London Daily

Focus on the big picture.
Tuesday, Aug 25, 2026

Explainer: Britain's insurers become test case for post-Brexit 'unshackling'

Explainer: Britain's insurers become test case for post-Brexit 'unshackling'

The British government and the Bank of England are reforming insurers' capital rules, seen as a post-Brexit test of UK willingness to "unshackle" the City of London after leaving the European Union.

Reform would potentially free up billions of pounds to invest in infrastructure to boost growth and help Britain to meet net zero climate targets.

Finance minister Jeremy Hunt could unveil changes on Thursday as part of his fiscal statement. But Hunt could be constrained by September's meltdown in UK government bond markets after his predecessor's mini-budget, which badly hit pension funds. This could curb Hunt's appetite for radical changes.


WHAT RULES ARE WE TALKING ABOUT?


The EU's Solvency II rules were introduced for insurers in 2016, after years of debate, when Britain was still an EU member.

They are designed to ensure insurers hold enough capital to remain stable and can make payouts on policies.

Insurance companies and UK lawmakers see reforming the rules as a key "Brexit dividend" now the UK is free to write its own rules.

Insurers have already complained that the EU rules are too restrictive, drive them to move business offshore, and tie up billions of pounds in capital that is not needed.

"Today, we will be required to hold less regulatory capital for investing in a coal mine than in a wind farm, that to us does not seem right," said Mike Eakins, chief investment officer of life insurer Phoenix (PHNX.L), referring to the EU's Solvency II regime.


WHAT'S BEEN DONE SO FAR?


There is a draft financial services and markets bill in parliament for approval that includes giving the Bank of England powers to change Solvency II.

The Bank has already consulted on potential changes it says would release 45-90 billion pounds ($53.65-$107.30 billion) of investment capital. Insurers say this does not go far enough, but the BoE has said that reform must not become a "free lunch" that puts pensioners' and policyholders' money at risk.

The finance ministry is seeking to broker a deal but it is unclear if it will override the BoE. After September's UK government bond turmoil, the government is seeking to reassure markets the UK financial system is stable and that its regulators are independent.


WHAT WILL THE REFORMS CHANGE?


There are three main elements.

The first is the risk margin, which acts as a capital buffer when one insurer takes over policies from another insurer that has run into trouble. It was costly when interest rates - and investment returns - were at historical lows, because this meant insurers had to hold more capital to pay future policies. That burden has fallen with higher rates.

There is a consensus emerging on this plan, but it will have less impact due to the rise in interest rates since the reforms were proposed.

The second element involves easing reporting requirements, widening the range of assets insurers can invest in, and tweaks to how insurers' internal capital models are approved. There is general agreement on this.

The third and final element is to reform something called the matching adjustment (MA), where agreement has proved difficult.


WHAT IS THE MATCHING ADJUSTMENT?


The MA helps to ensure insurers' assets generate enough cash in future years to cover payouts on policies and pensions.

Investing in an asset that will generate cash at the right time allows an insurer to recognise upfront some of those returns and cut back on capital requirements.

But there is a "haircut" or discount - known under the rules as a "fundamental spread" - which limits how much capital can be knocked off.

The BoE favours a bigger haircut. It also wants the MA to regularly reflect changes in market prices for the assets.

Insurers want a much faster response from regulators when they seek approval on whether an investment should benefit from capital relief.


HOW DOES LDI FIT INTO THIS?


Funds offering liability-driven investments (LDI) are also used by pension funds to help match assets to payouts. The funds faced collapse in September when they could not stump up collateral fast enough to cope with the UK government bond meltdown.

Regulators argue that the painful lessons from LDI turmoil have a read across for MA, meaning that caution should be the byword for any reforms.

"The recent LDI crisis has undoubtedly surprised certain politicians and regulators around parts of the market," said Eakins.

He said it should not influence Solvency II reform, but that others might disagree.

"It should have zero impact as LDI is completely separate from matching adjustment - I think the reality is that people might say ‘do we not need to do a broader look at financial services regulation?'”

WHAT ABOUT THE EU?


The EU is also updating its Solvency II rules but is further ahead than Britain. The European Parliament and member states are approving final changes. The BoE has said its own package would release more capital than changes proposed in the bloc.

