At Saragossa, we stay up to date with all regulatory changes affecting our clients’ businesses to help identify the core skills candidates need.

What’s happening with Solvency II?

After Brexit, businesses braced themselves for a lot of red tape, freeing them from the shackles of regulation. It hasn’t quite turned out to be the case, but almost six years after the vote, there are changes to Solvency II, the rules that set out how businesses report on their financial health. It’s all part of the Government’s “Benefits of Brexit” strategy, which could significantly impact investment.

The UK’s financial regulation of the insurance industry has been closely tied to the EU’s Solvency II directive. But, post-Brexit, the UK is free to diverge from it – and is pushing ahead with reforms.

In a speech to the Association of British Insurers (ABI) in February, Economic Secretary to the Treasury and City Minister John Glen announced the changes. “Leaving the EU means that the UK can now tailor the prudential regulation of insurers to our unique circumstances,” said Glen at the ABI’s black-tie dinner. Glen claimed the changes will be responsible for “supercharging the opportunities available to this, your industry, in this country.”

The changes to Solvency II are complex, but John Glen identifies four fundamental changes businesses should be aware of-

  1. A “substantial” cut in the risk margin of around 60-70%
  2. The fundamental spread will be reassessed to calculate the matching adjustment, enabling companies to match liabilities on long-term policies against predictable cash flows from investments.
  3. The Government will introduce a “significant increase in flexibility” to support greater investment in long-term assets.
  4. There will be a “major cut in the EU-derived regulations”, which they hope will reduce reporting and administrative burden on UK businesses.

In his speech, Glen went into further detail. If you’re interested and can spare the time, the transcript of the speech is worth reading.

Brexit dividend

The Government believes the changes will increase the global competitiveness of the UK while protecting consumers from premium price rises at a time when every other bill is rising.

And the impact on the business? The ABI estimates that up to £95bn could be freed up for the UK economy, which can be used to tackle existential challenges such as climate change. The Government hopes this long-promised Brexit dividend could provide a vital cash injection in areas where it’s urgently needed.

Unlocking capital for investment is essential as the UK seeks to transition from relying on fossil fuels to sustainable energy production. The crisis in Ukraine and the dire warnings of climate breakdown are driving forces for the UK’s new Energy Security Strategy, published in early April. Access to billions in funding could prove critical to establishing energy independence for the UK.

Is it all upside? There are dissenting voices, including Mick McAteer of the Financial Inclusion Centre, who warned that “Reforming Solvency II is attractive to insurers, as it could generate higher fees and provide a windfall for shareholders at the expense of policyholders and pension savers that use insurance-based products.”

Understanding impact

As with any regulation changes, there will be companies that feel the impact more than others. While we can’t say for sure what that will look like we know that everyone working in insurance will be affected.

Reforms, especially transformational reforms, will challenge businesses to adapt quickly. At Saragossa, we stay up to date with all regulatory changes affecting our clients’ businesses to help identify the core skills candidates need.

We will keep an eye on how things progress and continue to share any new information on our channels.