UK regulator turns compliant, can work with insurer solvency plan

The UK’s financial regulatory body is ready to begin marching to the government's beat for the shape of the UK’s pending insurance sector solvency regime, top officials indicated for MPs.

“We accept that the government has reached its final view and has not taken our advice,” the chief of the Prudential Regulation Authority (PRA) Sam Woods (pictured) told a parliamentary committee.

“It is a democratic system,” Bank of England Prudential Regulation Committee external member Julia Black said in testimony for MPs. “Whatever you decide, we will absolutely implement.”

The back seat stance is admittedly new for the Bank of England’s PRA which had shared responsibility more equitably with the government under the EU playbook. Woods rather reframes recent sparring as a reflection of his responsibility to put PRA expertise into the public debate.

“There is also a practical point: we need to get on with this,” he also added. Debate between government and the bank has ended ahead of the pending parliamentary moves.

The PRA chief was tested strongly under questioning, even asked if he had considered resignation given his office's critical stance to adjustments in insurer solvency being forwarded by the government. Woods denied any intent to resign or suggestion he had threatened such during policy negotiations.

Nor would the PRA under Woods use other regulatory powers to compensate for what it might consider a loss of its prudential prowess or prudency framework.

“We do not think we either should or can use those [new tools] to achieve the same effects as we were looking for” from the capital requirements, Woods told MPs.

At issue are plans by the UK Treasury to slash the risk margin in capital requirements, an estimate of the cost of transferring an insurer’s liabilities to a third party in the event of default, by as much as 65%.

Prefacing the Tuesday, March 07 committee hearing, Bank of England chief Andrew Bailey on Monday had released results of a bank study suggesting the proposed changes in the solvency regime would allow for billions in capital release, increasing the risk of insurer default in the system.

The estimate of risk of default, measured for life insurers only, was said to have increased from 0.5% to 0.6%, alternatively decried as a “20% increase” or a move “from one very small number to another.” In fact, existing transition mechanisms in the current solvency regime still valid to 2032 likely undercut the increase in risk to 0.03 percentage points, Bailey’s letter to MPs indicated.

Speaking to MPs in the Treasury Committee Tuesday, Woods framed his office's top concern less on the system security impact of the risk margin cut and more on PRA hopes for adjustments to the solvency regime's matching adjustment, the part of the asset spread that insurers can safely assume will be earned and therefore contribute, upfront, to insurer resources.

The Treasury plan largely left the existing methodology for calculating that matching adjustment intact, but could add new asset classes to the qualifying asset roster for better duration matching and could also alter treatment of sub-investment grade assets.

Woods additionally heaped support behind the proposal, hotly supported by the industry and now considered likely for passage, that his office be guided by a new secondary imperative to support competitiveness of the financial system.

"It's a very big change for us," Woods told MPs in committee. "It is very important that our staff understand that Parliament has changed something about what we are meant to do and embrace that."

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