As the government moves forward with plans to reform the pre-Brexit rules that apply to the UK insurance sector – dubbed Solvency II – clashes are brewing over how far the changes should go.
Whitehall’s plans aim to free up £90bn in investment by reducing the amount insurers must keep in reserve to protect themselves from bankruptcy. Still, it was at odds with the Bank of England over the scope of the reforms and how much money insurers should keep on their books, while industry insiders have accused the regulator of threatening future investment.
Sam Woods, head of the Prudential Regulation Authority (PRA), said on Friday the industry’s response to his team’s proposals was “largely negative”.
As the feud escalates, we explain how the government plans to use its post-Brexit freedoms in the insurance sector.
What are the pre-Brexit rules that apply to the UK insurance industry?
The European Union law, Solvency II, was introduced in 2016 in all member states of the bloc, including the UK.
Regulations for insurers cover a range of activities, from governance and accountability to risk assessment and management.
Why is the UK still abiding by this EU law?
When Britain left the EU, it did not reject all of its laws. Instead, the government has passed a law that will keep EU law on its books after Brexit, with the intention of gradually moving away from the other 27 member states.
As part of the post-Brexit turmoil, Downing Street said it would ease regulatory burdens in a number of financial services sectors to make Britain more competitive globally.
In practice, this means less policy is enshrined in law and the Bank takes a more active role in regulating key industries. As a result, regulatory powers have shifted from EU institutions to UK regulators.
Why have the reforms caused a fight?
The Treasury Department has authorized the PRA – which falls under the Bank of England – to cut red tape after Brexit. It was hoped this would make the insurance sector more competitive and support £90 billion in new investments, such as infrastructure projects. By easing regulations, insurers can take on more risk and allow more capital to flow into the economy.
Yet critics have accused the PRA of chasing reforms and pointing to an alleged bias against embracing post-Brexit opportunities to rewrite European rules.