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Solvency II: Treasury proposes overhaul of insurance rules in bid to unlock green investment

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The Treasury has this morning launched a consultation on proposed reforms to the Solvency II regulatory framework for insurance companies, arguing changes to current rules could unleash “tens of billions” of pounds of investment in green infrastructure projects across the UK.

The Solvency II regime is designed to protect insurance policyholders by essentially limiting where pensions providers can invest so as to avoid exposure to sectors that are deemed to be immature or high risk. But the government has faced growing pressure from the sector to capitalize on its divorce from the EU by reforming the rules, with industry arguing changes to the regime could deliver a major boost to green infrastructure projects that are now increasingly mainstream in nature.

Advocates for reform claim the EU legislation hurts emerging and fledgling sectors that need more support to grow, because it encourages life insurance companies to focus investment on large, well-funded companies. Earlier this year, specialist insurer of defined benefit pensions Pension Insurance Corporation calculated it would have an additional £2bn annually to invest in productive finance in the short-term, of which £500m could be channeled into renewables or green assets, if Ministers moved ahead with an “appropriate and UK-specific” version of Solvency II.

In the consultation document published today, the Treasury sets out its vision for a new, UK-specific regulatory regime for the insurance sector, putting forward a plan to relax the permitted risk margin for long-term life insurers from 60 to 70 per cent and consult on the appropriate risk margin for general insurers.

It is also seeking views on a plan to reform the ‘matching adjustment’, which provides incentives for insurers to issue long-term life insurance products by matching them against assets with similar characteristics, so as to allow more money to flow into long-term projects such as clean energy infrastructure. It said that allowing a more sensitive treatment of credit risk could help mobilize increased investment in a range of green infrastructure projects.

The government has also set out its plans to reduce reporting and other administrative burdens on companies, including by doubling the thresholds for the size of insurers that must comply with Solvency II requirements.

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In a statement, the Treasury claimed the suite proposals could “unlock tens of billions of pounds of investment in UK infrastructure and green projects”.

Economic Secretary to the Treasury John Glen said the consultation demonstrated the government’s commitment to adapt laws and regulations in the wake of Brexit to suit the UK’s particular needs.

“Today’s consultation demonstrates our commitment to go further and faster to deliver the benefits of Brexit,” he said. “Our reforms will unlock tens of billions of pounds of investment in the UK economy, spur innovation in the market while protecting policy holders – and will cement the UK’s position as a global hub for financial services,” he said.

The Prudential Regulation Authority (PRA) said the reforms could cut overall capital levels for life insurers by between 10 and 14 per cent while helping to drive sustainable growth in the UK. “This combination of reforms would involve an increase in the risk of insurer failure compared to the current position, but would still ensure the UK continued to operate a going concern regime, for example by ensuring annuity liabilities continue to be valued in line with evidence from observed transfer values ​​for longevity risk,” it said in a statement. “Such an outcome would be within the PRA’s risk appetite and should continue to advance its statutory objectives, as well as having a positive impact on sustainable growth in the UK and competitiveness.”

The consultation will run for 12 weeks and will close on 21 July, after which the government will publish a formal response.

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Treasury consults on Solvency II reforms

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