London Daily

Focus on the big picture.
Saturday, Jan 28, 2023

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

London Daily
Close
0:00
0:00
China is opening up for foreign investors.
You're Beautiful - James Blunt (Boyce Avenue acoustic cover)
Tesla reported record profits and record revenues for 2022
You Are So Beautiful
Germany confirms it will provide Ukraine with Leopard 2 tanks
Postmodern Jukebox European Tour Version
Prince Andrew and Virginia Giuffre Photo Is Fake: Ghislaine Maxwell
An old French tune (by Georges Brassens) Pomplamoose ft. John Schroeder
Opinion | Israel’s Supreme Court Claims a Veto on Democracy
Sattahip Motor Show 20
Moonwalker Buzz Aldrin Gets Married On His 93rd Birthday
SONATE AU CLAIR DE LUNE - Moonlight sonata
Who’s Threatening Israeli Democracy?
A kiss to build a dream on
Federal Reserve Probes Goldman’s Consumer Business
Wiz Khalifa - See You Again ft. Charlie Puth, Furious
China's first population drop in six decades
Wonderful Tonight - Eric Clapton (Boyce Avenue acoustic cover)
Microsoft is finalising plans to become the latest technology giant to reduce its workforce during a global economic slowdown
Mean Blues
Israelis rally in three cities against Netanyahu legal reforms
La Chansonnette
China's foreign ministry branch in Hong Kong urges British gov't to stop the biased and double standards Hong Kong report
Pattaya Addicts
Tesla slashes prices globally by as much as 20 percent
Franz Liszt - Liebestraum - Love Dream
Japan prosecutors indict man for ex-PM Shinzo Abe murder
Dream a little dream of me
1.4 Million Copies Of Prince Harry's Memoir 'Spare' Sold On 1st Day In UK
Tu Vuo' Fa' L'Americano - Hetty & the Jazzato Band
After Failing To Pay Office Rent, Twitter May Sell User Names
Unchained Melody sung like you've NEVER heard!
Lisa Marie Presley, singer and daughter of Elvis, dies aged 54
Dave Brubeck - Take Five
FIFA president questioned by prosecutors
Édith Piaf - Non, Je Ne Regrette Rien (Sofie)
Britain's Sunak breaks silence and admits using private healthcare
Rondo Alla Turca
Dirty bomb fears as URANIUM is found in cargo at Heathrow
Kiss of fire
Hype and backlash as Harry's memoir goes on sale. Unnamed royal source says prince 'kidnapped by cult of psychotherapy and Meghan'
Ed Sheeran - Perfect (Amadeus violin cover instrumental)
Saudi Arabia set to overtake India as fastest-growing major economy this year 
Tom Jones - I´ll Never Fall In Love Again 1967, 1989, 2001
Google and Facebook’s dominance in digital ads challenged by rapid ascent of Amazon and TikTok
Israel Cachao López - Guajira Clásica
FTX fraud investigators are digging deeper into Sam Bankman-Fried's inner circle – and reportedly have ex-engineer Nishad Singh in their sights
Edward Maya - Stereo Love (feat. Vika Jigulina) (Extended Mix)
TikTok CEO Plans to Meet European Union Regulators
Strauss - Radetzky March - Karajan
UK chaos: Hong Kong emigrants duped by false prospectus
La vie en rose
France has banned the online sale of paracetamol until February, citing ongoing supply issues
Despacito (Piano Cover) - Peter Bence
Japan reportedly to give families 1 million yen per child to move out of Tokyo
The Temptations - My Girl (Smokey Robinson Tribute) 2006 Kennedy Cent
Saudi Arabia’s female ambassadors: Who are the five women representing the Kingdom?
Orlando Cachaito Lopez Redencion
Will Canada ever become a real democracy?
Edith Piaf - NON, JE NE REGRETTE RIEN
Hong Kong property brokerages slash payrolls in choppy market
RADETZKY MARCH-2008-Wien, New Year Concert
U.S. Moves to Seize Robinhood Shares, Silvergate Accounts Tied to FTX
Only you (And you alone)
Effect of EU sanctions on Moscow is ‘less than zero’ – Belgian MEP
Beautiful in White x Canon in D (Piano Cover by Riyandi Kusuma)
Coinbase to Pay $100 Million in Settlement With New York Regulator
Strangers In The Night
FTX assets worth $3.5bn held by Bahamas securities regulator
Charles Aznavour - La Boheme
A Republican congressman-elect is under investigation in New York after he admitted he lied about his education and work experience.
Summer time
Brazilian football legend Pele, arguably the greatest player ever, has died at the age of 82.
