Blog: Solvency II reforms must ‘strike right balance’ for UK insurance industry – Pinsent Masons

Solvency II is an EU directive, retained in UK law, that regulates the insurance industry and outlines the amount of capital that insurance firms must hold to reduce the risk of their financial collapse. Both the UK and the EU are currently working on a raft of changes to update the directive.

As part of the reforms outlined in the consultation document (32 pages/243KB PDF), UK ministers plan to cut the difference between an insurer’s best estimate of its liabilities and the market value of its liabilities, known as the risk margin, for long-term life insurers by between 60% and 70%. The government said such a large reduction is possible because the current methodology used can overstate the market value of a firm’s liabilities, particularly in low interest rate environments.

Ministers hope that, by reducing the capital requirement thresholds and allowing greater flexibility in where insurers can invest their assets, the reforms will result in a “material release of possibly as much as 10% or even 15% of the capital currently held by life insurers” and “unlock tens of billions of pounds for long term productive investments, including infrastructure.”

The Treasury also hopes the proposed reforms will reduce the administrative burden of Solvency II by removing the requirement for UK branches of overseas insurers to calculate local capital requirements and instead rely on group capital. It also plans to increase the thresholds before Solvency II applies and simplify the directive’s reporting requirements.

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