Insurance - Q2 2022

• The risk margin
• The matching adjustment
• Increasing investment flexibility
• Reducing reporting and administrative burdens

HMT is proposing to reduce risk margins for long-term life insurers by 60-70%, explaining that a large reduction is feasible due to the current methodology overstating the market value of a firm’s liabilities, especially in low interest rate environments.

HMT suggests reducing capital requirement thresholds and allowing more flexibility in where insurers can invest their assets, which would create a material release of possibly as much as 10% or even 15% of the capital currently held by life insurers. This is expected to unlock “tens of billions of pounds” for productive investments, including infrastructure.

The proposed reforms also aim to reduce the administrative burden of Solvency II by eliminating the requirement for UK branches of overseas insurers to calculate local capital requirements. Instead, these branches would be able to rely on group capital.

HMT’s review follows the PRA’s publication of Policy Statement (PS) 29/21 ‘Review of Solvency II: Reporting (Phase 1)’ in December 2021, which proposed to extend eligibility for the quarterly reporting waiver to designated Category 3 firms and reduce the frequency of MCR reporting to an annual basis.

The PRA continues to work closely with HMT on the Review and is expected to consult soon on proposed changes to its rules and supervisory expectations.

FCA Portfolio Letters: FCA Supervisory Strategy

The FCA issued ‘portfolio letters’ to the Boards of certain types of insurance intermediaries. These letters set out the regulator’s view of the key risks within their supervisory portfolios.

Whilst these letters are addressed separately to those operating in the Lloyd’s and London Market and to Personal and Commercial Lines, there are some common themes, covering:

• Product oversight and governance:
  • In the Lloyd’s market, this relates to suitability, price transparency and certainty of cover
  • In personal and commercial lines, this is more about pricing practices and value
• Governance, culture, diversity & inclusion and ESG
• Resilience, including client assets and orderly wind down

The FCA expects firms to consider the extent of these risks within their business and act when they identify any harm.

Oversight of Appointed Representatives

The FCA reminded the insurance sector of ongoing obligations to provide adequate oversight for the firm or person(s) for which they remain responsible and accountable. At present, the FCA is seeing evidence of harm, including mis-selling, that has required them to act.