UK financial regulator refuses to budge on EU solvency rules

The UK’s financial regulator has dealt a blow to life insurers by refusing to change a much-hated part of the EU’s Solvency II capital rules, citing uncertainty over Brexit.

In a letter to MPs, Sam Woods, chief executive of the Prudential Regulation Authority, said that “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.”

Mr Woods had been considering changes to the so-called risk margin — a rule that covers how much capital insurers have to hold against very long term business such as annuities.

Insurers complain that the rule forces them to hold too much capital when interest rates are very low, as they have been since Solvency II was introduced in 2016. A parliamentary committee report last year called for changes to the risk margin.

The PRA has shown some sympathy with the insurers’ complaints and had been looking at ways to change the way the risk margin is calculated.

But in a letter to the Treasury Committee on Wednesday, Mr Woods said it would not be going ahead with its proposed solution because of Brexit-related uncertainty. He added that the PRA would keep reviewing its decision.

The decision had an immediate impact on share prices. Shares in Legal & General and Aviva — both of which are big annuity writers — both fell on news of the PRA’s decision.

Director-general of the ABI 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 UK 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.”

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