Big bang deregulation of the UK’s insurance sector was a much-hyped “Brexit dividend”. It is turning into an uncomfortable showdown. Reform pits the industry regulator, packed with technical expertise and an overriding mandate to ensure financial stability, against the government. Downing Street has broader concerns, including competitiveness and sustainable industry growth.
At issue are changes to the so-called Solvency II rules. EU states have already agreed amendments for its equivalent rule book. The UK has a parallel financial services future regulatory framework review.
At stake: some £4tn of investments held, roughly equally, by insurers and pension funds. More of that should be freed up for investment in assets like infrastructure, such as wind farms or social housing, reckons the government.
That seems fair enough. These are long term assets with predictable cash flows that match long-term liabilities. When up and running they can benefit the economy. Numbers vary, but risk margin adjustments would free £18bn for life insurers alone, based on end-2020 data. Lower capital requirements, all else being equal, could translate to lower fees for consumers. Industry would welcome a removal of some of the existing shackles and the chance to use more idle capital.
But the Bank of England’s Prudential Regulation Authority, which supervises insurers, has valid concerns. As a regulator it is inherently risk averse and is wedded to soundness and protection — as it should be.
As things stand, the UK is among the most prudent and best-buffered global insurance sectors. It boasts hefty rule books. Pension legislation, which filled 3,000 pages in the late 1980s, has expanded to more than 100,000. Of course, product range and sophistication has also increased exponentially. It is true that regulators could use a nudge from the government to take a more holistic approach. But this is not about rolling over. Rules are better guided by those who understand risk than those seeking to score a Brexit success.
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