LCP responds to plans for Solvency II reform

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In today’s Growth Plan, the Chancellor announced that the Government plans to “unleash the potential of the UK financial services sector.” As part of this it plans to “scrap EU rules from Solvency II to free up billions of pounds for investment.”

Charlie Finch, Partner in LCP’s De-Risking practice, commented: “We fully support changes that will allow insurers to be more competitive and make the Solvency II rules better fit for purpose. However, it is vitally important that, in the rush to promote growth, the reforms do not undermine policyholder security.  In just the past three years, over £100bn of money has been put into annuities by DB pension plans through buy-ins and buy-outs.  This was on the grounds that the UK insurance regime is one of the most robust in the world providing a safe, long-term home for people’s pensions.”

Charl Cronje, Partner in LCP’s Insurance team, added: The prospect of making a break from Solvency II in the UK is an exciting one, but it all depends on the detail.  When the UK adopted Solvency II, the internal model approval process (IMAP) made it impractical for many firms to use internal models to set regulatory capital.  So, at the top of my wish-list for a post-Brexit UK regulatory regime would be the reintroduction of the ability for all firms to use models that appropriately reflect their risk profile and help with real world risk management, rather than a rigid standard formula.  As in the pre-Solvency II era, discretionary regulatory loadings could be used to bridge any gaps in model sophistication and encourage ongoing improvements in modelling over time.