Government confirms plans to reform Solvency II

Proposed Solvency II reforms will be consulted on from April 2022.  This could impact future buy-out pricing so it’s significant for both insurers and the wider pensions industry.

Solvency II sets out the prudential regulatory requirements for EU insurance firms. UK insurers have been subject to it since 2016.  It has continued to apply to UK insurers since Brexit but the Government now wants to move away from it in favour of a UK-specific regime that would be “agile and easily adaptable”.

In a speech to the Association of British Insurers, John Glen MP, Economic Secretary to the Treasury, outlined that a package of reforms has been developed by the Treasury and the Prudential Regulation Authority (PRA) which includes:

• A substantial reduction in the risk margin, including a cut of around 60-70% for long-term life insurers.
• More sensitive treatment of credit risk in the matching adjustment.
• A significant increase in flexibility to allow insurers to invest in long-term assets such as infrastructure.
• A meaningful reduction in the current reporting and administrative burden on firms.

These developments will be closely watched by annuity providers and buy-out insurers.  It remains to be seen what impact these developments will have on annuity and buy-out pricing – and in turn on areas such as scheme funding, endgame planning and PPF levies.