One of the UK’s biggest insurers has accused regulators of becoming more interventionist in their oversight of the industry, suggesting the role should be scaled back.
Legal & General said that under new Solvency II rules, the Prudential Regulation Authority is “effectively overruling the judgment of the board” when it comes to setting capital requirements, and is taking a more “directive” approach when approving transactions.
“Boards do not feel empowered to make commercial decisions without reference to the regulator,” it said.
Legal & General would like audit firms to take over some of the work carried out by the PRA, especially that related to internal capital models. “The regulator could then opine on the more strategic issues which impact its statutory objectives,” it said.
The PRA declined to comment.
The insurer’s comments have been made in a submission to the Treasury select committee, which set up an inquiry into the future of the Solvency II capital rules in the UK after Brexit. The rules, which took more than a decade to create, were introduced at the start of this year.
While there is little appetite for a comprehensive overhaul of the regime many UK insurers, especially in the life insurance sector, would like to see some of the regulations changed.
Prudential, which has long been a critic of Solvency II, said the regime “fails to reflect adequately the long-term nature of the liabilities in many UK life insurance products”. The insurer also said that the PRA was “gold-plating” rules, interpreting them in a more conservative way than regulators in other EU countries.
Solvency II has much more detailed and frequent reporting requirements than [the previous regime] which are unnecessary, and create costs that are out of proportion to the benefit of the increased scrutiny for policyholders
Several of the submissions complained about the so-called risk margin, an extra layer of capital that insurers have to hold against very long-term business.
Aviva said that the risk margin was “inappropriate for long-term life insurance business and is unduly sensitive to interest rates”.
Insurers say that the risk margin makes products such as annuities more difficult to write, and pushes some business to offshore insurance centres such as Bermuda.
Submissions to the committee also complained about the reporting requirements associated with Solvency II.
Aviva said: “Solvency II has much more detailed and frequent reporting requirements than [the previous regime] which are unnecessary, and create costs that are out of proportion to the benefit of the increased scrutiny for policyholders.”
While the insurers want to see the PRA make changes to the way Solvency II is applied, they are also concerned about the UK’s influence over the rules after the UK leaves the EU. While the UK would be free to create its own regime in theory, in practice the insurers want a system that has equivalence with Solvency II.
Aviva said: “The main priority for Aviva is that the UK does not simply become a rule-taker with respect to Solvency II and any future changes that are made to it. It is essential the UK is in a position to determine and control a UK regulatory regime suitable for the UK context.”
Source: Financial Times