Insurance giant Legal & General would like to see the UK “move more quickly” in reforming the EU rules that govern Britain’s insurance sector, the head of the FTSE 100 firm’s pensions buyout segment told City A.M.
Andrew Kail, chief executive of L&G’s institutional retirement business, called for “clarity” on the UK’s plans to reshape the EU’s Solvency II regulations that determine the amounts of capital insurers must hold to protect themselves from bankruptcy.
“We’d like to see things move more quickly,” Kail told City A.M. “Any business would say that’s a good thing to have.”
He explained that the Solvency II reforms could free up capital to be invested in social housing and renewable energy projects, in letting insurers use a wider set of investments as protection against the threat of insolvency.
Kail explained that Solvency II is a “very rigourous set of regulations” as he claimed L&G is hoping to see some “flexibility” in the UK government’s new measures.
The UK government set out its final plans for a post-Brexit overhaul of the EU’s Solvency II rules in November 2022, with a view to unlocking billions in capital from insurance company balance sheets.
“There’s a lot of capital sitting on insurance company balance sheets, that, were the regulatory treatment favourable, could be deployed and invested in things that do real societal good,” Kail said.
The L&G chief said capital currently held on insurers’ balance sheets in the form of cash and other investments could be used to fix the UK’s housing crisis, make the transition to net zero, and facilitate the government’s push to “level up” the country.
An overhaul of Solvency II could let insurers use capital on their balance to invest in projects such as wind farms and affordable housing developments as backing against the threat of bankruptcy.
However, Kail argued the post-Brexit Solvency II shakeup should be viewed as a “graduation” rather than a “paradigm shift”.
He added that L&G is “very supportive” of the insurance regulator’s plans to overhaul the EU rules, but called “speed and certainty” in the reforms.
“Clarity is always a good thing,” Kail said, as he argued regulatory certainty “just makes our planning process easier.”
The L&G chief’s calls come as pensions market participants are readying themselves a boom in pension buyout deals and bulk annuity purchases (BPAs) that could put billions capital in the hands of Britain’s top insurers.
Pension buyout deals see companies pay a lump sum to hand liability for defined benefit pensions schemes over to a specialist insurer. In return, the insurance company pays members’ pensions.
Analysts from Peel Hunt in November forecast the UK could see £200bn worth of pension buyouts over the next three years as firms hand over liability for costly legacy pension schemes.
This extra capital could in turn be unlocked and invested in infrastructure projects throughout Britain if the Solvency II reforms go ahead.
This would in turn allow insurers to reap higher returns on that capital by letting them invest in assets with better payouts.
The L&G chief, however, called for certainty on the reforms in arguing insurers require regulatory clarity to ensure they fulfil their obligations to the individuals whose pension they pay.
“These are long term promises that we’re making and long term complicated investments,” Kail said.