As the next General Election approaches, the government will be keen to demonstrate that it has made progress on capturing tangible regulatory benefits from the UK having left the EU. The first hints of these efforts for the City have come in the form of proposals to overhaul the Solvency II rules, with the Prime Minister hoping that the changes will unleash an “investment big bang”.
Solvency II – an EU directive which came into force in January 2016 – currently governs the prudential regulation of insurance firms and groups in the UK. It covers financial resources, governance and accountability, risk assessment and management, supervision, reporting and public disclosure.
Since its introduction many firms have argued that the rules are too burdensome and overly restrictive. They argue that they are forced to hold more capital than necessary when interest rates are low and are prevented from making longer-term, illiquid investments – including in infrastructure and green energy projects – as a result.
To such firms, the government’s intention to reform the rules will be welcome news. The Pension Insurance Corporation, for example, has suggested that it will be able to invest up to £20 billion more in infrastructure if the rules are successfully changed, calling the reform agenda a “once in a lifetime opportunity”. The Director General of the CBI, Tony Danker, has similarly said that “overhauling Solvency II is a prime example of where we can do better”, arguing for a regime more closely tailored to the UK economy which could “unlock up to £95 billion” of extra investment.
The government launched its first Call for Evidence on Solvency II in October 2020, which closed in February 2021. The review remains ongoing, and the government has said that any reforms will be underpinned by three key objectives:
The Treasury has said that no announcement is imminent, but officials are positive about the eventual outcome. One source has said that the government is “confident it will end up in the right place” and that “Ministers are engaged and keen to make progress.”
Attention is focused on two key areas of the EU directive which the government will seek to amend. The first would see a change to capital requirements, maintaining protection of policyholders while addressing the concern that insurers need to hold too much capital at present. The second would see reforms to the so-called “matching adjustment” regime, allow more money to be deployed to long-term projects like offshore wind.
The Bank of England is due to announce the details of the reforms to Solvency II later in 2022, but the Governor Andrew Bailey has already hinted that these two changes will be high on the agenda. Bailey told members of TheCityUK in February 2022 that “the case for reform is clear” and that they would facilitate “more support from insurers for productive finance and infrastructure investment”.
The government will see unlocking infrastructure investment as a key part of its much-publicised Levelling Up agenda, which – amongst myriad other initiatives – aims to drive improvements in local infrastructure across the UK. While the government has allocated public money to this agenda, it has acknowledged that significant private investment will be needed to achieve the results that it seeks.
With the Conservatives’ polling declining sharply in recent months – and particularly in the Red Wall seats which were key to the party’s electoral success in 2019 – the prospect of unlocking new investment for politically popular infrastructure projects will be seen as a major prize as thoughts start turning to the next election. Investors will want to pay close attention to the announcements on Solvency II as they appear, to ensure that they can capitalise on what the government hopes will be a post-Brexit “investment bonanza”.
To discuss the government’s Solvency II reform agenda in more detail, please email Robert Thomas at email@example.com.