Brexit could be an opportunity for the UK to ‘strategically deviate’ from Solvency II, according to panelists at Insurance Asset Risk 2020 EMEA.
Erik Vynckier, chair of the research board of the Institute and Faculty of Actuaries, and a non-executive director at Foresters Friendly, told a panel on the outlook for regulation, policy and the insurance industry post-Brexit that Solvency II had in one sense failed to harmonise the European insurance market.
The EEA regulation did introduce a single set of rules, he said, but these have to be interpreted differently by different EU countries’ perspectives - and the UK would do well to forge its own path once it is out of the EU.
Among the significant items that need reviewing, Vynckier said the calculation of the risk margin tops the list.
“The risk margin is clearly double-counting,” he argued. “Irrespective of what you do, you have to have the internal capital provision, plus the external risk margin that an external party would charge you for. It's clear that you're double counting.”
The rule hasn’t created a safer industry, it has just created a transfer of liabilities outside of the EU, to Bermuda, Canada or the USA, he said.
“Not only is [the risk margin] a failure in practice, it's far too large and far too volatile,” Hugh Savill, director of regulation at the Association of British Insurers (ABI), added. “But the regulators have completely failed to make the case in theory for the risk margin. And it's just an unnecessary extra buffer.”
Vynckier pointed at some of the asset capital charge calibrations, which have led to very undiversified balance sheets, as other facets the UK should consider changing.
“CLOs are treated very poorly under Solvency II,” he said. “Those are calibrations of practices that are no longer with us.”
Vynckier said overwhelmingly the banks marking these to stressed markets were banks that needed to trade the instruments out of their balance sheets. “Insurers didn't need to accept those prices, they could well keep the securitisation on their balance sheet, ride through the mark to market and achieve the pick-up.”
Similarly, the ABI’s Savill believes the UK could improve the matching adjustment to make it easier for insurers to invest in illiquid investments, “which is the future for insurance, so long as interest rates remain at their current level”.
The panel was recorded before the UK treasury released its call for evidence for a Solvency II review.