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Categorized | Insurance

Insurers claim capital rules are harming customers

Posted on November 17, 2016

UK insurance groups have claimed that the latest EU capital regulations are harming customers and distorting markets — and are calling for changes in the way they are implemented.

According to the Association of British Insurers, the Solvency II rules, which came into force at the start of the year, have had unintended consequences and a reassessment is needed.

Its comments come in a submission to parliament’s Treasury select committee, which has launched an inquiry into the post-Brexit future of Solvency II in the UK. When it launched the investigation in September, the committee said it would look at the impact of the rules on customers, the economy and the competitiveness of the UK insurance industry.

One of the ABI’s main bugbears is the impact of Solvency II on the long-term life insurance business. It says that the rules have been one of the reasons why several insurers have left the annuity market, a trend which it says has reduced customer choice. It also says that Solvency II has encouraged many UK insurers to pass longevity risk on to offshore rivals via reinsurance contracts — a consequence that it argues was not intended when the rules were drafted.

It also takes issue with the way in which the Prudential Regulation Authority has interpreted the rules. “The PRA’s implementation of Solvency II goes beyond the requirements of Solvency II in a number of important areas, and we would argue goes beyond what is necessary for financial stability.”

Other complaints include the compliance and governance costs associated with the regime, and the capital charges on long-term investments such as infrastructure, which it says are too high.

At an investor day on Wednesday, Prudential made its feeling about the regime clear. “We’re no fans of Solvency II and we see no reason to pull our punches,” said chief financial officer Nic Nicandrou. “In an ideal world we’d like to see the whole thing dropped.”

The company’s chief executive, Mike Wells, said that the rules were pro-cyclical and “massively” sensitive to interest rates. “It’s great that the committee is taking a look at it,” he added.

Overall, the ABI said the structure of the rules, which took 10 years and £3bn to develop and implement, did not need to change.

“Solvency II is broadly fit for purpose,” explained Steven Findlay, head of prudential regulation at the ABI. “Insurers want equivalence with the rest of the EU and there is not enough time before we leave to develop a new set of regulations.”

However, he added: “Following the credit crisis, it was natural for the Prudential Regulation Authority to err on the side of caution in its implementation of the rules, but it is now time to reassess, to make sure they are flexible enough for the UK market.”

Experts warn that wholesale changes are unlikely, though.

“I don’t expect there to be significant changes post-Brexit, and changes won’t happen quickly,” said Oliver Wareham, partner at law firm Slaughter and May. “The UK would start with a regime that is equivalent to Solvency II and there would be pressure not to jeopardise that.”

But he added that some adjustments were possible. “The PRA aren’t seen as a light touch regulator but I think they would like more flexibility to make their own judgments on the rules. Previous comments from the PRA suggest that they would be open to some changes.”