Introduction

Gareth Truran, in his speech given at Bank of America Financials Conference on 20th September 2023, discusses the progress made in implementing Solvency UK, a new prudential regime for insurers, and its alignment with the broader UK regulatory framework. The changes aim to simplify Solvency II, adapt it to the UK market, support new entrants, and promote investment in productive finance while maintaining high standards for safety, soundness, and policyholder protection. Truran highlights the significant progress made and outlines the roadmap for future developments.

Implementing the New UK Regulatory Framework

To begin, Mr Truran provides an overview of the new regulatory framework in the UK, stating that Parliament has granted new powers to the Prudential Regulation Authority (PRA) which can be used to modify prudential regulations to align with UK needs, fostering competition, growth, and competitiveness. The PRA aims to contribute to economic growth by making informed policy decisions and promoting debate and research on the links between prudential regulation and competitiveness.

From Solvency II to Solvency UK

Truran discusses the evolution from Solvency II to Solvency UK. He mentions the November 2022 announcement by the Treasury, outlining the government’s plans for Solvency II reforms and the PRA’s role in implementing them. The PRA’s efforts have shifted towards developing and consulting on detailed policy proposals to expedite these reforms. The June consultation package simplified Solvency II, emphasising flexibility and judgment over prescriptive requirements to encourage market entry.

Investment Flexibility and the Matching Adjustment

The speech highlights the upcoming consultation on reforms to the matching adjustment (MA) to enhance investment flexibility. Truran outlines three key areas covered in the consultation.

  1. The regime will be updated to allow life insurers to include a wider range of assets in their MA portfolios, including those with highly predictable cash flows, promoting long-term productive investments.

  2. Streamline MA approvals and introduce an accelerated pathway for new investments to simplify processes.

  3. Supervisory measures to enhance risk management and policyholder protection.

MA Enhancements

He delves deeper into the enhancements to the MA, recognising the need to accommodate highly predictable assets while ensuring regulatory safeguards. The framework will identify additional risks introduced by such assets while allowing for flexibility in modelling and assessing these risks. The speech mentions the introduction of a new MA attestation framework to hold senior managers accountable for MA benefits and allow insurers to adjust risk allowances. Additionally, structured reporting will be introduced to monitor the evolution of MA portfolios and their impact on the industry.

4most’s Head of Insurance, Ramesh Indran, recently shared his thoughts on the updated framework with InsuranceERM Editor Christopher Cundy.

Implementation

An implementation timeline for Solvency UK reforms is also referenced. Details of the reforms will be published in stages, with final policies expected in the first half of 2024, and full implementation by the end of 2024. The Treasury plans to cut the risk margin for long-term life insurance by around 65%, releasing financial resources for more productive investments before the reforms take full effect.

Beyond 2024

Finally, Truran discusses future considerations beyond 2024. Potential areas for exploration include improving the proportionality of the regime for smaller insurers and evaluating the standard formula used by most insurers to calculate capital requirements. He outlines three main areas of focus:

  1. Enhanced Stress Testing: The PRA plans to enhance stress testing, publishing individual insurer results for transparency and market discipline. This will require engagement with stakeholders to understand the information users find most valuable and ensure proper understanding.

  2. Economic Impact: The PRA aims to assess the impact of prudential requirements on the economy, particularly in the life insurance sector. This includes evaluating the macroeconomic benefits and costs of insurer distress or failure.

  3. Alignment with International Standards: The PRA emphasizes the importance of aligning with international standards, such as the International Capital Standards (ICS), to ensure the UK’s competitiveness on the global stage.

Conclusion

In summary, Gareth Truran’s speech underscores the progress made in implementing Solvency UK while providing insights into the future of UK insurance regulation. The reforms aim to simplify regulations, encourage investment, and support the growth and competitiveness of the insurance sector. The PRA is committed to transparency, robust stress testing, and aligning with international standards to ensure a resilient and competitive UK insurance industry.

Read the speech – Solvency UK: Maintaining the momentum – speech by Gareth Truran | Bank of England