(Reuters) – The UK launched a public consultation on Thursday for a relaxation of capital rules for insurance companies after Brexit, in a move that the government said would increase investment in long-term infrastructure.
The UK inherited rules called Solvency II from the EU, and reforming them is seen by the insurance industry at £ 2.2 trillion ($ 2.73 trillion) and the government as important in keeping the country’s financial sector globally competitive.
The long-flagged proposals include a reduction of the risk margin by 60% to 70% for long-term life insurance companies. This is a £ 32 billion buffer held in case insurance companies have to transfer insurance to others in a crisis.
Insurance companies have said they reinsure certain business outside the UK to keep down risk margin requirements.
The Ministry of Finance said that the proposed changes would maintain a high level of protection for policyholders and help attract new insurance companies, which would increase consumer choice.
“Our reforms will unlock tens of billions of pounds of investment in the UK economy, stimulate market innovation while protecting policyholders ̵1; and will consolidate Britain’s position as a global hub for financial services,” Finance Minister John Glen said in a statement.
The Bank of England’s Prudential Regulation Authority said the reforms could lower the total capital levels of life insurance companies by around 10% to 15%.
“This combination of reforms would increase the risk of the insurer’s failure compared to the current position,” it said, adding that this would still be within the regulator’s “risk appetite.”
The government also proposed a more sensitive treatment of credit risk in the matching adjustment, currently worth around £ 81 billion, which provides incentives for insurance companies to issue long-term life insurance products by matching them against assets with similar characteristics.
The proposals would also make it easier for insurance companies to invest in long-term assets, such as infrastructure, and would reduce reporting requirements, the ministry said.
The EU is also reforming the Solvency II rules and has already put forward formal proposals which it says will unlock € 90 billion in the short term, falling to around € 30 billion in the longer term.
The public consultation ends in July and will be followed by a more detailed consultation by PRA later in the year. Legislation would probably be needed to implement some of the changes.