Insurers and analysts have warned that the UK government’s plans to reform Solvency II, with a view to lowering the sums that insurance firms must hold in their coffers, may not live up to expectations.
After City minister John Glen set out plans to reform the EU’s Solvency II rules, and “unleash” the “benefits of Brexit” by freeing up money to be invested in the UK economy, insurers celebrated.
The rule change is set to lower the amounts of money insurers must hold in case of insolvency, and could free up “as much as 10 per cent or even 15 per cent of the capital currently held by insurers,” Glen said.
However, insurers have now tempered their initial enthusiasm, in warning that the devil will be in the details when it comes to reform of Solvency II.
Insurers said the reforms may not provide an immediate boost to the economy, as they raised concerns that certain aspects of the reforms may cancel out the benefits.
Others have said that while the reforms may free up investment, insurers may also struggle to find suitable projects to invest in, meaning they will simply hold spare capital on their balance sheets.
Tracy Blackwell, chief executive at Pension Insurance Corporation, told City A.M. “I welcome John Glen’s announcement and the plan from the Government to reform Solvency II.”
“These changes once implemented should help channel billions of Pounds into areas like social housing and urban regeneration from long-term investors like Pension Insurance Corporation, whilst securing the pensions of our policyholders for decades to come.”
“However, we will wait to see the final detail of the reforms and we will be responding to the planned consultation to help ensure that we really seize this opportunity to improve lives across the country.”
Speaking to City A.M. Mandeep Jagpal, VP of equity research at RBC Capital Markets, also welcomed the reforms, but said that we are yet to see any details. He noted that the Solvency II reforms may take years to come into effect.
Blackwell added that: “Discussions about reforming Solvency II have been going on for years and it is noticeable that the Europeans are moving ahead with their own reforms.”
“The life chances and financial security of millions of people across the country depend on the timely and successful reform of this key piece of financial services regulation.”
Jagpal also said it may take a while before any freed-up capital is invested in the UK economy, as he warned that there are not yet enough projects ready for investment. He explained that the situation will mean the reforms will be slow to take effect.
Nonetheless, Jagpal said the reforms will come as a major positive to the UK’s insurance sector.