UK insurers fear promised Brexit capital reforms will go off the rails


Insurers loved the UK government’s long-awaited plans to release billions of pounds of their capital. But after the celebrations, fears arose that regulators could push the changes in a more cautious direction.

Reforms to the City of London’s rules, announced in December, aimed to roll back the European Union’s Solvency II capital regulation to open up investment opportunities in areas ranging from green innovation to housing. More than £100bn ($124bn) could be spent on socially beneficial projects by allowing companies to invest their clients’ pension savings more broadly, the Association of British Insurers said at the time.

But now industry executives are concerned. They fear that regulators, who have strongly opposed the reforms, may limit the measures. That’s because the Treasury largely sided with insurers on deregulation, but also proposed additional powers for the Prudential Regulation Authority, which is responsible for implementing the new approach.

UK insurers and banks are hoping for major financial services reforms in 2023

According to some insurance executives, who asked not to be named because the discussions on the subject were private, these powers could allow the PRA to pursue its long-held view that more money is being shifted to infrastructure assets – which are harder to value. and sellable – can jeopardize people’s savings, increasing the risk that taxpayers will have to bail out bankrupt companies in the future.

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Sam Woods, the PRA’s chief executive officer, told politicians on Monday that the new powers would not be used to undermine elected officials. “Parliament should assume that we will use them, but not to otherwise reverse engineer what we were trying to achieve,” he told the Treasury Select Committee.

Some in the industry fear that this may not be the intent, but it may be the effect – at least in part. The changes will allow the PRA to publish individual company results in annual stress tests, making it easier for clients to assess their investment decisions. That could deter some companies from being bold.

The watchdog will also be able to require companies to appoint a senior manager who takes responsibility for risk assessments on assets such as green technology or home equity mortgages, which may not have external ratings from companies such as Moody’s or Fitch.

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Loads added

The additional powers for the PRA could have a “significant impact”, said Sheikh Yasir, head of capital solutions at consultancy 4most and former Bank of England staff member, where he led a review on Solvency II. “We expect more oversight of the PRA’s valuation and internal ratings of illiquid assets,” he said. “The requirements regarding senior managers and stress testing will also give companies more responsibility to reassess their valuation methodologies, risk management systems and investment strategies.”

There will also be a political factor, as Bank of England Governor Andrew Bailey stressed at the same parliamentary hearing this week. The PRA must report to Parliament whether it believes the industry is behaving within the watchdog’s risk tolerance. It will be “very important,” Bailey said, to provide these reports to the Treasury Committee “on a regular basis.”

Others are more optimistic that the reforms will help create one of the most significant Brexit benefits yet in the financial services industry. A senior insurance manager, who declined to be named as it followed private conversations, said the government and the city had a common goal of spending more of Britain’s savings on urgently needed investments. The reforms could start as early as January 2024 if everyone cooperates, the person said.

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David Otudeko, head of prudential regulation at the Association of British Insurers, added: “We need to work together as there are real challenges behind our desire to make these investments.”

Parliament votes on the amendments. Woods said he hoped MPs would reflect on the rising risks, but also that they should support the whole package, including the PRA’s new powers. “There has been a disagreement, a very public one, between us and the government on this issue, but we have to move forward,” Woods said. “We cannot continue this debate forever.”

–With assistance from Laura Benitez.

Photo: Skyscrapers in the square mile financial district of the City of London in London, UK, on ​​Thursday, February 18, 2021. Photo credit: Chris Ratcliffe/Bloomberg

Copyright 2023 Bloomberg.

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