Insurers have called on the UK government to reconsider their plans to shake up the Solvency II rules that govern the country’s insurance sector, after warning the current plans could backfire.
The government’s current plans to reform the European Union’s Solvency II regulations could see life insurers forced to hold more capital than they are currently required to keep, the Association of British Insurers (ABI) has warned.
The current proposals would therefore prevent those funds being invested back into the UK economy, the ABI said, as it warned the current plans risk sabotaging the government’s original aims of freeing up capital to invest in infrastructure.
The plans to overhaul the EU’s 2015 regulations were initially welcomed by insurers as a means of levelling up the country and advancing the UK’s green transition.
The Bank of England (BoE) had previously said the government’s post-Brexit shakeup of Solvency II would also boost the insurance sectors competitiveness, by allowing them to invest capital they must hold to protect themselves against bankruptcy.
However, the ABI said the proposals, in their current form, risk backfiring, as the insurance trade body said any positive impacts will be “offset” by the requirement that life insurers hold more capital on their books.
ABI director general Hannah Gurga said: “The insurance and long-term savings industry could invest more capital to help level up the UK, boost the economy and support the transition to Net Zero.”
“The current proposals do not realise that opportunity and would risk penalising pension customers as a result of the increased costs associated with the proposed reforms,” Gurga added.
The comments come after the BoE this month warned that the Solvency II reforms will not be a “free lunch” for the insurance sector, that could put policyholders at risk.
Sam Woods, chief executive of the BoE’s Prudential Regulation Authority (PRA), warned that if the reforms simply “loosen regulations which were overcooked by the EU, without tackling other areas where regulations are too weak, then we are putting policyholders at risk.”
The BoE’s caution comes amid clashes between Downing Street and Threadneedle Street over the extent to which the reforms should go.
The BoE has said the reforms should aim to reduce insurers capital requirements by 10-15 per cent, as some insurers have called for capital requirements to be dropped by as much as 90 per cent.
However, the ABI warned that in their current form, the government’s proposals will not even drop capital requirements by 10-15 per cent, as life insurers will instead be forced to hold more capital on their books.