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Finance

WHAT DOES THE FUTURE HOLD FOR SOLVENCY II?

WHAT DOES THE FUTURE HOLD FOR SOLVENCY II?

Robert Gothan, CEO and founder of Accountagility – the leading solutions provider for the finance function 

Following the UK’s decision to leave the EU, the financial sector has been in a prolonged state of uncertainty as the Supreme Court and government continue to battle over who will trigger Article 50, and indeed when the Brexit process will begin.

With no one able to say for certain what Brexit will mean to the UK economy, businesses remain unsure of what the future holds, and the insurance industry is no exception. This sector has some particular concerns, however, as the government’s Treasury Select Committee continues its enquiry into Solvency II.

The long-awaited EU legislation celebrated its one-year anniversary in January this year. These rules aim to ensure that insurance and asset management firms have strong financial buffers in place to meet any claims from policyholders, along with other requirements including authorisation and risk assessment. As non-UK legislation, it is currently under scrutiny from the committee to see what improvements can be made in the interest of the insurance industry post-Brexit.

So what is the likely future of Solvency II and what can firms do to prepare for it?

Predicting the future

To consider the future of Solvency II, it is important to remember how the regulation came into effect and the influence it has had on firms across the EU. Its introduction saw firms having to invest heavily in their computation and technical systems in order to ensure they could comply with these new rules, which required a huge amount of resource from a financial, time and staffing perspective.

For many insurers, Brexit provides the perfect opportunity to get rid of this legislation and take back control. This view is not held by the entire market, however. Some insurers believe that removing Solvency II will prove both detrimental and costly to the UK market, given how long and how much it cost to introduce in the first place.

One option facing the sector is for the UK government to create its own regulation. In the long run, this could prove beneficial, as the UK will no longer be part of the EU and therefore should not necessarily have to uphold its regulations.However, this is not a popular choice for insurance firms that have invested significant amounts of both time and money into Solvency II to then face investing further resource into disassembling processes necessary for Solvency II, and implement new regimes to deal with an alternative.

A way to placate both groups is for the UK to adopt a version of Solvency II that best suits the needs of the UK insurance industry specifically. However, as UK firms will still likely want to conduct business across the European Union, whether we have access to the single market or not, Solvency II could continue to affect writing business abroad, even if it is no longer adopted by UK firms.

Planning ahead

With no clear answer given as to what the future of Solvency II will be, the uncertainty surrounding the UK showcases the need for insurance firms to adopt agile planning tools now, and ensure their existing tools are capable of coping with any changes to this regulation in the future.

In order to account for regulatory changes, firms must have the ability to plan and implement any changes quickly. To this end, it will be important to model many different scenarios, especially when planning for the impact of Brexit on the business.

With Article 50 set to be triggered this year, and full Brexit scheduled for 2019, it is likely that more changes for insurance regulation are on the horizon. Companies that do not have automated systems in place and instead rely on old trusted methods such as spreadsheets are likely to struggle to introduce changes to regulation in a timely manner and without error.

The future of Solvency II remains uncertain; the inquiry has yet to be completed and the results from the Treasury Select Committee could end up dividing the insurance industry and bringing about new regulation changes for the sector. It is therefore vital that firms protect themselves from an uncertain future by ensuring their systems are agile enough to cope with changes to existing regulations or the introduction of new ones.

Global Banking & Finance Review

 

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