The finalisation of the EU and the UK Solvency II frameworks will be particularly important for the life insurance industry, although some of the proposed reforms (including proportionality and reporting) will also be relevant to non-life firms. In the EU, we expect the final outcome of the reforms to look similar to the European Commission's original proposals for amendment. In the UK, the PRA will engage with insurers on the technical details of the Solvency II reforms during 2023 before issuing a formal consultation.
The ongoing EU and UK reviews of their respective Solvency II framework aim to achieve similar objectives - mainly to channel funds into green and sustainable investments. However, the mechanisms applied to achieve this in the two jurisdictions differ quite significantly.
While both the EU and the UK propose changes to the risk margin, UK reforms remain centred around amending the matching adjustment (MA) criteria, although the UK Government is leaving the fundamental spread calibration within the MA untouched as per its recent consultation response. The European Commission, meanwhile, is seeking to adjust the volatility adjustment (VA) and long-term equity (LTE) criteria. While different in substance, these sets of reforms provide both EU and UK insurers with an opportunity to review and adjust their overall investment strategies as well as MA/VA portfolios, in line with the new rules and, importantly, according to their own climate strategy.
Looking ahead, we expect the reforms to prompt insurers to review their product offerings and strategy, especially in light of the current macroeconomic environment. For life insurers, high interest rates coupled with capital reforms could prove to be a catalyst for re-designing existing products or exploring new product features.