The Prudential Regulation Authority (PRA) has set out another round of reforms to the Solvency II regime in an attempt to unlock a wave of investment in the UK economy.
The UK government set out its plans for a post-Brexit overhaul of the EU’s Solvency II rules in November last year, with a view to unlocking billions in capital from insurance company balance sheets.
Today’s proposals relate to the matching adjustment. The matching adjustment allows insurers to recognise as upfront capital a proportion of the return they are confident of making on the assets held against long-term liabilities.
By enabling greater flexibility over which assets can be included in a matching adjustment portfolio, insurance firms will be able to free up funds to invest in other long-term assets in the UK.
In theory it should also mean that insurance firms are incentivised to closely match their asset and liability cash flows, reducing risk.
James Isden, KPMG UK insurance director, said: “Insurers will welcome the widening of asset eligibility for the Matching Adjustment to allow the inclusion of assets with ‘highly predictable’ cash flows”.
The reforms also removes the cap on sub-investment grade assets which can be included in insurer’s matching adjustment portfolios, a move which Isden said firms will support.
Sam Woods, chief executive of the PRA, which is run by the Bank of England, said: “These proposals aim to promote policyholder protection while enabling the annuity sector to meet its commitments to the Government to increase investment in the UK economy.”
While increasing the flexibility of assets which can be included, the PRA are putting more responsibility on senior managers to assure regulators of the expected cash flow coming from assets in the portfolio.
Huw Evans, KPMG UK insurance partner, said: “Put simply, life insurers will gain some more freedoms but with significantly more complex responsibilities to go with them.”
The consultation for the matching adjustment reforms closes on 5 January with the reforms expected to be finalised and implemented by the middle of next year.
City minister Andrew Griffith said “this long-term decision for a brighter future will grow the economy and boost prosperity”.
Charlotte Clark, director of regulation at the Association of British Insurers (ABI), said “through our new Investment Delivery Forum, we’re committed to using the reforms to drive £100bn in green and good projects.
“This consultation brings us another step forward to acheiving that and we’ll continue to work closely with our members and the PRA throughout these final stages”.
The PRA published a consultation on the first stage of Solvency II reforms in June, which related mainly to the risk margin. The proposals sought to streamline reporting requirements and widen the scope for flexibility in investment decisions.
The consultation period for the first set of reforms closed at the beginning of September.