Sting and Stevie Wonder - Fragile (from Sting's 60th birthday concert)
Hong Kong to scrap almost all its Covid rules
Aux Champs Elysees
EU calls screening of travellers from China unjustified
Stand By Me - Ben E. King (Boyce Avenue acoustic cover)
US imposes Covid testing for visitors from China
La Mer (Beyond the Sea) – Avalon Jazz Band
Clashes erupt in central Paris after shooting at a Kurdish cultural center
She
Ukraine President Volodymyr Zelenskyy Addresses Joint Session of Congress - FULL SPEECH
Nathalie Song by Enzo Petrachi Stjepan Hauser Cello
If a country is denied the right to independence by another, it is not in a union. It is in a dictatorship.
Shape of My Heart - Sting (Boyce Avenue acoustic cover)
Where is Rishi? Chancellor Jeremy Hunt's excuses about the UK's economic challenges just don't make sense
Radiohead - Creep
Former FTX CEO Bankman-Fried finally arrested in Bahamas after U.S. files charges
Quizás,Quizás,Quizás - Andrea Bocelli - Jennifer Lopez
Corruption works: House Financial Services Chair Waters doesn't plan to subpoena her donor, Sam Bankman-Fried, to testify at hearing on FTX collapse
Perhaps, Perhaps, Perhaps - Multi-Couples
Ronaldo's new contract...
Pentatonix Havana
The EU has outsourced a big chunk of its migration policy to the private sector
Paula Cole - Autumn Leaves
Prince William's godmother resigns honorary royal role after exposing her/their racism
Oscar Benton Bensonhurst Blues
British PM Rishi Sunak pledges further action on strikes to 'protect lives'
OH NANANA vs ABUSADAMENTE
Nina Simone - ”I Put A Spell On You”. Vezi aici cum cântă Jeremy Ragsd
NIGHTWISH - The Phantom Of The Opera
Motorshow 2016 Tanjay Negros Oriental
Monica Bellucci - Ti Amo
Michael Jackson - Billie Jean Milena The Voice France 2018
Michael Buble (Help Me Make It Through The Night) feat Loren Allred
Memories Canon In D - Maroon 5 (Boyce Avenue piano acoustic cover)
Matteo Simoni - Marina
Maroon 5 - One More Night
Maroon 5 - Memories
Mark Knopfler - Brothers In Arms (Berlin 2007 Live)
Mark Knopfler & Emmylou Harris - Romeo And Juliet (Real Live Roadrunni
Marina, Marina - The LUCKY DUCKIES intimist live concert at Guimarães
Major Lazer & DJ Snake – Lean On Mauranne The Voice France 2016
Love Theme from Romeo and Juliet - Joslin - Henri Mancini, Nino Rota
LoLa & Hauser - Love Story
Linkin Park Jay-Z - Numb Encore (Live 8 2005)
Hallelujah Mennel Ibtissem, The Voice France Leonard Cohen
Leonard Cohen - Dance Me to the End of Love
Leonard Cohen & Natasha Rostova - Dance me to the end of love
La casa de papel - Bella Ciao
La Camisa Negra
L'italiano (Toto Cutugno) - The Gypsy Queens
Juanes - La Camisa Negra
Jonathan and Charlotte - Britain's Got Talent 2012 Live Semi Final - U
John Powell - Assassin's Tango
Joe Cocker - You Can Leave Your Hat On (LIVE in Dortmund)
Joe Cocker - Unchain My Heart 2002 Live
Joe Cocker - A Whiter Shade Of Pale
Jay Z & Alicia Keys - Empire State of Mind LIVE
Jason Mraz - Im Yours (live)
Jarrod Radnich - Bohemian Rhapsody - Virtuosic Piano Solo
James Blunt - You're Beautiful
James Blunt - You're Beautiful & Bonfire Heart (Live at The Nobel Peac)
If You Go Away - Helen Merrill & Stan Getz (Tribute to Virna Lisi)
I'LL BE MISSING YOU
I Say a Little Prayer
Hotel California ( Eagles ) 1994 Live
Historia de un amor - Luz Casal. Vezi interpretarea Biancăi Sumanariu
Here Comes The Sun - The Beatles (Boyce Avenue acoustic cover) on Spot
Heart - Stairway to Heaven Led Zeppelin - Kennedy Center Honors
HAVANA by Camila Cabello Zumba Pre Cooldown TML Crew Kramer Pastra
HAUSER and Señorita - I Will Always Love You
HAUSER - Waka Waka
HAUSER - Sway
