by the Prudential Regulation Authority (PRA) in its discussion paper, DP2/22. Some aspects of the reforms are undoubtedly positive for insurers, especially when considering what was being consulted upon. However, if measuring Solvency UK against the existing Solvency II, how significant are the changes that are now coming – have the Government objectives for the reforms been met?
WTW held a second Solvency II Reforms Breakfast Roundtable on 29 November, following the success of our 10 May event which followed the publication of the HMT consultation in April. We were joined by 38 roundtable participants representing 24 insurance client companies. In this article, we will summarise what we believe we can now expect from Solvency UK reflecting on some of the discussion at our roundtable.
Solvency UK versus existing Solvency II – what's changing?
The PRA has been arguing for changes to the Matching Adjustment (MA) calculation approach to give a higher allowance for retained credit risk through the Fundamental Spread (FS), and for it to have a more direct link to current spreads. Instead, the consultation response confirms that the existing calculation approach will be maintained with only a modest variation.
Alongside this, the long-anticipated changes to the Risk Margin (RM) will also be adopted with an intention to reduce the RM by an average of 65% for long-term life insurers; a benefit the PRA had previously argued as possible only if there was a significant increase in the FS. Similarly, additional flexibility is being granted to allow a greater range of assets and liabilities to be considered eligible for MA portfolios.