HM Treasury issued a call for evidence seeking views to reform the prudential regulatory regime—also known as Solvency II—of the insurance sector in UK. The review addresses potential areas for reform of Solvency II that could not only improve the efficiency and effectiveness of the application of the UK prudential regulatory regime, but also allow it to better recognize the unique features of the UK insurance sector. Views are also sought on how this regime can contribute to the climate change objectives of UK government. This call for evidence is the first stage of the review of Solvency II, which will also be informed by recent international prudential regulatory developments. The feedback period on this review of Solvency II ends on January 19, 2021. In a separate statement, HM Treasury highlighted that FCA has outlined a timeframe to align its climate risk reporting requirements with those proposed in the Pension Schemes Bill, with the Pensions Minister Guy Opperman welcoming the plans to usher in the landmark climate risk reporting measures in 2022.
The review of Solvency II will consider how the current prudential regulatory framework can be improved to ensure that it provides for an appropriate amount of capital for the insurance sector, for a high degree of policyholder protection, and for suitable standards of governance, risk management, and transparency. The government is seeking responses in the following key areas:
- Risk margin—The risk margin is an additional resource that an insurance firm is required to hold on its balance sheet. The government and PRA support the objective underpinning the risk margin and the protection that it provides to policyholders over and above other provisions in Solvency II. The government seeks views on the preferred way to reform the risk margin in UK.
- Matching adjustment—The government seeks views on whether the matching adjustment is operating optimally, including the criteria used to determine the eligibility of assets and liabilities. Moreover, the government seeks views on the role that the matching adjustment could play to better support delivery of its climate, "leveling up" and long-term investment objectives, including in appropriate infrastructure or other long-term productive assets. It also seeks views on the application processes for the use of the matching adjustment.
- Calculation of the solvency capital requirement (SCR)—The size, and calculation, of SCR is a critical part of Solvency II. The government seeks views on whether the current approach can be made less prescriptive, less complex, and increase the ability of regulators to apply supervisory judgment. In addition, the government seeks views on the role that the determination of the SCR can play to support insurance firms to deliver long-term capital to support growth, including to invest in infrastructure, venture capital and growth equity, and other long-term productive assets. The government also seeks views on the role that the determination of the SCR could play to support delivery of its climate change objectives, the delivery of its Green Finance Strategy, and address the risks posed by exposure to "stranded assets."
- Calculation of consolidated group SCR using multiple internal models—Particular rules for the calculation of SCR apply at the level of an insurance group. The government seeks views on the calculation of this group SCR, including circumstances in which the use of multiple internal models may be appropriate.
- Calculation of transitional measure on technical provisions—The transitional measure on technical provisions enables insurance firms to apply a transitional deduction to the value of their insurance liabilities in certain circumstances. The government seeks views on whether the provisions for the calculation of the transitional measure on technical provisions could be improved.
- Reporting requirements—The government seeks views on whether the reporting requirements for insurance firms are appropriate and deliver benefits that are proportionate to the costs of the preparation of the reports that are required. For example, reporting requirements could be reduced though the extension of eligibility for existing reporting waivers to cover a larger proportion of the insurance sector or the removal of some reporting requirements. Other possible changes could result in alterations or additions to the existing templates or to formalize the existing ad hoc requests.
- Branch capital requirements for foreign insurance firms—The government seeks views on whether the requirements for UK branches of foreign insurance firms are operating optimally and whether reforms are required, in line with the objectives of this review.
- Thresholds for regulation by PRA under Solvency II—The government seeks views on the scope of application of Solvency II in relation to small insurance firms. The Government seeks views on the appropriate size, and breadth, of insurance firms regulated under Solvency II.
- Mobilization of new insurance firms—The government seeks views on the mobilization of new insurance firms, including whether the current regimes contain barriers to new insurance firms
- Transition from LIBOR to Overnight Indexed Swap (OIS) rates—The government seeks views on any issues arising for insurance firms from the forthcoming switch from LIBOR to Overnight Indexed Swap rates. The government and PRA aim to give certainty to insurance firms as soon as possible on any issues arising from the forthcoming switch from LIBOR to Overnight Indexed Swap rates, including in relation to timing and application of the Credit Risk Adjustment. PRA plans to consult on various aspects of the transition later in 2020.
Comment Due Date: January 19, 2021
Keywords: Europe, UK, Insurance, Pensions, Solvency II, Solvency II Review, Reporting, SCR, LIBOR, Interest Rate Benchmarks, Climate Change Risk, ESG, Internal Model Approach, PRA, FCA, HM Treasury
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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