On 28 April 2020, the UK Government announced that its world-leading insurance industry will be able to invest tens of billions of pounds more in long-term UK infrastructure and green projects under proposals published that day.
The Solvency II consultation sets out proposed reforms to the Solvency II regime to capitalise on the UK’s post-Brexit freedoms to spur a vibrant, innovative and internationally competitive insurance industry.
It is proposed to cut EU red tape and unlock investment, helping to create jobs while also maintaining a high level of protection for policyholders. The proposed reforms will also help to increase access to market for new insurers and offer greater consumer choice. The move is part of the UK Government’s commitment to go further and faster to capitalise on the benefits of Brexit.
John Glen, the former Economic Secretary, first announced the UK Government’s intention to reform Solvency II legislation in a speech to the Association of British Insurers in February 2022, with a commitment to consult in April 2022.
The consultation sets out detail on the reforms, including:
- A substantial reduction in the risk margin for long-term life insurers, including a cut of around 60-70%, and consulting on the appropriate level for general insurers. This step will release capital on insurer’s balance sheet.
- A more sensitive treatment of credit risk in the matching adjustment. The matching adjustment provides incentives for insurers to issue long-term life insurance products by ‘matching’ them against assets with similar characteristics, helping to increase the availability of this type of product on the UK market.
- A significant increase in flexibility to allow insurers to invest in long-term assets such as infrastructure.
- A meaningful reduction in the current reporting and administrative burden on firms, removing EU bureaucracy including by doubling the thresholds for the size of insurers before the Solvency II regime applies.
- Deliver further reforms to EU derived legislation, which will increase access to the market for new insurers and offer greater consumer choice. For instance, the UK Government will introduce a new mobilisation regime to encourage new insurers into the market to boost competition, drive growth and create jobs.
What do these proposed changes mean for Gibraltar?
In April 2021, the UK’s Financial Services Act 2021 (the Act) gained royal assent. Included in the Act was the new Gibraltar Authorisation Regime (GAR) that set out the framework for the long term UK market access of Gibraltar insurance firms.
The Government of Gibraltar is working closely with the UK Government, with the involvement of the financial services regulators from both Gibraltar and the UK, on the operational aspects of the GAR which is expected to come into force during the first quarter of 2024.
The GAR requires Gibraltar to commit to regulatory alignment with the UK although not a mirror image. Any changes that the UK makes to Solvency II legislation are likely be replicated within Gibraltar’s own insurance legislation as part of that commitment to maintain regulatory alignment with the UK.
Much of the consultation focuses on potential changes for the UK’s long-term life insurers. By contrast, Gibraltar has a very small life insurance sector when compared to its non-life insurance sector.
There is a section on ‘Reducing reporting and administrative burdens’, which is likely to be of interest to Gibraltar insurers in general.
The consultation ends on 21 July 2022. The PRA in the UK will also publish a consultation of its own later.