The Treasury Committee has published its Report on the Solvency II Directive. The objective of Solvency II is to create a harmonised EU-wide insurance regulatory scheme.
The Report draws on over 50 pieces of written evidence on EU insurance regulation, and three oral evidence sessions. Consultation took place with a diverse range of interested parties, including insurance firms, financial regulators, consultants, trade bodies, expert associations, and individuals. Specific areas explored in the Report include:
- The risk of procyclicality and market distortion
- The potential impact on long term savings and investment, and the function of the Matching Adjustment
- The calibration of the Risk Margin
- The approval of Internal Models and subsequent model change
- The volume and complexity of data required from firms
- The usability of the Volatility Adjustment
- The working of the Transitional Measure on Technical Provisions
- The rigidity of Solvency II's approach to Contract Boundaries.
The Report recommends that the Prudential Regulation Authority (PRA) should have a pragmatic discussion with the insurance industry, concerning the practical difficulties which the Committee has identified in the implementation of the Directive. This should focus on the scope for amendments and increased proportionality.
As well as the PRA's primary objectives, it has a secondary objective, which is to "facilitate effective competition". The Committee recommends that the Treasury should consider giving this objective equal primacy.
The Report further states that, given the complexity of the task and the importance of the industry, both domestically and internationally, the Committee would like to see the development of a clear agreed strategy dealing with the following:
- What changes to insurance regulation can be implemented by the UK authorities now, unilaterally, without the need for a change in the Solvency II Directive (to include consideration of what steps would be required to allow regulatory forbearance to limit systemic risks in the event of market turbulence)
- What steps the UK regulator would like to see taken to refine the Directive or its applicability to the UK post-Brexit, as a contribution to the Brexit negotiations
- What action can be taken post-Brexit to foster innovation, competition and competitiveness for the benefit of UK consumers and the standing of the UK's place in the international insurance industry
- How UK insurance regulation will harmonise with international capital standards and emerging accounting standards.
A copy of the Report may be found here: https://publications.parliament.uk/pa/cm201719/cmselect/cmtreasy/324/32402.htm.
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