INFOCUS: Corporate credit risk in the insurance market

Solvency II, the pan-European regulatory regime for insurers and re-insurers, is undergoing its first major review

The UK’s exit from the EU has left the Prudential Regulation Authority (”PRA”) as the owner of the insurance prudential regime within the UK. Recognising the opportunity to tailor the regime to support the economic recovery, HM Treasury launched a ‘Call for Evidence’ that closed on 19 February 2021.

What are the key objectives of the review?

The UK Government would like the review to enhance the competitiveness of the insurance sector internationally and to encourage insurers to redeploy more long-term capital across a wider range of asset classes (e.g. infrastructure and growth equity) to support the economic recovery.

What could be the implications for insurers?

Whilst the review has only just started, the Association of British Insurers has a list of grievances it would like to see addressed as part of the review, in particular a recalibration of risk margin and matching adjustment. It has called for changes that would free up £95bn capital. The changes could also have a knock-on impact on premiums by reducing annuity costs. Some insurers have already distanced themselves from some of these suggestions and PRA has clarified that it has no preconceived goal to either increase or decrease capital reserving in the sector as part of this review.

What does this mean for the BPA market, trustees and sponsors?

The life insurance sector is already poised to experience transformational growth over the next decade, and this current review will likely set the rules of the game over that period. If the changes do lead to cheaper premiums, then many schemes may find they are closer to an insurance transaction than they think.

We encourage trustees and sponsors to plan ahead to get ready to transact, and ensure insurer counterparty risk is actively embedded in their decision making processes.

Read 2021, An eventful year ahead for insurance transactions

For more information contact Adolfo Aponte, Managing Director

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