This government has been clear about its vision for turning the UK into the most open and dynamic financial services sector on the planet. We understand the crucial contribution the sector already makes to this country and are determined, post-Brexit, that it fulfil its huge potential. A big part of that will be about unleashing our world-class insurance industry.
Until now, the industry has been governed by ‘Solvency II’, an EU regulatory framework designed together by member states to suit their collective needs. But the truth is that regulation developed to reconcile insurance markets for 28 different EU countries has never worked well for us. Now we’re outside the EU, the government is determined to fix that. We have a genuine opportunity to maintain and grow an innovative and vibrant insurance sector in a balanced way – one which protects policyholders, ensures the safety and soundness of firms, and makes it easier for insurance firms to use long- term capital to unlock growth.
That last point is crucial. We think there’s billions of pounds available to insurance companies to invest in growth-supporting infrastructure like wind farms and social housing. Unlocking that investment capital could be transformative up and down the country: boosting the economic recovery post-Covid, levelling up the regions, and accelerating us on the path to Net Zero.
The time for reform is now, and we’re seizing that opportunity with both hands. The Treasury has been working alongside the Prudential Regulation Authority on a set of reforms that will replace this existing EU-focused, rules-driven, inflexible and burdensome body of regulation with one that is UK-focused, agile and easily adaptable – a new ‘Solvency UK’. We want to facilitate not hinder market developments – encouraging investment in long-term productive assets and supporting the entry of new and innovative firms.
What are the specifics of the reforms we’re proposing?
Firstly, a substantial reduction in the risk margin – including a cut of around 60-70 per centfor long-term life insurers. This will reduce how much capital they need to hold, over and above the expected cost of what they may need to pay out. It means firms will have more money to invest in long-term productive assets, helping the UK insurance sector to become even more prosperous and internationally competitive.
Secondly, there will be a reassessment of how insurers allow for the risks they are exposed to from their investments. This is important to ensure that policyholders are properly protected when things go wrong. Thirdly, we will introduce a significant increase in flexibility to allow more investment in long-term assets such as infrastructure, the hardware which makes economic growth possible.
And, fourthly, we want a major cut in the red tape and administrative burdens on insurers. The existing requirements are disproportionately complex, leading to an unreasonable burden on insurers. There’s work still to be done to fully estimate the impact of these reforms – and we will formally consult on the package in April.
But I expect there to be a material release of the capital currently held by life insurers, allowing them to put tens of billions of pounds into long-term productive assets. Very importantly, I’m also confident that these reforms will safeguard policyholder protection.
I’m excited about what is an ambitious and innovative reform agenda. And look forward to delivering ‘Solvency UK’ – a regulatory framework which meets the UK’s needs perfectly – in turn, supercharging this country’s insurance sector. As the Prime Minister said a few weeks ago, the UK has made huge strides ‘to capitalise on our newfound freedoms and restore the UK’s status as a sovereign, independent country that can determine its own future’.
He’s right. And, frankly, this is a perfect example of exactly that.