Insurance big bang to fire up UK investment

Billions of pounds could be freed up to invest in Britain as the chancellor takes steps to free the insurance industry from its EU shackles.

In documents published alongside the fall statement, Jeremy Hunt confirmed that he would continue to reform complex regulations known as Solvency II.

Insurers said the 2016 rules governing how much capital they must hold to cover potential losses and where that money can be invested were too burdensome, discouraging them from investing in projects such as wind farms, and instead forcing them to investing money in ‘safer but lower-yielding assets such as bonds.

Now the Treasury is reducing the ‘risk margin buffer’ by 65 percent for life insurers and 30 percent for non-life insurers.

But it rejected the Bank of England’s proposals to tighten the matching adjustment, which gives an advantage to life insurers who invest in assets that pay out at the right time to cover future liabilities.

During the long discussions on the Solvency II reform, the Bank was concerned that an overly generous matching adjustment would make insurers and their clients more vulnerable in the event of a recession.

In an effort to rally the City behind his Autumn Statement, Hunt invoked the “Big Bang” wave of deregulation initiated by his 1980s predecessor Nigel Lawson.

Hunt said: ‘Nigel Lawson’s Big Bang inspires us today, but nearly 40 years later we must remain true to his mission to make the UK the most innovative and competitive financial center in the world.’

He said the Solvency II reform would ‘free up tens of billions of pounds of investment for our growth-enhancing industries’.

Amanda Blanc, Aviva’s boss, said: “This is a very welcome boost to investment.

We estimate that Solvency II reforms will enable Aviva to invest at least £25bn in the UK over the next ten years, including in critical areas such as social housing, schools, hospitals and green energy projects.”

Loic Bellettre, a partner at accountant EY, said the bank’s decision to ignore the matching adjustment would “particularly be a relief to annuity companies, which would otherwise have faced significant increases and volatility in required capital levels.”

The Bank of England’s Prudential Regulation Authority (PRA) said it “supports the government’s aim of promoting growth and productive investment, and has a primary role of protecting policyholders”.

Following the commitment to reform Solvency II, the PRA said the ‘important decisions will now be for Parliament’.