Solvency II: When will the post-Brexit investment bonanza arrive?
When Rishi Sunak pointed to a once obscure piece of prudential regulation during a leadership debate last year, it felt to many in the City like a watershed moment.
After years of heated debate in the Square Mile, Solvency II – the regime in question – had now well and truly transitioned onto the political frontline.
Now the pools of capital locked up on the balance sheet of the country’s insurance giants could be unleashed in a post-Brexit bonanza of investment, the believers said.
The more staid observers – including the Prudential Regulation Authority overseeing the regulation of insurers – urged for ministers and firms to take a more cautious approach.
After acrimonious debates between ministers and regulators, the sector is now getting ready to implement the major overhaul.
So when can we expect the promised wave of investment from UK insurers?
Some done, more to do
Regulators have made major progress in reforming the UK’s solvency regime over the past two years in a bid to free up the promised billions-strong wave of investment.
In November last year, the government announced the first stage of reform and introduced the new regime of Solvency UK which would ditch some of the EU-era standards and tailor them for the UK market.
The crux of the new regime will be introducing greater flexibility for insurers and allowing cash to flow into illiquid assets like infrastructure.
In June, the PRA made its first significant step toward the new regime so far when it published a set of proposals to streamline a number of areas within the Solvency II regime.
Just yesterday a further consultation was released on the so-called matching adjustment, which allows insurance firms to discount capital requirements on certain long-term liabilities if they invest in assets with a similar duration.
In essence the reforms will free up capital by allowing insurance firms to count a greater variety of long-term assets as upfront capital.
But when will reform actually come?
Next year will prove to be a crucial one for prudential reform in the insurance industry.
The PRA said last week it expects its final policy in all areas of reform “to be published during the first half of 2024”, with implementation for most of the changes planned for the end of the year. The PRA’s director of prudential policy Gareth Truran suggested the watchdog was even gunning for most reforms to be ushered through by June 2024.
Some have questioned whether the insurance sector will follow through on its promise to invest spare capital in UK assets, suggesting it may just go to shareholder payouts instead.
Director of the PRA, Sam Woods, said he “can’t guarantee” that the reforms will bring about the wave of promised investment, suggesting the government should ensure that it does.
But Hannah Gurga, director general of the Association of British Insurers (ABI) told Morning Wire the insurance sectors “wants to hit the ground running as soon as the reforms are implemented”.
With the support of major insurers, the ABI established the Investment Delivery Forum in July to help deliver the wave of investment unlocked through Solvency II reforms.
“The reforms will unlock £100bn over the next ten years, which will be invested in green and good infrastructure projects to help us reach Net Zero by 2050,” Gurga said.
FTSE 100 insurer Phoenix estimates it will be able to invest up to £40bn in productive assets to support goals like levelling up and climate change.
A spokesperson from Phoenix group told Morning Wire that it will continue to “ensure these changes better mobilise the UK’s £3.4trn of pension wealth to help UK society by investing and directing it into the economy”.