Over the last week or two, a number of articles have “warned” us that Solvency II is here to stay – even in post-#Brexit Britain. This raises 2 questions: (i) is Solvency II really here to stay? And (ii) if it is, is that something (re)insurers, (re)insureds and investors need to “warn” or be “warned” about?
In legal terms, the first question is easily answered: unless and until the UK leaves the EU, Solvency II will still apply in and to the UK. From the moment the UK leaves the EU (if it does), everything might be up for grabs – but that doesn’t mean anything will change.
If the UK leaves the EU, but joins the European Economic Area, Solvency II will still to apply – but the UK won’t be able to influence Solvency II rule developments, as they occur over time.
If the UK leaves the EU, and chooses not to join the EEA, things could change – but they probably won’t:
- to protect its (re)insurance industry, the UK’s likely to want to be regarded as “Solvency II equivalent” on all 3 bases ((a) reinsurance supervision; (b) the group solvency calculation; and (c) group supervision). Solvency II equivalence could most easily be achieved by keeping Solvency II, almost exactly as it is. That doesn’t mean equivalence is a forgone conclusion – the Commission will still need to make an equivalence determination, and it won’t necessarily do that for some time. But, at least if Solvency II is retained in materially the same form, a determination will be possible, as soon as the political will can be found to make it;
- if the UK wanted to replace some or all of Solvency II, it would take several years to develop an alternative regime, consult on it, and bring it into force – even if HM Treasury and the PRA had nothing else to do. In truth, of course, they’ll have lots of things to do – and replacing Solvency II is unlikely to be one of their highest priorities;
- the UK’s (re)insurance industry operates across the EU, Switzerland, Bermuda, North America, and the rest of the world. The EU would still have Solvency II, Switzerland and Bermuda would still be Solvency II equivalent, and the EU, the US, the IAIS, the NAIC and others, would still be working hard to adopt best practice, and reduce regulatory arbitrage, wherever they can. If the UK struck out on its own, there’s a risk that it would become mis-aligned with international developments, and that would create material competitive disadvantage for UK (re)insurers. UK (re)insurers, and international (re)insurers with UK (re)insured risks or operations, would also have another set of regulators to deal with, and another set of regulations to comply with, and that’s more likely to add cost and complexity than competitive advantage;
- seasoned Treasury and PRA watchers will also suspect 2 other things: although they might be tempted to follow Bermuda’s lead, by bifurcating (re)insurance regulation in the UK, if it can be done without undermining policyholder protection or financial stability, hell might be freezing over before the political and parliamentary time can be found to bring bifurcation about; and (despite the occasional protest), HM Treasury, the PRA and the Bank of England actually like most of Solvency II. If they had a completely free hand, they might simplify some of it, and push capital standards up, but that’s about all.
If that’s right, what does it tell us about the “warnings” we’re being given?
The UK’s (re)insurers, its regulators, and Lloyd’s spent many hundreds of millions of pounds preparing for Solvency II. And they’ve only had to comply with it for 6 1/2 months. Many (re)insurers say they’ve had some return on their investment – but not nearly enough (yet). They think some of Solvency II is unduly burdensome (some of Pillar II, and lots of Pillar III). They also think it’s unnecessarily complicated and too conservative (Pillar I). But – in pure regulatory terms – more substantial change is the last thing the industry needs. I therefore wonder if the “warnings” were misunderstood. Perhaps they were really prayers, or sighs of relief instead?