Insurers are pushing for the UK to change parts of EU insurance rules as soon as the Brexit transition period ends, arguing that this would allow them to invest more in UK infrastructure.
The EU’s Solvency II rules, which determines how insurers are funded and governed, will still apply in the UK after Brexit, but the UK government will have more flexibility to change them. Ministers are set to launch a review of how Solvency II is working in the UK this autumn.
UK life insurers would like early changes to the risk margin, a part of Solvency II that forces insurers to hold more capital against long-term business, such as annuities. The risk margin is particularly sensitive to low interest rates, rising when rates fall.
“The risk margin has to change. It is insanity,” said Tracy Blackwell, chief executive of Pension Insurance Corporation, a specialist insurer, in an interview with the Financial Times. “It is very volatile and it makes capital planning quite tricky.”
“We are expecting something to happen early next year,” she added, saying that the risk margin should be at the “top of the agenda” in the government review.
Insurers say that the risk margin makes it more difficult for them to take over corporate pension schemes — via deals known as buyouts — and to invest in long-term assets, such as infrastructure.
These investments are increasingly important to insurers because of the low returns available on more traditional assets such as government and corporate bonds.
This month, PIC announced a £130m investment in its first “build-to-rent” property development project in Manchester, and is planning more of the same.
Legal & General has been investing in infrastructure for a number of years. Talking at an FT Live event this month, chief executive Nigel Wilson said that the company was turning housing “into an institutional asset class”, adding that it was an area where the UK had underinvested for many years.
The Prudential Regulation Authority, which supervises the UK insurance industry, has in the past recognised that there are problems with the risk margin but has not made major changes to it, largely because such changes have to be agreed at EU level.
However, a speedy change to the risk margin might not be plain sailing. While life insurers want changes in the way Solvency II is applied in the UK, the other large chunk of the industry — property & casualty insurers — is keen to keep the status quo. They are not affected by the risk margin, but they do a lot of business with countries in the EU so are keen for the UK’s regulations to remain aligned with Europe.