Articles - The future of Solvency II

The UK’s decision to leave the EU has left a number of industries in various states of uncertainty. With the government announcing its plans to evoke Article 50 and begin negotiations from March next year, many companies are wondering what the future holds for the British economy once it has finally left the EU.

 By Robert Gothan, CEO and founder of Accountagility
 For the financial services industry, the feeling of uncertainty is especially great and the insurance sector is no exception. Insurance companies faced many changes over the past 12 months and one of the biggest was the implementation of Solvency II, an EU legislation that aims to harmonise insurance regulations across all 28 member states. The issue now facing the UK insurance industry is whether this directive will still have an impact on UK firms once negotiations between the Prime Minister and other countries in the bloc have concluded, probably in early 2019, and the UK no longer belongs to the European Union.

 What can UK insurance firms expect to see in the future and what is the future of Solvency II post Brexit?

 Before Brexit
 To consider the future of this important legislation, it is important to consider the impact Solvency II had on the insurance industry when it was first introduced at the start of the year. The aim of Solvency II was to ensure that insurance firms had strong financial buffers in place along with other requirements covering a number of areas such as authorisation, risk assessment and supervisory reporting. The firms that were compliant with the legislation and had an adequate amount of capital on their books at any one time could then offer other services to customers across Europe.

 This change meant that all firms were forced to invest heavily in their computation systems in order to ensure they could cope with the reform, from both a human resource and financial perspective. The implementation of Solvency II impacted business for insurance firms as business became more expensive to write, causing a surge in M&A activity and leading to companies having to turn down unprofitable opportunities. Essentially, Solvency II caused insurance firms to focus on business areas which required less capital, and were therefore solvency friendly.

 The future of Solvency II
 Following the UK’s decision to leave the EU, there have been many questions asking what will happen to Solvency II. A UK parliamentary committee launched an inquiry at the beginning of September 2016 to reconsider some of the EU rules for insurers and to see if there are possible improvements that could help protect customers in the UK. Whilst there is a strong belief that Brexit provides the UK insurance market with an opportunity to take back control of insurance regulation, there are still some that believe tearing up the Solvency II regulation will prove detrimental and costly to the market. One of the reasons for this being the millions, if not billions, of pounds spent on improving technology to cope with the regulation in the first place.

 Brexit introduces a new dynamic to the insurance industry, creating a regulatory challenge but also bringing about a new level of uncertainty not experienced previously. The question now being asked by UK insurance companies is, with the prospect of a hard Brexit now looking like a reality from 2017, does the UK stick with Solvency II, or does it look to create its own equivalent regulation? With the latter being both another time constraint and also expensive. If the UK creates its own regulation which is similar to its European predecessor, the insurance industry will be appeased. This approach is consistent with Theresa May’s comments to date, on how the UK Brexit legislation would be organised. A UK-only directive which is markedly different, on the other hand, would prove to be exceedingly unpopular with firms that have already invested time and money in programming in order to cope with Solvency II. This puts more pressure on Britain to sign up to Solvency II, despite the fact that it is a counter-Brexit proposal.

 The importance of planning
 This prolonged period of uncertainty has showcased the need for firms within the financial services sector to have planning tools that are agile enough to not only cope with vast and fluctuating amounts of data, but can also deal with changes to regulations.

 Since the referendum on June 23rd, foreign exchange rates have been especially volatile and continue to be so. With the Brexit process set to finally kick off next year, no-one can say for sure when it will finally settle into a more stable pattern. For the insurance industry, the importance of monitoring forex has never been greater as its risk profile could be higher as a result of the weakening Sterling. Having an agile planning tool will allow businesses to plan for movements in exchange rates, rather than having to react to them.

 Having this ability to plan and quickly implement any changes will mean that businesses can also prepare for any changes in regulation coming from the UK itself. “RegTech” has become more than just an industry buzzword in recent months. With full Brexit scheduled for 2019, and with more changes to legislation on the horizon, increasing numbers of organisations within the sector are looking for an agile financial planning tool that will become an intrinsic part of their business process.

 Whilst it remains to be seen what changes will be made to Solvency II, and as the UK distances itself from the European Union, it is inevitable that more legislation will be introduced. When this happens, it will be the companies that have updated their planning tools and their technology that will be the best prepared for the changes that may come their way.

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