In response to the practical difficulties of the Directive, the Report recommends that the PRA should have a pragmatic discussion with the insurance industry. This should focus on the scope for amendments and increased proportionality in the implementation of the Directive.
The development and implementation of Solvency II has been a major event for firms and regulators across the European Union. During the last Parliament, the Treasury Committee received over 50 pieces of written evidence on EU insurance regulation, and held three oral evidence sessions, from a diverse range of stakeholders including insurance firms, financial regulators, consultants, trade bodies, expert associations, and individuals. This report draws on that evidence and concludes an inquiry for which much of the groundwork was done by the previous Treasury Committee.
With such a large piece of legislation, it should not be a surprise that there are a number of areas that need to be refined. Specific areas explored in this Report include:
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the risk of procyclicality and market distortion;
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the potential impact on long term savings and investment, and the function of the Matching Adjustment;
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the calibration of the Risk Margin;
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the approval of Internal Models and subsequent model change;
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the volume and complexity of data required from firms;
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the usability of the Volatility Adjustment;
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the working of the Transitional Measure on Technical Provisions; and
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the rigidity of Solvency II’s approach to Contract Boundaries.
The evidence submitted to the previous Committee highlighted problems both with the legislation as drafted and with the way it has been implemented in the UK by the Prudential Regulation Authority (PRA). 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–for example, around the availability of investment grade long-term assets. Such disagreements do not foster good policymaking.
[...] Given the complexity of the task and the importance of the industry, both domestically and internationally, the Committee would like to see the development of a clear agreed strategy designed to provide a roadmap for:
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what changes to insurance regulation can be implemented by the UK authorities now, unilaterally, without the need for a change in the Solvency II Directive (to include consideration of what steps would be required to allow regulatory forbearance to limit systemic risks in the event of market turbulence);
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what steps the UK regulator would like to see taken to refine the Directive or its applicability to the UK post-Brexit, as a contribution to the Brexit negotiations;
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what action can be taken post-Brexit to foster innovation, competition and competitiveness for the benefit of UK consumers and the standing of the UK’s place in the international insurance industry; and
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how UK insurance regulation will harmonise with international capital standards and emerging accounting standards.
Press release
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