UK insurers say Brexit unlikely to affect EU solvency rules

UK insurers have warned that Brexit is unlikely to lead to a big dilution of the EU’s Solvency II capital rules.

Solvency II, which came into force at the start of this year, is seen by many in the industry as an expensive, bureaucratic regime that puts them at a disadvantage when doing business outside the EU.

Some people hope that Brexit will be an opportunity to roll it back. Last week, Lord Turnbull, a former board member at Prudential, told the Treasury select committee that Solvency II was “an absolutely dreadful piece of legislation”, adding that “it would help insurance companies if we could leave that arrangement”.

Huw Evans, director-general of the Association of British Insurers, meanwhile, has called for regulators to help the UK insurance industry to become more competitive.

However, many insurers and their advisers warn that Solvency II, which took over a decade to develop and cost millions of pounds to implement, will not disappear in a hurry.

"UK regulators and insurers were big drivers [of Solvency II]," said James Bateson, a partner at law firm Norton Rose Fulbright. "Solvency II reflects UK regulatory philosophy to a large degree."

He added that, as UK insurers would want to retain access to EU markets, they would want UK regulations to be deemed equivalent to Solvency II rules. “You’re not going to be able to relax Solvency II and get access to the single market, so I can’t see any significant deviation from Solvency II in the short term.”

However, there are hopes that an exit from the EU may enable regulators to ease back on some of the harsher parts of the regime.

The so-called risk margin - an extra layer of capital that applies to some long term life insurance products - is a particular cause of consternation in the UK. Insurers complain that it is too volatile, especially when interest rates are low, and that it discourages them from writing annuities.

Burden

Insurers also hope that post-Brexit regulators might be persuaded to ease back on the administrative burden associated with Solvency II. They complain that much of it is unnecessary and adds costs to what is already an expensive regime.

But Solvency II could prove its worth over the coming months as the shape of Brexit become clearer. “Solvency II has changed the governance of insurance companies to take account of potential shocks. The industry is in a far better position to cope with this than they were five years ago,” said Shaun Crawford, global insurance leader at EY.

Insurers have been keen to reassure the markets about their financial strength since the referendum result was announced, but Aviva will this week become the first to give more detail on the impact of the vote.

At an investor day on Wednesday the group will present its plans for the next few years. Analysts say that, after spending the last few years fixing the company’s balance sheet, chief executive Mark Wilson has to explain where growth will come from.

"The issue for Aviva is how they manage to convince on growth prospects," said James Shuck, analyst at UBS. "People want clear targets, but I don't think they'll give them."

Like other insurers, Aviva is likely to promise growth in mid-single digits and also stress its commitment to investment in digital products and services. Analysts are also hoping for an update on M&A and on dividend plans.

– Copyright The Financial Times Limited 2016