MPs investigating how Solvency II impacts UK insurers have released an at times excoriating report on Solvency II and its enforcement by the UK regulator, and demanded the two parties engage more on contentious issues.
The House of Commons Treasury Select Committee said insurers and their watchdog must foster "greater confidence in one another", in its report, The Solvency II Directive and its impact on the UK Insurance Industry.
It is also demanding the Prudential Regulation Authority (PRA) update it by next April on how it has addressed 11 key points of discord with the industry, and whether underwriters agree with its approach.
Nicky Morgan MP, chair of the Treasury Committee, said: "The UK insurance industry managed investments of over £1.9trn in 2016 and paid nearly £12bn in taxes. We should not ignore the consequences of Brexit on this important UK industry, nor the way that it is regulated irrespective of Brexit."
The committee report published today painted a picture of an industry at sixes and sevens with its own supervisor over Solvency II. "While some differences of opinion are to be expected, the current committee is as concerned as its predecessor at the extent of disagreement between the PRA and industry on matters that should be relatively factual."
It noted that parties submitting views to it about the legislation and its implementation ranged from "'absolutely dreadful' to a view that, while there are 'bits of it that don't work well', the 'fundamental regime is pretty sensible'."
It urged the PRA to think beyond Brexit and an industry directly ruled by Solvency II, to ensure its ongoing supervision lets UK insurers remain competitive beyond the EU, and it and the industry should jointly figure out where aspects of Solvency II can be changed while the UK is still an EU member.
"The PRA should consider the end goal, including areas which can be developed after Brexit, rather than confining its thinking to what can be accomplished within the parameters of Solvency II," the committee's report said.
"The goal is a system of regulation which is right for the UK insurance industry and which meets the current and future needs of consumers, providing a prudent regulatory structure without stifling competition and innovation."
With this in mind, the committee suggested reinstating 'competition' alongside 'solvency' as a primary goal of the supervision.
It said also that the PRA must reflect on skills and experience in its insurance directorate "to ensure there is a genuine 'feel' for the insurance industry", and conduct more staff exchanges with the sector "so that each can appreciate the objectives of the other".
The committee identified 11 key points of friction between insurers and their regulator, and possible remedies, including:
- the risk margin, whose calibration the industry and PRA should jointly improve;
- the matching- and volatility adjustments, where the watchdog and underwriters should alleviate the burden on insurers to "develop complex structures in order to achieve the regulatory treatment that they warrant";
- illiquid assets, where the parties should agree an approach of treating these that "balances prudential concerns with the desire not to create unreasonable barriers to insurers investing in long term assets";
- data provision, where the PRA should apply proportionality;
- transitional measures on technical provisions, for which the parties should simplify calculation and approvals;
- internal models, where the PRA should simplify the approval process, among other steps;
- reporting models, where the PRA should "provide a view of where it might be possible better to align UK regulation post Brexit with IFRS 17";
- developing a solution for firms who will lose the legal validity of their contracts after Brexit;
- addressing hurdles to market entry contained in the standard formula;
- developing proposals for the introduction of forbearance at the national level to deal with procyclicality; and
- the issue of contract boundaries.
The committee also criticised the PRA's application of Solvency II rules for being sometimes unbending.
The committee wrote: "Although in theory the Solvency II legislation allows for 'proportionality', in practice it encourages a detailed rules-based approach to implementation, which a cautious and professional regulator such as the PRA found it difficult to avoid.
"Solvency II has been very costly to implement, and there are areas which are defective, partly due to the underlying rules-based directive and partly due to a lack of proportionality in implementing it. The PRA needs to ensure that its supervisory approach reflects a balance between its prudential and competition objectives."