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LMG: Regulators Can Achieve More by Insisting on Less

Classy dressed senior businessman with knight sword

The London Market Group wants to see nuanced refinement of the Solvency II UK regime. Unnecessarily burdensome requirements should be scaled back leaving what is actually important to clients, supervisors and firms.

According to some, the world can be split in to two groups: those that see regulation as a white knight riding to the rescue and those that see it as a hired mercenary – necessary, not altogether welcome and often expensive. From the London Market Group’s (LMG) perspective, regulation – and Solvency II specifically – are vital tools to ensure fairness, security and integrity amongst those it governs. But there is still work to be done.

Solvency II was introduced in 2016 in the UK by the PRA as a means of improving consumer protection, modernising supervision, deepening EU market integration and increasing the international competitiveness of EU insurers. While it has certainly brought some of these benefits and strengths to the London Market it is imperative that any regulator listens to the organisations in its charge to ensure every client, supervisor and firm is appropriately represented.

In the five years since it was established, there has been adequate time for the London Market to ruminate and actively reflect on Solvency II. And as the body that presents the collective views of the International Underwriting Association of London (IUA), Lloyd’s of London, the Lloyd’s Market Association (LMA) and the London & International Insurance Brokers’ Association (LIIBA), the LMG has taken an active part in the Government’s Solvency II review.

There is much that the regulation gets right. For example, as was recognised in the original conceptual design of Solvency II, insurer failure is rarely caused by inadequate capital but by poor management and inappropriate risk decisions. Therefore, appropriate interventions were rightly enforced by Solvency II, particularly around governance and risk management, and they have served to improve risk understanding and oversight in most firms on exactly this risk.

Our members however continue to tell us that too much of how Solvency II is implemented takes the form of additional and unnecessary regulatory processes which duplicate work performed by other regulators. These are often costly and time-consuming, only serving to inhibit overseas firms from operating here. Ultimately, they hinder our ambition to keep the UK as the centre for the global (re)insurance market.

Solvency II is resolutely a force for good. As burdensome as it may be, it works effectively in the London Market’s interest. The key is to put a shine on its armour.

After extensive consultation, and as part of our Plan for the Future, we suggest three main reforms to make the London Market specifically a natural home for foreign (re)insurance companies:

  • The treatment of pure reinsurance branches is too onerous. The PRA currently treats pure reinsurance branches in the same way as direct insurance branches. This goes too far beyond the requirements set out in Solvency II. Constraints such as these lead to unnecessary additional solvency requirements, duplicating reporting as well as additional governance requirements. The clients of reinsurance branches are also other insurance companies in their own rights, so the branch is therefore already fully protected by the group company.

  • Where a UK branch of an EEA-based firm is not writing any UK risk, we would suggest that there is limited or even no involvement by the PRA in these cases. This is not as controversial as it sounds given that all the necessary regulatory compliance will have been undertaken with the firm’s home state regulator in the EEA country. We believe such an approach would significantly boost the UK’s competitiveness and its attractiveness to EEA firms seeking to write global cover in the London Market, while crucially presenting no risk to UK policyholders.

  • As the UK develops its regime for overseas firms, the PRA should be willing to trust the supervision provided by non-EU regulators when they supervise UK branches. For example, where the UK has recognised the jurisdiction to be equivalent - now the case with Bermuda, Switzerland and Japan - in relation to its supervision of groups and reinsurers, the PRA should not apply additional regulation at UK branch level, at least in respect of those areas where equivalence has been found.

In highly competitive global trading environment, the London Market must keep pace with the regional hubs which are vying for its business if we are to retain our position as a global centre. We can already look to other popular global domiciles like Bermuda, Singapore and Hong Kong who are actively using their solvency regime in a more proportionate manner to ensure they stay competitive. They interpret governance and reporting requirements, roles and responsibility clauses more flexibly so that they are able to operate with more agility. Their nuanced approach to Solvency II means that they still stay within the rules and, crucially, remain competitive in the global market.

The proposals can also be resolved within the UK’s current framework without compromising its own alignment with the Solvency II regime. Which is the right thing to do and exactly what the London market is asking for.

We have undertaken a concerted campaign in Westminster and Whitehall to put forward our suggestions for both the Solvency II review and other improvements we think the government could help with. In June alone we met H.M Treasury, the PRA, Number 10 as well as slew of MPs and peers. We hope to continue these discussions once the summer recess is over.

This is not about a race to the bottom in terms of regulatory standards. A reduction in UK regulation or a dilution in UK regulatory standards would not benefit anyone. Far from it. International clients and investors absolutely see adherence to Solvency II as a benefit of doing business in the UK. Solvency II is resolutely a force for good. As burdensome as it may be, it works effectively in the London Market’s interest. The key is to put a shine on its armour.