Solvency reforms UK: S&P global notes no revolutionary changes for insurers

S&P Global Ratings anticipates the implementation of Solvency UK reforms, which align the European Economic Area-wide Solvency II insurance regulatory framework with the UK insurance market, to be largely completed by the end of 2024.

The insurance industry generally welcomes these reforms due to their potential to reduce costs and increase flexibility. However, S&P Global Ratings believes these reforms are not revolutionary and are unlikely to significantly impact the creditworthiness of rated UK insurers, as they expect minimal effects on capital and business positions.

One significant change is the reduction in the risk margin calculation, effective since December 31, 2023, which lowers the cost of capital from 6% to 4% and introduces a tapering element. This adjustment is expected to lower underwriting costs and improve solvency ratios, particularly benefiting life insurers.

While this change is unlikely to directly influence financial strength ratings, it may indirectly impact capital adequacy views if excess regulatory solvency capital is allocated for other purposes, potentially affecting rating assessments.

Additionally, the reforms are expected to benefit insurance or reinsurance of products with long-term longevity exposure in the UK, particularly supporting pension risk transfer.

However, they are not expected to substantially alter reinsurance strategies for ceding longevity risk in the medium term, despite potential reductions in net benefits.

Another aspect of the reforms involves matching adjustment reforms, expected to be effective by the end of June 2024. These changes may have a limited transformative effect compared to initial expectations. They aim to broaden access to long-term assets for UK insurers, especially annuity writers, by allowing some long-term assets to qualify for matching long-term liabilities.

While these reforms provide additional asset flexibility, significant additional asset risk-taking by insurers is unlikely in the short term. The reforms also include streamlining approval processes and simplifying disclosure requirements, which are expected to reduce regulatory operational burden and expenses for insurers. Despite these changes, robust risk oversight by the Prudential Regulation Authority on UK insurers is anticipated to continue.

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