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UK to ease insurance capital rules in post-Brexit shakeup

Insurance Workers cross London Bridge, with the City of London financial district seen behind, during the morning rush-hour, as the coronavirus disease (COVID-19) lockdown guidelines imposed by British government encourage working from home, in London, Britain, January 4, 2022. REUTERS/Toby Melville
Treasury is pushing for a overhaul of the insurance industry. Photo:Toby Melville/Reuters

The Treasury has announced a reform of the insurance industry post-Brexit designed to unlock "tens of billions of pounds" of insurance sector capital to boost the economy through infrastructure investment.

Financial services John Glen said the overhaul would help UK firms invest more in infrastructure projects as the government seeks to capitalise on Brexit opportunities.

"EU regulation doesn’t work for us any more and the government is determined to fix that by tailoring the prudential regulation of insurers to our unique circumstances,” he said in a speech at the Association of British Insurers annual dinner on Monday.

The EU-focused rules known as Solvency II will be replaced by a more flexible UK regime, with a full consultation document in April.

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"We have a genuine opportunity to maintain and grow an innovative and vibrant insurance sector while protecting policyholders and making it easier for insurance firms to use long-term capital to unlock growth."

The proposals will include a "substantial reduction in the risk margin", as much as 60% to 70% for long term life insurers, he said, referring to capital required in case policies must be transferred to another insurer in the event of a collapse.

There will be a "more sensitive" treatment of credit risk in the matching adjustment and a "significant increase" in flexibility to allow insurers to invest in long-term assets such as infrastructure.

Changes will also include "a meaningful reduction" in the current reporting and administrative burden on firms.

"There’s work still to be done to fully estimate the impact of these reforms. But I expect there to be a material capital release… possibly as much as 10% or even 15% of the capital currently held by life insurers… allowing them to put tens of billions of pounds into long-term productive assets, with multiple benefits country-wide," Glen said.

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Charlotte Clark, director of regulation at the Association of British Insurers, commented: "This announcement is a positive step that sees us well on the way to ensuring that we have a package that provides additional investment in the UK, without undermining the high standards of policy holder protection we have."

Amanda Blanc, group CEO at Aviva, added: "Effective reform of Solvency 2 rules will enable UK insurers like Aviva to play an even bigger role in supporting the UK economy, investing more in the country’s essential infrastructure – the colleges, hospitals, transport and renewable energy which are critical to our future.”

The government has been pushing to demonstrate the benefits of Brexit for the country amid ongoing criticism from businesses over higher costs and red tape.

Jacob Rees-Mogg has recently been delegated by Boris Johnson to prove some advantages of leaving the European Union.

The new Brexit opportunities minister had previously said it would take half a century to feel the full benefit of Brexit. He is now calling for a rapid rewriting of legacy EU financial rules to create an "investment big bang" in the UK.

A Bank of England's senior official warned that there is a risk that the UK could go too far in terms of deregulation.

"A regulatory race to the bottom", Vicky Saporta, executive director of Prudential Policy Directorate at the Prudential Regulation Authority, told the Treasury Committee on Monday, as "although there are clear benefits of the UK getting back rulemaking powers...we also have the possibility of pressure to lower standards" as regulators.

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