Solvency II: PRA proposes changes to ease reporting burdens
The Prudential Regulation Authority (PRA) has issued a consultation paper in which it proposes significant changes to how insurance firms must satisfy reporting requirements under Solvency II, while reducing the administrative burden.
The PRA’s proposed changes would affect all firms in the UK obliged to report under Solvency II regulations, as well as the Society of Lloyd’s and its managing agents and mutuals. Among the proposals are an exemption for mutuals to submit an annual controller report where they do not have a controller, the option for the PRA to grant waivers for quarterly reporting, and a reduction in the amount of information to be included in some PRA reporting templates, which would cut red tape for smaller firms.
The PRA says its proposals will help it better supervise firms and meet its statutory objectives under Solvency II, which came into effect two years ago. It has drafted the proposals in response to feedback from insurance firms on the current reporting system and takes account of issues raised by industry body the Association of British Insurers (ABI) as well as the Treasury Committee.
The consultation paper comes on the back of guidelines issued by the European Insurance and Occupational Pensions Authority (EIOPA) in December 2017. Insurers had expressed concern about EIOPA’s guidelines, as they were unclear on how firms could apply the principle of proportionality in practice, in accordance with the scale and complexity of their business. The PRA’s proposals to limit the reporting burden are therefore likely to be given the seal of approval.
Firms most likely to benefit from the reforms are those that have liabilities of under £500m. Smaller firms have argued that Solvency II’s reporting requirements are excessive, with the PRA agreeing – it says the reporting burden in the UK has increased by four to eight times.
The consultation also appears to be taking Brexit into account. If the UK leaves the EU as planned, in spring 2019, then Solvency II is one of the more likely financial regulations the Bank of England would be seeking to roll back, according to statements by BoE governor Mark Carney last November. Brexit is seen by many in the insurance industry as an opportunity for major reform to reporting requirements and firms have been quick to lobby the Treasury, which says the BoE and the insurance industry need to reach agreement on how to keep the sector competitive post-Brexit.
The sector is worth an estimated £2 trillion in the UK. While the PRA’s proposals would go some way to helping insurers compete, the select committee says the PRA still has too much focus on levels of capital and not enough on the risk margin. The current proposals do not offer any possibility to reduce the risk margin, however.
The PRA published its consultation document on 11 January and the consultation will close on 13 April.