Moving on: Sam Woods’ talk on Solvency UK regime and the next steps

On 20th February, Sam Woods, the Deputy Governor for Prudential Regulation and CEO of the Prudential Regulation Authority (PRA), delivered a speech [1] on the next steps for reforming the Solvency II insurance regulations in the UK.

To begin, the PRA Head reiterated that the government does not intend to implement major changes in the fundamental spread calculation approach. To do this, PRA provided assurance that the new instruments and flexibilities offered under the new proposed Solvency UK regime won’t be used, implicitly, by the PRA to achieve similar results to those previously expected through fundamental spread reforms. Instruments being introduced by the government through the reforms include:

• Formal attestations by senior managers on the aptness of the Matching adjustment (MA) levels being allowed by insurers;

• An allowance for additional adjustments in fundamental spreads in cases of insufficient MA;

• The publication of individual firms’ stress testing exercise results.

In addition, the insurance industry is increasing its assessment focus on the impacts of the proposed reforms on the MA and the expected significant reduction in the Risk Margin. Nonetheless, Mr. Woods emphasised the importance of, and provided clarifications on, other pivotal aspects of the reforms previously announced by the UK Government:

• Removal of unnecessary bureaucracy from the regime, via reduced reporting requirements; reduced internal model tests (or standards); and a widened asset eligibility for MA. Thereby removing unnecessary complexities; maintaining a quicker model approval process; and allowing for investment flexibility for insurers.

• UK market expansion by expanding the Solvency UK regime thresholds; removing capital requirements for branches of foreign insurers; allowing greater flexibility in group capital requirements’ calculations; and adopting a more comprehensible UK ISPV regime. Thereby removing or reducing barriers to entry, and hence enhancing the competitiveness of the UK market.

The expected significant reduction in the MA due to the proposed reforms would involve herculean efforts on the part of insurers to manage a volatile balance sheet, while simultaneously ensuring policyholder protection. Consequently, the governor stressed that adequate valuation and a more granular rating of assets under the matching portfolio is a crucial aspect of the regime in order to maintain appropriate MA levels.

Next steps

The PRA is currently collaborating with industry experts to gain valuable insight into some of the more complex areas of the reforms, such as:

• Reduced reporting requirements;

• Broadened asset eligibility to facilitate MA portfolio inclusion of productive assets with highly predictable cashflows;

• MA cap removal for assets below investment grade; and

• Other measures that might be necessary for the expansion of the UK market.

He confirmed that if the UK parliament supports the proposed Financial Services and Markets Bill, firms are expected to be informed of the operational aspects of these reforms by the end of 2023. The implementation phase is anticipated to occur in 2 stages, with PRA consultations for each being published in June and September 2023, respectively.