21 July 2022
The Institute and Faculty of Actuaries (IFoA) welcomes HM Treasury’s (HMT’s) proposals on the future path of Solvency II in the UK with a major opportunity to recast insurance regulation in a post-Brexit world. The IFoA believes it is important in the public interest that the government’s desire to free up investment under a UK solvency regime is balanced with appropriate policyholder protection. In our response to HMT’s Review of Solvency II, we reiterate our support for HMT’s underpinning objectives while considering approaches in one important area: the Fundamental Spread methodology.
There has been significant industry interest and debate over the calibration of the Fundamental Spread. We believe that the Prudential Regulation Authority (PRA) has justifiable concerns over aspects of the current Fundamental Spread methodology, such as limited risk sensitivity.
However, we do not believe that the ‘revolution’ in approach proposed in the consultation is appropriate. In our consultation response and accompanying research, we have considered how adjustments could be made to the existing Fundamental Spread methodology, in an ‘evolution’ of the current regime. These seek to address some of the PRA’s concerns around risk sensitivity, and to better reflect the characteristics of different asset classes.
We broadly support HMT’s ambition in removing unnecessary restrictions in the use of the Matching Adjustment. Increasing Matching Adjustment asset eligibility would provide insurers with a greater range of investment opportunities. There are both societal and environmental benefits to increased investment in appropriate long-term productive finance.
Matt Saker, IFoA President said:
“Our research on the Fundamental Spread and our consultation response have been considered from an independent, public interest perspective. It is really important to find an appropriate Fundamental Spread methodology if the new Solvency regime is to meet the government’s ambitions to increase the insurance industry’s investment flexibility.
“We believe our response and our research address the Treasury’s wider objectives to provide a prudent regulatory regime, foster innovation and competitiveness, provide policyholder protection and release long-term infrastructure and green investment."
“Actuaries have a range and depth of expertise in this specific and highly technical area. For this reason, the IFoA has an important role to play in the debate on the future evolution of this Solvency II review and we look forward to engaging further with Treasury in the development of this regulation.”