Britain proposes post-Brexit easing of insurer capital rules

By Huw Jones

LONDON (Reuters) -Britain launched public consultation on Thursday for a post-Brexit relaxation of capital rules for insurers, in a step the government said would increase investments in long-term infrastructure.

Britain inherited rules known as Solvency II from the European Union, and reforming them is seen by the 2.2 trillion pound insurance industry and government as important for keeping the country’s financial sector globally competitive.

The long-flagged proposals https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1071899/20220328_Review_of_Solvency_II_Consultation.pdf include a 60% to 70% reduction in the risk margin for long-term life insurers. This is a 32 billion pound buffer held in case insurers must transfer policies to others in a crisis.

Insurers have said they reinsure some business outside Britain to keep their risk-margin requirements down.

The finance ministry said the proposed changes would maintain high protection for policyholders and help attract new insurers, increasing consumer choice.

“Our reforms will unlock tens of billions of pounds of investment in the UK economy, spur innovation in the market while protecting policyholders – and will cement the UK’s position as a global hub for financial services,” financial services minister John Glen said in a statement.

The Bank of England’s Prudential Regulation Authority (PRA) said the reforms could cut overall capital levels for life insurers by around 10% to 15%.

“This combination of reforms would involve an increase in the risk of insurer failure compared to the current position,” it said, adding this would still be within the regulator’s “risk appetite”.

The government also proposed more-sensitive treatment of credit risk in the matching adjustment, currently worth around 81 billion pounds, which provides incentives for insurers to issue long-term life insurance products by matching them against assets with similar characteristics.

The proposals would also make it easier for insurers to invest in long-term assets, such as infrastructure, and would cut reporting requirements, the ministry said.

The EU is also reforming the Solvency II rules and has already made formal proposals which it says will unlock 90 billion euros in the short term, falling to around 30 billion euros in the longer term.

The public consultation closes in July and will be followed by more detailed consultation by the PRA later in the year. Legislation would likely be needed to implement some of the changes.

(Reporting by Huw JonesEditing by William Schomberg, John Stonestreet and Bradley Perrett)