Viewpoint: Solvency reform, the secondary growth objective and UK electoral risk
Reform of the solvency rules affecting insurers operating in the UK is well under way and remains one of the oft-referred-to benefits of its exit from the European Union
An impending election in the UK might introduce risk to ongoing solvency reform and delay the secondary growth that has been promised
Solvency reform is expected to unlock a variety of changes that will help deliver growth in our financial services sector, providing regulators with an expanded remit that gives them the mandate to facilitate this growth.
The new secondary growth objectives that have now been formally bestowed on the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) are independent of the solvency reforms, but also intrinsically connected.
The government says the reforms will “boost economic growth by delivering a more tailored, clearer and simpler regulatory regime” and will also “cement the UK as one of the best countries in the world in which to do business”.
That certainly seems to be the accepted position and, by and large, the delivered and proposed changes have been welcomed by the insurance industry. But this is a complex area and there are a variety of legal and regulatory changes required to unlock all the hoped-for benefits, including some that rely on specific statutory instruments – also known as secondary, delegated or subordinate legislation – to deliver the change.
These are being delivered as part of the government’s smarter regulatory frameworks programme. This is the umbrella under which the government seeks to deliver the various statutory instruments that will affect the required legislative change to deliver all the promised benefits.
Matching adjustment reform
Reform of the matching adjustment is part of the mechanism it is hoped will unlock growth in the financial services sector. Back in September 2023, the PRA published CP19/23 – Review of Solvency II: Reform of the Matching Adjustment with a request for responses by January 5, 2024. Within that, the PRA talked about the related anticipated legislation on the matching adjustment.
Those draft regulations have now been published in the form of the Draft Insurance and Reinsurance Undertakings (Prudential Requirements) Regulations covering the matching adjustment framework and calculation.
Two draft regulations have been published: the Insurance and Reinsurance Undertakings (Prudential Requirements) Regulations 2023, and the Insurance and Reinsurance Undertakings (Prudential Requirements) (No 2) Regulations 2023. These are statutory instruments that are required to bring into force specific elements of the solvency reform and are subject to parliamentary scrutiny and approval and therein lies the electoral risk.
Electoral risk
Parliamentary approval is generally not a quick process, unless there is a very pressing social or political need such as the Post Office scandal, where the need for swift legislation was not in dispute. While to some of us solvency reform is a pressing matter, I suspect the wider population will not share our fascination with the subject and the pressure on the government to ensure this makes swift progress is less evident.
We are fewer than 12 months from the next general election and possibly much closer than that. It seems to be accepted that trying to hold an election during the colder winter months is not in anyone’s interest, not least the electorate. The impact of weather on electoral turnout is a subject that has exercised scientific minds but suffice to say, few expect the government to take that approach.
Britain’s prime minister, Rishi Sunak, has hinted at the second half of 2024 as the likely date, which probably means September or October if we factor in weather risk. But also worthy of note is the fact local elections are being held across England on May 2 and, historically, local and national elections have often been combined to save costs. That could still prove to be the case for the 2024 general election, considering no party in power wants to give the opposition any more warning of the date than it is legally required to do so.
Statutory instruments are required to follow clear processes before becoming law – that is, finalised by the signature of the relevant minister, at which point they are deemed to be “made”.
Given the government is “dissolved” once an election is called, any business not concluded by that point is paused and would become a matter for the next government. With some of the legislative change required seemingly not yet published in draft, elements of the changes required to conclude all solvency reform may well be at risk of falling to the next government.
There is no suggestion Labour, which at present looks the most likely party to form the next government, has a materially different view on solvency reform. Whether it would give it a similar level of priority to the incumbent government, however, is unclear.
If managing solvency reform is part of your responsibility, be prepared for the possibility of an extended timetable for its implementation.
Claire King is risk and compliance director at ICSR
