UK insurance industry will struggle to take back control
When Britain voted to leave the European Union, some saw it as a good opportunity to change insurance regulations in Britain’s favour, but moving away from the European framework will be easier said than done.
Some have hoped that, after Brexit, the British insurance sector can design a new regulatory regime andkeep London as a global hub.
In an echo of the claims made about the effect of leaving the EU on many other policy areas, Andrew Tyrie, then chairman of the UK Treasury Select Committee, said: “Brexit provides an opportunity for the UK to assume greater control of insurance regulation.”
Solvency II, the EU’s legislation to harmonise insurance regulations across all member states, came into effect in 2016. Like many aspects of what the EU does, it came under attack in the Brexit debate, with detractors claiming it was expensive and unnecessary red tape.
If Britain leaves the single market, it has the option to opt out of the Solvency II framework. Britain would probably keep the rules to begin with, but one lawyer told me it could be held up as an example of red tape to be shredded.
British insurers have had a number of gripes with Solvency II, and there are parts of it they would like to change.
The ‘risk margin’ that insurers must hold on their balance sheet is sensitive to interest rates, and it makes longer-term annuities in a low interest rate environment expensive for insurers. British insurers write more of these annuities than their European counterparts.
But the idea of making vast changes to regulation is fanciful. To remain global in outlook, Britain’s new regulatory regime would need to achieve equivalence with Solvency II, something that Switzerland and Bermuda have already done and that Australia, Canada and the US are working towards.
Unlike these jurisdictions, Britain outside of Solvency II would be starting from a point of complete equivalence. This could be seen as beneficial from the perspective of wanting to please European regulators; on the other hand, it means any change of course would be closely scrutinised.
Given how new Solvency II is, there could well be modifications over the coming years. Outside the tent, Britain would lose the chance to shape how the rules evolve but would still be obliged to follow their development.
A further obstacle to reshaping UK insurance regulation would be the capacity of the Prudential Regulation Authority (PRA) to act.
PRA chief executive Sam Woods warned earlier this month that the regulator could face “a material extra burden” after Brexit with the need to authorise and supervise EU financial firms. If the PRA is swamped by managing this task, any meaningful change to insurance regulation is likely to take a long time.
Britain may decide to opt out of Solvency II, but the prospect of an immediate revolution looks unlikely. Designing whatever rules take your fancy while also keeping European regulators on board is like having your cake and eating it: pretty difficult.