HM Treasury reform of Solvency II consultation

Post Brexit, the government is set on reforming a critical piece of EU financial regulation called Solvency II. This is designed to protect consumers by making sure that insurance companies hold a cushion of assets to be able to withstand financial shocks and honour commitments to policyholders – for example, pay pension annuities.

The reform of Solvency II should be seen in conjunction with other reforms to financial regulation intended to align financial market behaviours with climate goals. We have two primary concerns in relation to the proposed government reforms of Solvency II and wider financial market reform.

  • The prudential regulation of UK insurers (and therefore consumer protection available to policyholders) should be robust and maintain trust and confidence in the sector over the long term; and
  • Market, prudential, and conduct of business regulation should align UK financial market behaviours with climate goals.

The insurance lobby is arguing that post Brexit provides an ideal opportunity to relax some of the measures contained in Solvency II, claiming this would free up investment to support the green transition. We think this is disingenuous and the real intention of the insurance lobby proposals is to weaken regulation to provide a windfall for shareholders, not finance the green transition.

In our submission we conclude that the state of some of our major insurance companies means regulatory standards need to be toughened, not weakened. There are more effective ways of directing the financial resources of financial institutions to support the green transition without compromising consumer protection and undermining long term trust and confidence in the insurance industry and pensions.

Moreover, overall, we conclude that the proposals in Solvency II would do little to align behaviours in the UK financial system and markets with climate goals.

Our submission can be found here: FIC HMT BoE PRA Solvency II consultation response final 210722