Letters: Time to bank on it with Solvency II
[Re: Insurers and analysts temper enthusiasm on Solvency II reforms, March 2]
They say good things come to those who wait. The governments proposed post-Brexit reforms to the EU’s Solvency II requirements finally incentivises UK insurers to put their excess cash to better use with lower capital charges. Solvency II has proved to be overkill in the eyes of numerous insurers. Brought in to prevent insurers becoming insolvent, the rules are the housing equivalent of needing to earn a £200,000 salary to cover a £200,000 mortgage, as opposed to applying a normal four times multiple.
This means insurers have been forced to hold a huge pile of cash which they have been unable to put to work elsewhere.
It is, however, important to note that the government is not getting rid of the need to hold a certain amount of capital in reserve to meet liability requirements, they are simply saying that insurers do not need all this excess cash. With bond yields low and insurers committed to written guarantees to deliver some level of returns to investors, the reforms come at the ideal time. Many are already looking to invest in private market assets that can produce a higher yield.
This is all well and good if insurers have the capabilities in place to support alternative asset classes. Having these capabilities means insurers can invest cash or cash equivalents confidently by ensuring there are up-to-date positions and risk statements each day.
Those that gain most from these reforms whenever the legislation is passed will ultimately be the ones that can use the capital released to invest in infrastructure and drive the UK forward in delivering a dynamic post-Brexit financial services market.
Michael Shean