Sam Woods, Deputy Governor for Prudential Regulation and CEO of the Prudential Regulation Authority (PRA), has delivered a speech to the Association of British Insurers in which he stated that insurance regulation is about to change in the UK. Woods discussed the reform to the architecture of financial services regulation in the UK as well as the review into the UK adoption of Solvency II.
The UK will shift away from regulating through legislation and will move towards rule-making by the regulators. This will enable rule-making to be informed by day-to-day risk assessments made by the regulators in their role as firm supervisors. Enabling the regulator to adapt requirements without legislation should make it easier to change rules when needed and create greater manoeuvrability. What will this mean in practice?
Sam Woods sees leaving the EU as an opportunity to make supervisory processes, such as approving internal models, simpler. This will mean reducing the volume of materials that must be referred to in order to define compliance with the Solvency II regime. Having a streamlined set of rules will reduce the burden on firms as well as the PRA.
Woods reassured his audience about the new approach, arguing that the PRA has no intention of overburdening firms with an avalanche of new regulations. The PRA regime is not a zero-failure regime. What the PRA will focus on will be the risks of disorderly failure. In that light, the UK will consider a resolution regime for insurance companies.
Woods signalled concern about calls for incentives for specific forms of investment and reminds his audience that the regime must remain risk-focused. Disregarding the risks of specific types of investment (regardless of their ESG credentials) could result in an undercapitalised system. Woods says that, although firms must understand the risks of their climate change exposures in order to transition to net-zero safely, the wider societal and environmental benefits of investing to support the transition should be managed through other public policy tools. Woods also expressed concerns about the benefit of changes the regulator’s objectives to add a competition objective.
Turning to the review of Solvency II, Woods described the current regime as “over specified” and in need of tailoring in some places, especially in respect of life insurance. In particular, the calculation of the risk margin, the matching adjustment and internal models may need to be reviewed but Woods indicates in this speech that there is no appetite to weaken prudential standards.
For further information: Sam Woods delivers speech on the future of UK insurance regulation