The CEO of the U.K.'s Prudential Regulatory Authority, Sam Woods, has hit back at criticism of its approach to implementing Europe's new Solvency II insurance capital regime.

In an October 2017 report on the implementation of Solvency II, the Treasury Select Committee — a panel of MPs that holds the U.K. Treasury to account — noted concerns that had been expressed in some submitted evidence that the PRA's approach "is overly focused on solvency — to the detriment of its secondary competition objective."

Speaking at the Association of British Insurers annual conference in London on Feb. 27, Woods said: "Some have expressed concern that the PRA's focus on prudential matters may inhibit competition. I would argue the opposite is true. Prudential regulation is integral to competition. Without minimum standards, policyholders would be much more exposed to the risks presented by imprudently run firms."

Woods argued that an absence of standards would allow unscrupulous firms to drive out better-managed ones by charging unsustainably cheap prices to grab market share.

"This perversion of competition could lead to the failure of insurers to pay out claims and reputational damage to the wider U.K. insurance market," he said.

Woods added that if a large company failed, it would increase prices for consumers because the remaining firms would have to pay for the collapse through their contributions to the U.K. Financial Services Compensation Scheme, which honors financial services firms' obligations to customers when the firms themselves are rendered unable to pay. The remaining insurers would pass on this cost to their customers, he said.

'Not persuaded' to change competition objective

The Treasury Select Committee report also noted calls for the PRA's competition objective, which is a secondary objective, to be promoted to a primary objective. The report highlighted oral evidence from ABI's Director General, Huw Evans, that the association's members are "overwhelmingly in favor of [competition] being an equal objective."

But Woods told the conference that he was "not persuaded of the case for giving a primary competition objective to the PRA." He said such an approach could mean giving the PRA the same competition powers as the U.K.'s Financial Conduct Authority, allowing it to conduct market studies and introduce rules to promote competition.

He added: "Given the potential for overlap with the FCA and [the U.K.'s Competition and Markets Authority], which both have specific objectives to promote competition, I would be wary of taking this route."