UK Solvency II reforms may not yield net zero windfall, insurers warn

The government has proposed reforms to the Solvency II regulatory framework for insurers, with the aim of freeing up capital for long-term investment, including in net zero transition. But insurers say the current proposals may not deliver that objective.

Last week, the UK government published its long-awaited Financial Services and Markets Bill, with chancellor Nadhim Zahawi describing it as a “landmark piece of legislation” that would deliver “our vision for a [financial services] sector that is more open, competitive, green and technologically enabled”.

A key objective of the bill is to introduce a new regulatory approach for UK financial services now that the country is no longer in the EU. In addition to awarding new powers to the Financial Conduct Authority and the Prudential Regulation Authority, the bill also identifies a number of areas of EU-era financial regulation to be repealed or amended.

Reforming Solvency II regulation for insurers – notably, adjusting capital requirements to free up capital for long-term investment in areas such as infrastructure and to support net zero transition – has been flagged as one such important change.

However, insurers have raised concerns about the likely outcomes of the government’s proposals, in a consultation that closed last week.

Opposite effect

Industry group the Association of British Insurers has suggested the proposals, which are targeting a release of 10–15 per cent of capital held under the current Solvency II regime, would not achieve the desired capital release and associated investment in the government’s target areas. The ABI suggests that the proposals could mean life insurers need to hold more capital, rather than less, and could have a detrimental impact on customers. It has called for more work to be done.

The government’s proposals “would risk penalising pension customers as a result of the increased costs associated with the proposed reforms”, says ABI director general Hannah Gurga, who has pledged to work with the government and regulators for a Solvency II solution “that meets all of our objectives”.

Charlotte Clark, director of regulation at the ABI, added: “This is a significant opportunity for our world-leading insurance and long-term savings sector, and we will review the Bill in close detail, particularly with regards to the effective use of capital and the outcome of the future regulatory framework.”

She added: “We look forward to working with the government on behalf of our members to deliver the best outcome for the UK’s economy and customers.”

Cautious support

Although there are clearly still important details to be addressed, there is generally broad support for the government’s agenda of enabling greater investment by insurers into long-term assets and to support net zero transition.

Andy Briggs, group chief executive of pensions and savings company Phoenix Group, said it supported the government’s plans to position the UK as a centre for financial services, and its commitment to net zero. However, the company was cautious about any changes compromising consumer protection.

“As an insurer, we are a long-term investor looking for stable returns over decades. Insurers are some of the largest asset owners in the UK, and Solvency II reforms could represent a unique and very significant opportunity to ensure more private sector capital can be directed by insurers into long-term infrastructure assets in the UK,” Briggs said.

“We have the ambition to invest up to £50bn over the next five years in illiquid and sustainable investments in the UK, which will support and accelerate the decarbonisation and levelling-up agendas,” he added. “However, being able to deliver this is contingent on achieving the right regulatory environment, which embraces growth for our policyholders while ensuring the highest standards of consumer protection.”