20 September 2016
Help UK insurers get back to managing the business, not managing the regulators
So, the Treasury is starting an inquiry into UK insurance regulation in the face of Brexit. Perhaps I can help them get started with a few personal suggestions?
1. Don’t change for change’s sake
It's tempting to dismantle Solvency II wholesale, given what a burden it’s been. But that would be a mistake. In the course of complying with Solvency II, many insurers have massively improved their risk management, modelling and communication internally and externally. Let's not lose that.
2. Revisit the regulators' remit
Did the UK gold-plate Solvency II, or were we the only country that implemented it properly? Whatever your view, there’s no arguing about the net effect: regulators are spending too much time challenging well-run firms on the minutiae, taking resource away from policing the small number of operators who really are sailing close to the wind. So, revisit the regulators' priorities and free them up to do the jobs that really will protect policyholders.
3. Ditch model approval
Back in the ICAS days, you calculated your regulatory capital using a model and, where the regulator wasn't fully happy with your modelling, you squared things by accepting a capital loading.
Solvency II couldn't allow a system like that. There was too much risk that some European regulators would go easy on their firms. The solution was to discourage regulators from using discretionary loadings and instead creating a Europe-wide standard for model approval. The aim was that the quality of capital modelling would then be as good in one country as another.
This idea just didn’t work. The standard was set too high, discouraging virtually everyone in Europe from bothering with a model. Hardly a good result when the goal is getting firms to be more risk-aware. And there still isn't a level playing field. Some regulators (including our own) are undoubtedly tougher than others on models.
A workable post-Brexit solution would be to set a lower threshold for model "approval", and then reintroduce the use of PRA discretionary loadings where models don't quite come up to scratch.
4. Don't lose the "O" in ORSA
It's the one bit of Solvency II that firms have said they value. The Own Risk and Solvency Assessment has proved to be an excellent tool both internally and for communicating with the regulator. But complaints are growing that the regulator is too prescriptive about the content of the report, to the extent that some firms now have separate "internal" and "regulatory" ORSAs. Guys, the clue is in the word "own". It’s important that any new UK regulation enables firms to keep the ORSA relevant for their business.
So, Treasury Committee, you have a golden opportunity to build on the good bits of Solvency II and clear away the clutter. Regulators do some excellent work, like the PRA’s recent warnings about the market losing underwriting discipline, backed by some powerful analysis. Free them up to regulate more intelligently and proportionately, and help UK insurers get back to managing the business, not managing the regulators.