HAUSER - Lambada
HAUSER - Historia de un Amor
HAUSER - Despacito
Great Pretender
Georgia May Foote & Giovanni Pernice Samba to 'Volare' - Strictly Come
Gary Moore - Still Got The Blues
GIPSY KINGS VOLARE Penelope Cruz
Fugees - Killing Me Softly With His Song
French Latino - Historia de un Amor
For A Few Dollars More The Danish National Symphony Orchestra (Live)
Flashdance • What a Feeling • Irene Cara
Filip Rudan - “Someone You Loved” Audicija 4 The Voice Hrvatska Sez
Eric Clapton - Wonderful Tonight
Enya - Only Time
Enrique Iglesias - Bailando (English Version) ft. Sean Paul
Enrique Iglesias - Bailamos
Elena Yerevan Historia de un amor
Ed Sheeran - Shape of You (Official Music Video)
Ed Sheeran - Perfect Symphony [with Andrea Bocelli]
Ed Sheeran - Perfect (Official Music Video)
Easy On Me - Adele (Boyce Avenue 90’s style piano acoustic cover) on S
ERA - Ameno
ELENA YEREVAN- Cancion Del Mariachi-IN STUDIO-2017 DPR
Dust In The Wind - Kansas (Boyce Avenue acoustic cover)
Don't Let Me Be Misunderstood
Despacito x Shape Of You - Pentatonix
Deep Purple - Child In Time - Live (1970)
David Foster When A Man Loves A WomanIt's A Mans World (SealMichael Bo
Dance me to the end of Love ( Pi-Air Design )
Coolio - Gangsta's Paradise (feat. L.V.) [Official Music Video]
Conquest Of Paradise (Vangelis), played on Böhm Emporio organ
Cielito Lindo
Chico & The Gypsies - Bamboleo
Canción Del Mariachi - Antonio Banderas, Los Lobos • Desperado
Camila Cabello - Havana (Audio) ft. Young Thug
Camila Cabello - Havana ( cover by J.Fla )
California Dreamin' - The Mamas & The Papas José Feliciano (Boyce Ave
Buster Benton - Money Is The Name of The Game
Hallelujah Pentatonix
Bobby McFerrin - Don't Worry Be Happy (Official Music Video)
Bob Dylan - Knockin' On Heaven's Door Emilia The Voice Kids France
Besame Mucho - Cesaria Evora
Ben E. King - Stand by Me Sax Cover Alexandra Ilieva Thomann
Bella Ciao
Bella Ciao - INSTRUMENTAL
Beautiful in White x Canon in D (Piano Cover by Riyandi Kusuma)
Bad Romance - Vintage 1920's Gatsby Style Lady Gaga Cover ft. Ariana Savalas & Sarah Reich(1)
BELLA CIAO 2020 - KARAOKE ITALIANO
BAMBOLEO - Gipsy Kings • Antonio Banderas, Katya Virshilas
BAILANDO (original)
Awesome Ukrainian yodeler - SOFIA SHKIDCHENKO (with English subtitles)
Avicii - The Nights
Atom - The Great Gig in the Sky
Aretha Franklin - (You Make Me Feel Like) A Natural Woman (Official Ly
Antonio Banderas - Cancion del Mariachi (Desperado)
André Rieu - Zorba's Dance (Sirtaki)
André Rieu - Can't Help Falling In Love
André Rieu & Mirusia - Ave Maria
Andrew Reyes Elton John - Don't Let The Sun Go Down The Voice 2020 (
Andreas Kümmert Whiter Shade Of Pale The Voice of Germany 2013 Showd
And I Love You So
All About That Bass - Postmodern Jukebox European Tour Version
Alan Walker - Faded (Piano Cover)
Ain't No Sunshine -- Bill Withers (cover by Canen 12 y.o.)
African music
Adriana Vidović - “Creep” Audicija 4 The Voice Hrvatska Sezona 3
Adriana Vidović - “Believer” Nokaut 3 The Voice Hrvatska Sezona 3
A Fistful of Dollars - The Danish National Symphony Orchestra and Tuva
4 Beautiful Soundtracks Relaxing Piano [10min]
2CELLOS - Whole Lotta Love vs. Beethoven 5th Symphony [OFFICIAL VIDEO]
2CELLOS - Smooth Criminal (Live at Suntory Hall, Tokyo)
2CELLOS - Smells Like Teen Spirit [Live at Sydney Opera House]
2CELLOS - Despacito [OFFICIAL VIDEO]
13 Year Old Girl Playing Il Silenzio (The Silence) - André Rieu
094.All About That Bass
00 - SADNESS PART 1
(Ghost) Riders In the Sky (American Outlaws Live at Nassau Coliseum, 1
(Everything I Do) I Do It For You - Bryan Adams (Boyce Avenue ft. Conn
What a wonderful world
Moon river
×