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Solvency II: concerns raised by UK Treasury and Bank of England

15 February 2016. Published by Matthew Griffith, Partner

In only its second month after implementation, the effects of Solvency II have already been called into question by the UK Treasury and the Bank of England, due to its potential impact on long-term investment and the competitiveness of the EEA insurers.

The Treasury recently produced a submission for the EU Commission, in response to its request for evidence and feedback on the framework.

The Directive (as amended by Omnibus II Directive) contains a clause inviting the Commission to review the methods, assumptions and standard parameters used when calculating the Solvency Capital Requirement (SCR) within the standard formula within five years of application of the new regime. This was later brought forward to 2018 by a recital in the delegated act.

However, the Treasury's submission makes clear that there is a case for broadening the scope of the planned review, and bringing it forward still further, adding that Solvency II is "already raising issues around the impact of the framework on long-term investment and competitiveness of the European insurance industry". More specifically, the Treasury stated that the planned review of Solvency II should involve a "close examination" of its impact on:

  • Long-term investment: how does Solvency II affect EEA insurers' ability to invest in a way that contributes to stable, long-term growth in the European economy?
  • Competitiveness: how does Solvency II affect EEA insurers competing internationally, both against foreign competitors operating within the EEA, and when themselves operating in foreign markets outside the EEA?

The submission went on to stress the importance of conduct monitoring and peer review exercises going forward, to ensure that Solvency II is uniformly implemented across Europe.

Separately, the Bank of England has, in its own submission, voiced concerns over the 'Ultimate Forward Rate' under Solvency II, which is used to calculate insurers' long term liabilities. It stated that differences remain in the way that discount curves are derived and applied under different currencies and in different national markets, which "can lead to large differences in the solvency positions of firms according to where they are located in the EU".

"In order to establish a truly harmonised approach to insurance regulation, it is essential that the valuation of the insurance balance sheet is done on a consistent basis", it said.

While it is certainly promising for insurers that the UK authorities have been quick to engage proactively on the impacts of Solvency II, it is equally concerning that this has been required so soon after its implementation. We now wait with anticipation to see how these comments are ultimately dealt with by the European Commission.