Prudential Regulation Authority
Solvency II – PRA speech on capital requirements of UK insurance prudential regime – 10 February 2021
The PRA has published a speech by Anna Sweeney (PRA Executive Director, Insurance) on the relationship between capital requirements and the other aspects of the UK prudential regime for insurers, in the context of HM Treasury’s review of Solvency II. The speech makes a number of points, including:
- the PRA has entered the UK Solvency II review with no goal of either decreasing or increasing total capital in the sector - it does not presently feel that current levels are manifestly too high or low;
- the PRA does not consider capital requirements in isolation, but as part of a three-pillar regulatory regime of capital, risk management and disclosure. Within this framework, it takes into account the strength of market discipline, the ladder of intervention, and the way that firms structure themselves to judge when the level of capital is appropriate;
- effective risk management is key. Beyond a certain level, concentrations and other exposures to irreducible uncertainty make it impossible to say that any feasible level of capital is adequate to deliver policyholder protection. The remedy lies in restructuring firms’ balance sheets and business models; and
- a balance needs to be struck between the costs and benefits of the capital element of prudential regulation and its place in the wider regime. The PRA does not feel the current balance is badly wrong and it is open to evidence about what constitutes an appropriate level of capital.
The speech includes a reminder that HM Treasury’s call for evidence on the UK Solvency II review closes on 19 February 2021.
PRA speech on capital requirements of UK insurance prudential regime
Department for Work and Pensions
Pension Schemes Act 2021 – Royal Assent granted – 11 February 2021
The Department for Work and Pensions has announced that the Pension Schemes Act 2021 has completed its progress through the parliamentary procedure and received Royal Assent. The Act contains major changes for both defined benefit and defined contribution pension schemes, including new powers for the Pensions Regulator.
Certain sections of the Act that contain regulation-making powers took effect on 11 February 2021. The majority of the Act’s provisions will be brought into force following subsequent statutory instruments and consultations in the coming months.
DWP press release
Pension Schemes Act 2021
Association of British Insurers
UK insurance sector – ABI publishes speech on future opportunities – 10 February 2021
The ABI has published a speech given by James Dalton (Director of General Insurance Policy at the ABI) to the Westminster Business Forum on the future of the UK insurance industry post Brexit and learning lessons from COVID-19.
The speech considers the FCA business insurance (BI) interruption test case around the themes of trust, transparency and product simplicity and sets out five key opportunities for the insurance industry.
In relation to the test case, the speech indicates that the focus for insurers should be to support their customers by: (i) swift payouts of valid claims; and (ii) interim payouts where appropriate and the provision of clear and prompt responses to customer questions. Insurance intermediaries have a key role in assisting their customers in relation to the collation of documents required by insurers and in providing explanations where policies do not provide cover.
Going forward, the insurance industry needs to tackle the problem of consumer trust by: (i) paying valid claims promptly; (ii) addressing the information mismatch between customers’ understanding of policy coverage and the coverage intended by insurers; and (iii) redoubling its efforts to provide solutions to the hardest elements of risk on which to provide insurance cover.
The speech discusses five key opportunities for the insurance industry under the heading of ‘Building back better’:
- FCA consultation on general insurance (GI) pricing practices: the consultation closed in January 2021 and the speech states this is a ‘once in generation’ opportunity to fund change for the better in the way that insurance products are priced, bought and sold. There is a need for a market where consumer loyalty is not punished and seeking the lowest price is not unduly rewarded. The speech supports the FCA’s attempt to have a system where customers focus on product appropriateness and quality;
- Solvency II: in light of HM Treasury’s ongoing review of the Solvency II framework, the speech indicates there are areas that could be improved, particularly in light of the UK having now left the EU and being able to review the framework from a UK-specific point of view. These improvements include improvements to the current restrictions on the types of investments that can be held, the risk margin and matching adjustment mechanisms, and reporting requirements;
- climate change: as well helping customers to manage the risks that arise from climate change, insurers are also major institutional investors with the capacity to drive the growth in renewable energy and sustainable infrastructure needed to mitigate climate change;
- economic contribution of the industry: insurance will have a vital role to play in building back a more balanced economy and providing a sense of security and protection for consumers’ financial futures; and
- insurance following the end of the Brexit transition period: the ABI is continuing to press the European Commission to allow the UK to rejoin the Green Card Free Circulation Zone and it is hoped that the Commission recognise the UK as being equivalent for reinsurance purposes.
James Dalton speech on the future of the UK insurance sector
