Solvency II reform could unlock ‘tens of billions’ in investments

Solvency II forms part of the EU’s regulatory framework for insurance companies, covering financial resources, governance and accountability, risk assessment and management, and, effectively, tells providers in what they can and cannot invest. This has long been seen as a key area of reform post-Brexit.

Dr Kay Swinburne, chair of financial services at KPMG, told an Association of British Insurers webinar in February 2021 that Solvency II had “never worked for the UK”, which has “a very different attitude towards long-term investments than the rest of the EU”.

The government is particularly keen to tap defined contribution schemes for investment in the post-Covid-19 economic recovery and its “Build Back Better” agenda, and the PIC argued in its new report that Solvency II reform is vital if the government is to achieve these ends.

“While Solvency II has many features that benefit the UK, reforming it to better suit our specific needs, rather than the general needs of all insurance companies across every EU member state, presents a once-in-a-generation opportunity to unlock and channel hundreds of billions of pounds of UK savings into projects that support the race to net zero and the levelling-up agenda — into what the Treasury is calling productive finance,” the report stated.

The PIC argued that flaws in the existing regulation encourage life insurance companies to invest in large, well-funded companies at the expense of the country at large, which could benefit from increased long-term investment in the economy.

The insurer itself could have almost doubled its investment — from £10.9bn to £20.9bn — since 2016 were it not for the effects of Solvency II. It calculated that appropriate reforms to these rules could see its own planned investment in “productive finance” increase from £30bn to £50bn by 2030. 

Though such reforms are being explored by the Treasury and the Prudential Regulation Authority, the PIC warned there is “a real danger of missed opportunities through delay and a failure to achieve the full potential of reform, affecting the lives of millions of people”.

Proper reform, which has been made possible by Brexit, would mean the company had an additional £2bn a year to invest in productive finance in the short term, and open up an additional £450m for investment in social housing, it stated.

It said its ideal reform would preserve “insurer balance sheet resilience throughout the cycle”, protecting policyholder pensions, while discouraging investment in relatively risky assets like overvalued markets.

Tracy Blackwell, chief executive of the PIC, said: “We have a once-in-a-lifetime opportunity to channel new investment into communities across the UK, building quality homes, decarbonising our economy, creating jobs and levelling up.

“The life chances and financial security of millions of people across the country depend on the timely and successful reform of this key piece of financial services regulation. Success would incentivise tens of billions of pounds of long-term investment and enhance consumer protections.”

Frank Gordon, director of policy at the Association for Renewable Energy and Clean Technology, added: “REA welcomes this report and its findings. A lack of available finance can be a barrier to developing new renewable and clean tech projects, and the changes proposed would help unleash a wave of new investment that can help take us to net zero.

“Such investment will create jobs and ensure that green tech can be built quickly, while also tackling other problems like air and noise pollution.”