UK insurance trade body proposes changes to Solvency II capital requirements

The Association of British Insurers, or ABI, has called on the U.K. government to ease Solvency II capital requirements, which it said could free up £95 billion for reinvestment.

The trade body is pushing for changes to the regime's Matching Adjustment, saying the current framework, designed in the aftermath of the financial crisis, forces insurers and long-term savings providers to invest heavily in highly rated corporate debt and in sovereign bonds.

The ABI said this skews investment towards non-green investments and makes it harder to invest in renewable energy, infrastructure and companies vital to the transition to net-zero. An analysis by KPMG for the association estimated that £60 billion of the roughly £300 billion funds held in Matching Adjustment portfolios could be reinvested if rules allow pension funds that are managed by insurers to invest in a broader and greener range of assets.

The trade body also proposed changes to Solvency II's risk margin, the formula for which it said is "overly-sensitive to very low interest rates, forcing insurers to hold billions of excess capital for no purpose and contributing to low levels of supply and competition in the annuity market."

About £35 billion of capital currently backing the risk margin, solvency capital requirement and companies' capital buffers could be redeployed either to increase investment in the sector, support the annuity market or be returned to shareholders for investment elsewhere in the economy, the association said.

The changes could also lead to £16.6 billion in additional annual GDP in the U.K. by 2051, according to the analysis.

The association said the proposed changes would still ensure the industry holds enough capital to withstand a 1-in-200-year event and meet its obligations while managing its assets responsibly and safely.