($1 = 0.8388 pounds)

Newsletter

Related Articles

0:00
0:00
Close
Turnbull Warns AUKUS Could Leave Australia Without Promised Nuclear Submarines
California Billionaires Pour More Than $150 Million Into Fight Over Proposed Wealth Tax
German Broadcaster Goes Dark to Warn AfD Could End Its Saxony-Anhalt Service
Badenoch Plans Major Shadow Cabinet Reshuffle as Tories Struggle in Third Place
Premier League Season Opens With Managerial Debuts and Dramatic Early Fixtures
England Cricket Drops Brydon Carse From Selection Pending Club Investigation
Graeme Dott Convicted of Child Sexual Abuse Offences in Scotland
Protesters Occupy British Aircraft Parts Factory Over Alleged Military Links to Israel
More Than 100 Former British and French Diplomats Call for Sanctions on Israel
Ipsos Poll Shows British Public Split Between Immigration Controls and Economic Growth
British Cybersecurity Agencies Raise Alert Over Growing Threats to Critical Infrastructure
Two-Thirds of England Now Under Official Drought Conditions After Prolonged Summer Heat
Institute of Directors Calls for Urgent Action to Revive Britain’s Stagnant Labour Market
Andy Burnham Visits Kyiv on First Foreign Trip and Pledges Continued British Support for Ukraine
New Daily Diabetes and Weight-Loss Pill Launches in UK Pharmacies
UK Payroll Employment Falls by 94,000 as Labour Market Cools
Onshore Wind Planning Applications in England Reach Ten-Year High After Rules Eased
UK Government Demands Social Media Platforms Remove Dangerous Driving Content After A66 Crash
Thames Water Creditors Face Backlash Over Proposed Corporate Restructuring
Twelve Arrested After Fatal A66 Crash Linked to Organised Crime Investigation
UK Household Energy Debt Could Reach £7 Billion by Year-End
UK Defence Ministry to Use Ukraine Battlefield Data to Train AI Security Systems
UK Government Redirects £4 Billion of Affordable Homes Funding Away From Social Housing
UK Government Borrowing Reaches £1.8 Billion in July, Exceeding Forecasts
UK Prime Minister Andy Burnham Pledges Advanced Missile Support for Ukraine
8Bank of England Holds Interest Rate at 3.75% as Middle East Energy Risks Rise
Prime Minister Andy Burnham to Give Ukraine Classified Storm Shadow Blueprints for Domestic Missile Production
UK Graduate Job Vacancies Plunge 45% to Lowest Levels on Record
Government Audit Reveals Pressure on UK Hospitality From Business Rates and Rising Costs
Kindertransport Survivor Prepares to Revisit European Sites Linked to Her Family’s Wartime Separation
Northern England Transport Operators Strengthen Contingency Plans as Travel Demand Rises
New Implant Trials Offer Treatment Prospects for Patients With Refractory Angina
South Wales Reviews Wildfire Response After Exceptionally Dry Summer
UK Treasury Prepares Autumn Fiscal Statement Amid Spending and Defense Pressures
Norfolk Records First Wild Beaver Births in More Than Five Hundred Years
Historic Portrait of Benjamin Disraeli Reported Missing From Parliament’s Art Collection
Five People, Including Police Officers, Killed in A66 Crash as Families Pay Tribute
Most English Secondary Schools Found to Fall Short of National Healthy Food Standards
UK Think Tank Says Productivity Growth May Be Stronger Than Official Data Shows
Reform Party Proposes Lower Social Housing Priority for Foreign-Born UK Citizens
UK Government Plans Business Rate Overhaul to Ease Pressure on Pubs and Hotels
New Daily Diabetes and Weight-Loss Pill Launches Across NHS Pharmacies in England
UK Graduate Job Vacancies Fall to Lowest Level in a Decade
UK Prime Minister Andy Burnham Visits Kyiv to Reaffirm Long-Term Military Support for Ukraine
Iranian Hackers Shut Down British Power Plant for Four Days in Landmark Cyber Attack
Novak Djokovic Reveals Relentless Self-Doubt and Rejects Retirement in New Documentary
Trump Imposes 50% Tariffs on Canadian Goods After Bilateral Trade Talks Collapse
First Bus Bars Unaccompanied Under-Sixteens From Evening Services in Stoke-on-Trent
Lithium-Ion Battery Fires Cost UK Waste Sector About One Billion Pounds a Year
Reform UK Proposes Lower Social Housing Priority for Foreign-Born Naturalised Citizens
×