Tensions are growing between Downing Street and UK regulators over Boris Johnson’s flagship post-Brexit reform of the insurance sector, which aims to unleash an “investment big bang” in British infrastructure.
The prime minister has told allies he is “getting impatient” over the pace of change to the so-called Solvency II rules and with what he believes are excessively cautious regulators. “He keeps asking why it isn’t happening,” said one.
Insurers have lobbied for years for the Solvency II regulatory regime to be amended, arguing it requires them to hold too much capital and is too restrictive in setting the parameters for which assets they can invest in.
Johnson has suggested insurance companies will embark on an “investment big bang” by putting billions of pounds into infrastructure, including green energy schemes, after the planned overhaul.
But the Bank of England’s Prudential Regulation Authority, which supervises insurers, is determined to ensure any easing of the regulatory burden does not create risk to policyholders or to the stability of companies.
One senior government official said: “The PRA is being a bit of a dog in the manger over this.” Another said the PRA was “not being very transparent” at explaining its rationale for a more cautious regulatory regime.
The PRA said it “has been clear that it supports a major reform of Solvency II, including measures to promote investment in the economy, while providing an appropriate level of protection for policyholders”.
Johnson is determined to show some benefits of Brexit to offset the damage caused to Britain’s trade and investment performance since barriers were erected between the UK and the EU.
The Solvency II regulatory regime was introduced when the UK was part of the EU, and a government consultation on reform was published in April that involves changes to the law as well as an overhaul of regulation. The consultation closes in late July.
Discontent has been growing among insurance chiefs over the direction of the Solvency II shake-up.
Some fear the PRA’s proposed changes to the so-called matching adjustment, which feeds into the calculation of insurers’ long-term liabilities, will eliminate much of the benefit from a planned reduction in a key capital buffer.
Charlotte Gerken, executive director for insurance at the PRA, said in a speech last month that a 60 per cent cut in life insurers’ risk margin, an extra capital buffer brought in with Solvency II, would “only” be possible if a key part of the matching adjustment calculation “is also reformed to better reflect credit risk retained by life insurers”.
Rishi Sunak, chancellor, held talks with insurers on Monday, where executives questioned the PRA’s proposed methodology on the matching adjustment, according to one person briefed on the meeting.
The pace of UK reform has also been a sticking point for insurers, as the EU forges ahead with its own Solvency II overhaul.
Brussels issued its proposals last September, and EU member states have agreed a position, but the European parliament is still discussing the changes.
“There is a chance that we can beat them to the crunch but they are far ahead of us at the moment,” said one UK-based insurance executive.
The government will pave the way to changes to Solvency II in a financial services bill, to be brought forward in the autumn, with a view to enacting the legislation in the first half of next year.
The Treasury said: “We want to support our vibrant insurance sector to invest in this country, while continuing to ensure protection of policyholders.
“We’re working closely with the regulators and the industry to redesign the rules so they best suit our country’s needs.”