PwC UK warns that Solvency II reforms will require investment to develop new systems and processes for insurers

According to the latest analysis by PwC UK, the proposed unleashing of investment from the insurance industry, as part of the Solvency II reforms, may face “steep implementation and governance challenges.”

Related topics:  PwC UK,  New Analysis
Tabitha Lambie | Editor, Protection Reporter
12th October 2023
"Overall, it is uncertain whether these proposals alone will achieve the government's aim to enable significant additional investment in the UK economy. The timetable for implementation is very short."
- Lee Clarke, life insurance leader at PwC UK

The analysis follows the publication of the Prudential Regulation Authority (PRA)’s consultation paper on reforms to the Solvency Regime for matching adjustment (MA) portfolios (a key valuation feature that supports the balance sheets of UK annuity providers). This consultation paper outlines a wide range of significant impacts on insurer’s balance sheets, reporting requirements and the personal responsibilities of senior management.

This refresh of the Solvency II regulations should unlock the insurance industry’s investment power, to fuel the UK economy. However, PwC UK warns that the planned adjustments, including a widening of the assets and liabilities that are eligible for the MA, could see high costs of implementation and a potential reduction in the benefit of the MA for some assets that are used to back annuity business.

Lee Clarke, life insurance leader at PwC UK, has said this consultation paper has provided some “much-needed clarity on what the Solvency UK rules are likely to entail for UK life insurers.” He believes there are some “potential benefits” through the expansion of the asset and liability eligibility criteria and streamlining of the MA application process.

“However, alongside these changes is a strengthening of the governance frameworks firms must adopt, through the fundamental spread attestation process, internal credit rating assurance, and substantial additional reporting requirements on asset and liability information. These are going to take insurers some time to work through and investment will be required to develop the systems and processes capable of dealing with these new requirements,” he explained.

“Firms will welcome the release of this long-awaited consultation on reforms to the MA framework post-Brexit,” Ross Evans, life insurance capital & investment partner at PwC UK, agreed.

“The proposals bring greater investment freedom and streamlined approval processes in certain situations. These are changes that the industry has been crying out for since the implementation of Solvency II. But firms will have to comply with extra requirements to make the most of these  new freedoms. 

“One of the PRA’s other proposals is the introduction of an attestation process, whereby CFOs (in most cases) will have to attest that the MA can be earned with a high degree of confidence. The PRA’s expectations in this area suggest we could see a reduced MA benefit for some assets.

“There are some important clarifications and questions that firms will need answers to through the consultation process, and it remains to be seen how much new investment in productive assets these proposals will help to unlock,” he concluded.

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