General Insurance Article - What might prudential regulation look like under Brexit?


Whatever your opinions on Solvency 2, it is unlikely anything will change fundamentally. This is not just because the industry has spent huge amounts of money and is chronically sick from continual regulatory change, but also because it will be vital for an independent UK to gain equivalence. Having already implemented Solvency 2 and been at the heart of EIOPA it would seem difficult for the EU to not grant this important status, even if there was political opposition.

 By Barney Wanstall, Director, Insurance, PwC
 Equivalence status will be helpful for UK based groups and UK reinsurers – European insurers will be able to rely on UK group supervision, they will also be able to purchase reinsurance from lower or unrated UK reinsurers and incur the same counterparty default risk capital charges as from equivalent EU reinsurers.
  
 However, we should remember that equivalence only goes so far – it is a separate issue from passporting – the ability to trade freely around the EU from the UK. Passporting is a political issue – the central EU position is not to grant this without the free movement of people. So, whilst there are a number of scenarios when it comes to trading rights, UK insurers currently look unlikely to retain this right however good the regulatory regime is.
  
 Experience to date has shown that the PRA has been both championing and to a certain extent hamstrung by Solvency 2 – the directive being both more prescriptive for firms but also more restrictive on the regulatory toolkit. So what might happen now that they have more freedom?
  
 Firstly, we should remember that equivalence does not equate to compliance – the PRA could choose to scale back some of the less liked aspects of solvency 2 – such as reporting – and still be “more equivalent” than required. It is clear from the countries already approved that there is no need to “copy” solvency 2. There may also be an increased need (or opportunity?) for the UK to demonstrate its attractiveness following the successful examples of Bermuda and Switzerland. So given all this, what might change in a post-EU regulatory regime?
     
  1.   More flexible capital requirements: The ICA regime operated very successfully for a number of years, for those without an approved internal model, the setting of capital via the standard formula has felt like a step back. Whilst neither approved internal models or the standard formula will be quickly thrown away, both the regulator and potentially firms would welcome more of the flexibility that the old regime offered – we were probably already equivalent with ICA.
  2.  
  3.   Less reporting: Few would disagree that the reporting burden under Pillar 3 is excessive, given how little regulatory reporting changed for insurers in the 20 years prior to Solvency 2 there is some hope that a liberated PRA would offer some respite here.
  4.  
  5.   International Capital Standards: solvency 2 or no solvency 2 ICS was going to arrive at some point – probably previously via an update to Solvency 2. Now the PRA would likely participate directly in the process to determine ICS – and also independently determine how it gets incorporated into UK regulation.
  6.  
  7.   More waivers: Without the constraints of European law, the PRA would regain its previous flexibility to offer waivers on a more discretionary basis. This worked well under solvency 1, and could be equally as successful under the UK version of Solvency 2.
 Therefore whilst our exit from the EU will undoubtedly be negative for the industry, the outlook for regulation is more positive – where some sensible regulatory leadership could relieve some of the burden for insurers but retain a world class regime which is credible and well respected. That said, a liberated PRA will also need to resist the temptation to go beyond Solvency II. So whatever the exact regime, the PRA, relative to many of its European counterparts, is a sophisticated, well-resourced and risk averse regulator and so the regulatory responsibilities for UK insurers is likely to remain high.

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