Are UK insurers ready for the Solvency II Review?
09 July 2021
Anna Sweeney, the Bank of England's executive director for insurance, has set out the next stage of the Solvency II review, building on the Call for Evidence launched last year. The study will focus on areas of potential policy change which are easier to quantify and have a balance sheet impact, such as changes to the matching adjustment and risk margin, as well as elements of the Transitional Measure on Technical Provisions.
The Prudential Regulation Authority (PRA), in agreement with HM Treasury, plans to launch the Quantitative Impact Study for the Solvency II review this summer. It will aim to gather data to help it form policy proposals. Firms will be asked to respond to the data requests within three months, which Sweeney acknowledged in her speech "will require significant resource". Sweeney noted that certain changes to Solvency II can be made by the PRA within the existing framework, and it plans to publish a consultation paper on simplifications to the Solvency II reporting process.
She also announced that the PRA intends to enhance the use of stress testing in its supervisory approach, and to conduct an insurance stress test in 2022. Finally, Sweeney noted that insurers are increasingly investing in more diverse and novel asset types which present uncertainties and risks that need to be carefully evaluated and understood, to ensure policyholders remain protected.
This is set to be an important consultation with the contentious areas of Solvency II, such as the matching adjustment and risk margin, being examined. As Sweeeny said: "There is, I think, a consensus in the UK that the risk margin as currently designed is not doing its job correctly." She added: "We see significant scope for reform." This could potentially change the attractiveness of annuities and impact an insurer’s long term strategy.
How PwC can help?
Sweeney acknowledged it will require "significant resource" for firms - having just three months to respond over the summer. It will coincide with a busy period for insurers as they prepare assumptions and methodology setting as well as Q3.
We can provide assurance over the data inputted into this study and/or calculations.
Stress and Scenario testing advice
Review of current methodology and comparison to best practice.
Advice on the regulatory requirements for illiquid assets and the approach to modelling and valuation.
Understanding the impact on competitiveness and returns.