As the Government pushes forward with plans to reform pre-Brexit rules that govern the UK’s insurance industry – named Solvency II – there are clashes over how far the changes should go.
Whitehall’s plans aim to free up £90bn of investment, by reducing the amount insurers must hold in reserve to protect themselves from bankruptcy. Yet it has been at loggerheads with the Bank of England over the extent of reforms and how much money insurers should hold in their books, while industry insiders have accused the regulator of threatening future investment.
Sam Woods, head of the Prudential Regulation Authority (PRA), said on Friday that the industry reaction to his team’s proposals has been “largely negative”.
As the row escalates, we explain how the Government plans to use its post-Brexit freedoms in the insurance industry.
What are the pre-Brexit rules that govern Britain’s insurance industry?
The European Union law, Solvency II, was introduced in 2016 across the bloc’s member states, including the UK.
The regulations for insurers cover a range of activities, from governance and accountability to risk assessment and management.
Why does the UK still abide by this EU law?
When Britain left the EU, it did not discard all its laws. Instead, the Government passed an act that retains EU law on its books post-Brexit, with the intention of gradually diverging from the other 27 member states.
As part of its post-Brexit shake-up, Downing Street said it would loosen the regulatory burden across a number of financial services sectors to make Britain more globally competitive.
In practice, that means fewer policies will be laid down in law, with the Bank taking a more active role in regulating key industries. As a result, regulatory powers have moved from EU institutions to British regulators.
Why have the reforms caused a row?
The Treasury gave the PRA – which falls under the Bank of England – permission to slash red tape following Brexit. It was hoped that this would make the insurance sector more competitive and support £90bn in new investment, such as infrastructure projects. By loosening regulations, insurers can take on more risk and allow more capital to flow into the economy.
Yet critics have accused the PRA of dragging its heels on the reforms and point to a perceived bias against embracing post-Brexit opportunities to rewrite European rules.
Meanwhile, there are clashes over how much by reducing the amount insurers must hold in reserve should change.
In his speech, Mr Woods said its planned reform of insurance capital rules would release the equivalent of 10pc to 15pc of the current capital held by life insurers, which could support between £45bn and £90bn of additional investment in the UK.
Yet those proposals, he said, have faced pushback from the insurance sector, with some arguing that requirements should be cut by up to 90pc.
What has the PRA said about loosening regulations?
“There are areas where the regulation we have inherited from the EU is too strong for the UK, and others where it is too weak,” said Mr Woods. “We should be willing to make changes in both directions where the evidence supports it.”
He argued that if the reforms simply “loosen regulations which were overcooked by the EU, without tackling other areas where regulations are too weak, then we are putting policyholders at risk.”
Mr Woods also said reforms would not be “a free lunch” and that the UK “must avoid a regulatory race to the bottom” to make sure consumers and pensioners are not at risk.
How have insurers responded to the regulator’s proposals?
Some insurers are so outraged they have told the PRA they would prefer to stick with the less onerous EU rules, but Mr Woods has called this “a red herring”.
He argues that tighter regulation in this area would “work better for the UK”. According to the PRA, the new reforms are around 70pc less volatile than those proposed by the insurance industry.