On 13 September, the Treasury Committee agreed the terms of reference for its inquiry into Solvency II, signaling the launch of its inquiry into the Directive.
The inquiry appears to be open to the possibility of replacing Solvency II, with the Chairman of the Treasury Committee, Rt Hon Andrew Tyrie MP, commenting:
“Brexit provides an opportunity for the UK to assume greater control of insurance regulation...The Treasury Committee will now take a look…to see what improvements can be made in the interests of the consumer.”
The terms of reference state that the Treasury Committee is seeking to understand “the strengths and weaknesses of Solvency II in its existing form and its status in the context of insurance regulation internationally.” In particular, the Treasury Committee is seeking to examine whether Solvency II impacts on the ability of insurance to meet the needs of UK customers and the UK economy, and whether Solvency II has any impact on the competitiveness of the UK insurance industry.
There is a clear suggestion that Solvency II can be improved upon – but what does this mean for the insurance market?
As we explained in our briefing “Preparing for Brexit: seven things that (re)insurance businesses can do now”2 , we would expect the UK to seek to maintain its equivalence under Solvency II for group supervision, group solvency and reinsurance in order to help UK insurers to continue to trade in Europe. By far the simplest way of doing this would be to maintain these aspects of Solvency II in its current form – departing from Solvency II may throw up hurdles for UK (re) insurers and intermediaries which wish to trade in Europe.
It is also far from certain that departing from Solvency II would lead to a relaxation of requirements, which was one of the arguments made in favour of Brexit. Experience shows that the UK regulators generally seek to impose higher standards than those set by European legislation, as demonstrated by the UK’s transposition of the Insurance Mediation Directive.
Indeed, it is our understanding that it was only the maximum-harmonising nature of Solvency II which prevented the UK regulators imposing a stricter regime than that which is contained in the Directive. While the Treasury Committee may regard Brexit and the abolition of Solvency II as an opportunity to “improve” the UK’s insurance regulatory regime, extricating the UK from Solvency II may prove complicated and carry as yet unforeseen drawbacks. We will continue to monitor the inquiry, and the submissions made by stakeholders, with great interest.