On 8 January 2019, the Solvency 2 and Insurance (Amendments, etc.) (EU Exit) Regulations 2019 were published.
These draft regulations aim to address deficiencies in “retained” EU law in relation to the prudential regulation of insurers and reinsurers after the UK has left the EU. The regulations change legislation to reflect the fact that the UK will no longer be in the EU.
Consistent with the government’s on-shoring policy, the Solvency II regime currently implemented in the UK under the EU Solvency II Directive (2009/139/EC) and subordinate legislation and guidance will not change after the UK has left the EU. However, to ensure that the Solvency II regime continues to operate effectively once the UK is outside of the EU, certain deficiency fixes to the existing legislation will be necessary.
What do the regulations do?
- Regulation of Cross-Border EEA Groups of (Re)Insurance companies
After exit, in a no-deal scenario it is assumed that the EU will treat the UK as a ‘third country’ and therefore, UK groups with EEA insurance subsidiaries may become subject to group supervision by EEA supervisory authorities (if UK group supervision is not deemed to be equivalent). The UK Solvency II regime will be amended so that EU27 countries will be treated as third countries. This means that EEA groups with UK insurance subsidiaries will also be subject to group supervision by the PRA (in the absence of any equivalence assessments).
To ensure that the Solvency II regime can continue to operate effectively in the UK, HM Treasury will take on the Commission’s function of making equivalence decisions for third country regimes, while the PRA will take on the role that EIOPA currently has for providing technical assessments of third country regimes. Where the Commission has already taken equivalence decisions for third countries, these will be incorporated into UK law by the EU (Withdrawal) Act 2018 and will continue to apply to the UK’s regulatory and supervisory relationship with those third-countries.
- Risk weights for EU assets
The regulations remove the preferential treatment of EU risk weighted assets and exposures for insurers using the standard formula.
- Transfer of functions
To ensure that the UK’s standalone Solvency II regime will work effectively, certain key functions carried out by EU institutions will need to be transferred to appropriate UK bodies such as the PRA.
- Information sharing and cooperation requirements between UK and EEA regulators
Binding obligations to UK authorities to cooperate and share information with EEA authorities will be removed from UK legislation. This is appropriate given that the UK will no longer be a member of the European Union, and will ensure the UK is not obliged to share information or cooperate with the EU on a unilateral basis and with no guarantee of reciprocity.
- Binding Technical Standards (BTS)
All the BTS mandates currently set out in Solvency II will be brought into UK law with responsibility for meeting those mandates transferred to the PRA.