The U.K. Prudential Regulation Authority has suspended work on changing a controversial part of the Solvency II pan-European insurance capital regime, prompting a backlash from insurers.
PRA CEO Sam Woods wrote to Nicky Morgan, the chair of the parliamentary Treasury select committee, to say that although the regulator had found a solution to calculating the Solvency II risk margin that had some merit, "in the context of the ongoing uncertainty about our future relationship with the EU in relation to financial services we do not yet see a durable way to implement a change with sufficient certainty for firms to be able to rely on it for pricing, capital planning and use of reinsurance."
Woods added: "We will keep this position under review and will update the committee as soon as we can see a clear way forward."
In a statement responding to Woods' letter, Association of British Insurers Director General Huw Evans said: "It is very disappointing that the Prudential Regulation Committee have chosen not to take action to address an issue which they themselves have said is having a highly damaging impact on the U.K. insurance industry and its customers. While it is a step forward for them to confirm a technical solution to the problem exists within the current Solvency II framework, that only makes it more frustrating to hear that uncertainty about Brexit has prevented the regulator acting in a way that makes sense for UK PLC."
Solvency II requires insurers to hold a risk margin above their solvency capital requirements. The PRA contends that the way it is calculated is too sensitive to interest rates, leaving it too high given current low rates, and is particularly troublesome for long-dated contracts such as annuities. U.K. life insurers have responded by reinsuring most of their longevity risk offshore, Woods noted in the letter, adding: "This build-up of the stock of offshore reinsurance is an unintended consequence and, if left unconstrained, would become a significant prudential concern."
Longevity risk is the risk of policyholders living longer than expected.
The Treasury select committee is a cross-party group of members of the U.K. parliament that holds the U.K. Treasury to account.
