Support for Solvency II (SII) from the UK’s insurance industry has waned over the past several years, according to new research from business and financial adviser, Grant Thornton.
Grant Thornton’s survey of the insurance market it conducted found that only 17% of respondents thought SII had been worth the effort.
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Only a quarter believed SII is clearly the best way to run their businesses, which represented a drop from the 31% when surveyed in 2014.
The vast majority (91%) believed the principles of SII were appropriate, but nearly 70% thought they had been ruined by the implementation of the regime.
'SII too complicated'
Furthermore, two-thirds felt SII is too complicated and a similar proportion believed it is using up resources that could be better used elsewhere.
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By GlobalDataSimon Sheaf, head of general insurance actuarial and risk at Grant Thornton, commented: "Clearly, the implementation of Solvency II has been met with varying degrees of enthusiasm; but despite the increasing negativity towards the regime, there has been an overall acceptance of the inevitable and insurers have had to 'bite the bullet' over the past few years.”
Brexit impact
Sheaf went on to reveal: “Since the Brexit result, we've seen calls to re-examine the regime's application in the UK, including the recently announced Treasury Committee inquiry. Nevertheless, there remains a significant chance that a Solvency II equivalent regime will continue to apply in the UK. And, what is more, whatever the eventual outcome of the deliberations on the future of insurance regulation in the UK, it is clear that Solvency II will continue to apply for several years."
UK MPs review Solvency II
Grant Thornton's research comes after the UK’s House of Commons Treasury Select Committee has targeted the EU’s Solvency II regime – as it examines ‘room for improvement’ in the post-Brexit landscape
The Treasury Select Committee – which recently announced the inquiry – would not be responsible for deciding the UK's post-Brexit solvency regime.
But its aim is to assess the impact of S2 on the competitiveness of the UK insurance industry and on insurers' ability to meet customers' needs.
The UK inquiry into Solvency II and the potential for post-Brexit changes is likely to look closely at capital requirements for annuities and at potential risks for reinsurers if future UK rules are not considered equivalent to S2, according to Fitch Ratings.
The ratings agency believes insurers are likely to highlight the impact on annuities because S2 capital requirements for these products are particularly onerous in the current market and because they have
Timetric IIC insight report on Solvency II
An insight report available from Timetric’s Insurance Intelligence Center (IIC) Solvency II – Beyond Implementation explains that complying with Solvency II will present a major challenge to smaller insurers.
As Solvency II increases a firm’s capital requirements and raises fixed costs, it will drain resources that previously would have been allocated to business operations, distributions to shareholders or expansion.
Even large insurers are divesting their businesses that do not align with their strategic goals. Companies that own insurers such as banks may also sell subsidiaries to avoid additional capital requirements.
Therefore, it is predicted that there will be a wave of consolidation, as smaller insurers are acquired by larger rivals and divestments and shedding of non-core divisions continues.
The number of insurance companies in Europe fell by 7.2% from 5,226 in 2010 to 4,863 in 2014, according to Insurance Europe. Solvency II played a large part the consolidation.
Timetric IIC analysis of Brexit impact on Solvency II
According to the Timetric report, if the UK secures full European Economic Area (EEA) membership and retains its passporting rights then the regulatory disruption from Brexit, will be minimal for insurers based in the UK, as the UK will be bound to follow Solvency II in exactly the same way it is doing so now.
However, this option would still affect all insurers based in the EEA. In this scenario it is much likely the UK would not be able to keep the right to have a say in the decision making of the European institutions that oversee the development of Solvency II.
The Prudential Regulation Authority (PRA) would not be in discussions between national regulatory authorities (NRAs) and therefore would not have a say on decisions taken to amend the framework.
This is significant because as the regulator of one of the largest insurance markets in Europe the PRA is likely to have had a substantial influence on the decisions taken at a European level.
Furthermore, as an authority that has been described as gold-plating Solvency II regulations due to the stringency with which they have applied the rules, it is conceivable that Solvency II could in many ways be less strenuous for insurers than it would be if the UK had remained a full PRA member.
This is also would be true if the UK completely left the EU and did not have access to the EEA.
In summary, the IIC report says it is fair to say whichever way Brexit is executed (if it is executed at all); the UK's influence over the path of Solvency II will be diminished regardless. This will have significant implications for the future path of insurance regulation across the continent.
Life Insurance International survey of industry experts
The IIC report comes as Insurance experts have told Life Insurance International (LII) that Solvency II is highly unlikely to be watered down for UK insurers following the Brexit vote.
Although Solvency II looks certain to remain in place, at least in the short term, Victoria Sander, a partner at Linklaters, has said there may be room for to deviate from the regulatory regime over time, and there may be a change of pace.
She notes: "There may be room for the UK to deviate from Solvency II over time. For instance, there have been some concerns expressed, not least of all by the Bank of England, regarding the risk margin and whether this operates as originally intended."
LII also understands from a senior figure representing insurers in Europe that there will not be any great changes to Solvency II. While there may be a change of pace in the implementation of Solvency II, it is felt that insurers do not want to jeopardise the regime.
To read the full the IIC report on Solvency II, visit the Insurance Intelligence Center at www.insurance-ic.com
