London Daily

Focus on the big picture.
Friday, Jul 25, 2025

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
Politics is a good business: Barack Obama’s Reported Net Worth Growth, 1990–2025
Thai Civilian Death Toll Rises to 12 in Cambodian Cross-Border Attacks
TSUNAMI: Trump Just Crossed the Rubicon—And There’s No Turning Back
Over 120 Criminal Cases Dismissed in Boston Amid Public Defender Shortage
UN's Top Court Declares Environmental Protection a Legal Obligation Under International Law
"Crazy Thing": OpenAI's Sam Altman Warns Of AI Voice Fraud Crisis In Banking
The Podcaster Who Accidentally Revealed He Earns Over $10 Million a Year
Trump Announces $550 Billion Japanese Investment and New Trade Agreements with Indonesia and the Philippines
US Treasury Secretary Calls for Institutional Review of Federal Reserve Amid AI‑Driven Growth Expectations
UK Government Considers Dropping Demand for Apple Encryption Backdoor
Severe Flooding in South Korea Claims Lives Amid Ongoing Rescue Operations
Japanese Man Discovers Family Connection Through DNA Testing After Decades of Separation
Russia Signals Openness to Ukraine Peace Talks Amid Escalating Drone Warfare
Switzerland Implements Ban on Mammography Screening
Japanese Prime Minister Vows to Stay After Coalition Loses Upper House Majority
Pogacar Extends Dominance with Stage Fifteen Triumph at Tour de France
CEO Resigns Amid Controversy Over Relationship with HR Executive
Man Dies After Being Pulled Into MRI Machine Due to Metal Chain in New York Clinic
NVIDIA Achieves $4 Trillion Valuation Amid AI Demand
US Revokes Visas of Brazilian Corrupted Judges Amid Fake Bolsonaro Investigation
U.S. Congress Approves Rescissions Act Cutting Federal Funding for NPR and PBS
North Korea Restricts Foreign Tourist Access to New Seaside Resort
Brazil's Supreme Court Imposes Radical Restrictions on Former President Bolsonaro
Centrist Criticism of von der Leyen Resurfaces as she Survives EU Confidence Vote
Judge Criticizes DOJ Over Secrecy in Dropping Charges Against Gang Leader
Apple Closes $16.5 Billion Tax Dispute With Ireland
Von der Leyen Faces Setback Over €2 Trillion EU Budget Proposal
UK and Germany Collaborate on Global Military Equipment Sales
Trump Plans Over 10% Tariffs on African and Caribbean Nations
Flying Taxi CEO Reclaims Billionaire Status After Stock Surge
Epstein Files Deepen Republican Party Divide
Zuckerberg Faces $8 Billion Privacy Lawsuit From Meta Shareholders
FIFA Pressured to Rethink World Cup Calendar Due to Climate Change
SpaceX Nears $400 Billion Valuation With New Share Sale
Microsoft, US Lab to Use AI for Faster Nuclear Plant Licensing
Trump Walks Back Talk of Firing Fed Chair Jerome Powell
Zelensky Reshuffles Cabinet to Win Support at Home and in Washington
"Can You Hit Moscow?" Trump Asked Zelensky To Make Putin "Feel The Pain"
Irish Tech Worker Detained 100 days by US Authorities for Overstaying Visa
Dimon Warns on Fed Independence as Trump Administration Eyes Powell’s Succession
Church of England Removes 1991 Sexuality Guidelines from Clergy Selection
Superman Franchise Achieves Success with Latest Release
Hungary's Viktor Orban Rejects Agreements on Illegal Migration
Jeff Bezos Considers Purchasing Condé Nast as a Wedding Gift
Ghislaine Maxwell Says She’s Ready to Testify Before Congress on Epstein’s Criminal Empire
Bal des Pompiers: A Celebration of Community and Firefighter Culture in France
FBI Chief Kash Patel Denies Resignation Speculations Amid Epstein List Controversy
Air India Pilot’s Mental Health Records Under Scrutiny
Google Secures Windsurf AI Coding Team in $2.4 Billion Licence Deal
Jamie Dimon Warns Europe Is Losing Global Competitiveness and Flags Market Complacency
×