This article was first published by Insurance Day in their Viewpoint section.
Reform of the Solvency rules affecting reinsurers operating in the UK is well underway and remains one of the oft-referred-to benefits of our exit from the EU. The new secondary growth objectives that have now been formally bestowed on the PRA and FCA are independent of the Solvency reforms, but also intrinsically connected. Solvency reform is expected to unlock a variety of changes that will help deliver growth in our financial services sector, providing the regulators with the expansion to their remit that gives them the mandate to facilitate this growth.
The Secondary Growth Objective And Matching Adjustment Reform
To quote the Government:
“The reforms will boost economic growth by delivering a more tailored, clearer and simpler regulatory regime. They will also cement the UK as one of the best countries in the world in which to do business.”.
That certainly seems to be the accepted position and by and large, the delivered and proposed changes have been broadly welcomed by those in our industry. But this is a complex area and there are a variety of legal and regulatory changes required to unlock all of the hoped-for benefits, including some that rely on specific Statutory Instruments (Also known as secondary, delegated or subordinate legislation) to deliver the change. These are being delivered as part of its Smarter Regulatory Frameworks programme. This is the umbrella through which the Government seeks to deliver the various Statutory Instruments that will effect the required legislative change to deliver all of the promised benefits.
Reform of the Matching Adjustment is part of the mechanism by which it is hoped to unlock growth in the financial services sector and back in September 2023, the PRA published CP19/23 – Review of Solvency II: Reform of the Matching Adjustment” with a request for responses by 5th January 2024. Within that, it talked about the related anticipated legislation on the Matching Adjustment. Those draft regulations have now been published in the form of the “Draft Insurance and Reinsurance Undertakings (Prudential Requirements) Regulations” covering the Matching Adjustment framework and calculation. Two draft regulations have been published:
- The Insurance and Reinsurance Undertakings (Prudential Requirements) Regulations 2023; and
- The Insurance and Reinsurance Undertakings (Prudential Requirements) (No. 2) Regulations 2023
These are statutory instruments that are required to bring into force specific elements of the Solvency reform and are subject to Parliamentary scrutiny and approval. And therein lies the electoral risk.
Legislative Change And Electoral Risk
Parliamentary approval is generally not a quick process, unless there is a very pressing social or political need such as the Post Office scandal, where the need for swift legislation was not in dispute. Whilst to some of us Solvency reform is a pressing matter, I suspect the wider population will not share our fascination with the subject and the pressure on the government to ensure this progresses swiftly is less evident.
We are of course now less than 12 months from the next general election, and possibly much closer than that. It seems to be generally accepted that trying to hold an election around Christmas or over the colder winter months is just not in anyone’s interest, not least the electorate who will find it harder to muster the enthusiasm to turn out if an election day proved to be cold, wet or even snowy. The impact of weather on electoral turn-out is a subject that has exercised scientific minds (“When the election rains out and how bad weather excludes marginal voters from turning out” if you want to read the detail!) but suffice it to say, no one expects the Government to take that approach.
Rishi Sunak has hinted at the second half of 2024 as the likely date, which probably means September or October if we factor in weather risk. But also worthy of note is the fact that local elections are being held across England on 2nd May, and historically, local and national elections have often been combined to save costs. That could yet still prove to be the case for the 2024 General Election, given no party in power wants to give the opposition any more warning than it is legally required to do so of the date on which an election will be held.
Solvency Reform – The Risk
Statutory Instruments are required to follow clear processes before becoming law – that is finalised by the signature of the relevant minister, at which point they are deemed to be “made”. Given the Government is dissolved once an election is called, that means any business not concluded at that point is paused and would become a matter for the next Government. With some of the legislative change required seemingly not yet published in draft, it would appear that elements of the changes required to conclude all Solvency reform may well be at risk of falling to a new Government to conclude.
There is no suggestion Labour, who it seems at present are the most likely party to be asked by His Majesty King Charles III to form the next Government, have a materially different view on Solvency reform, but whether it has a similar level of priority is more questionable. If managing Solvency reform is part of your responsibility, be prepared for the possibility of an extended timetable for the implementation of all aspects of Solvency reform.
If you would like to discuss an aspect of the way your firm approaches the Solvency reforms, please speak with the author or your usual ICSR contact.
