Clifford Chance
Countdown to Solvency UK - Solvency UK: Fostering Growth and Innovation in the Insurance Sector
According to the Association of British Insurers’ (ABI) Investment Delivery Forum, the introduction of Solvency UK could potentially unlock £100 billion for investment in a broader range of productive assets over the next decade. The Forum, comprising representatives from the insurance and long-term savings industry, is tasked with directing and overseeing this funding, particularly into projects focused on green infrastructure and housing. While ambitious, this initiative aligns with the UK government’s goal of overhauling the EU’s Solvency II framework to implement Solvency UK, a tailored regime designed specifically for the UK.
This article explores the key reforms under Solvency UK, highlighting how reforms to the Matching Adjustment (MA) framework, regulation of third-country branches (TCBs), the new mobilisation regime for start-ups, and adjustments to Solvency II thresholds are designed to drive market growth and foster innovation. This article considers whether the reforms represent a transformative shift that improve the overall competitiveness of the UK insurance industry.
1. The Matching Adjustment
The PRA’s MA reforms are considered in detail in the article “Solvency UK and the Matching Adjustment: A Closer look”.
The PRA’s reforms to the MA framework have been touted as a key driver for growth and innovation within the UK insurance sector. In a July 2024 webinar titled ‘Solvency UK – time to build’, Gareth Trunan, Executive Director of Insurance Supervision, highlighted how the PRA thinks MA reforms could enhance competition and support long-term investment in UK productive assets.
While Trunan framed the MA reforms as facilitating economic growth, the actual impact on the sector may be more gradual and less dramatic than hoped. The expansion of asset eligibility to include assets with highly predictable (HP) cashflows mentioned by Trunan should indeed offer some more investment opportunities, but the use of HP assets is limited in aggregate to creating 10% of the MA benefit for the MA portfolio, and comes with the caveat that insurers must still obtain PRA approval for each new asset or liability they wish to include in their portfolios. This approval process, despite being streamlined, will still, therefore, require insurers to meet comparatively stringent standards, which could limit the speed at which firms can fully capitalise on the reforms.
Additionally, the implementation of the MA attestation requirement flagged by Trunan introduces an extra layer of responsibility for insurers to ensure that their asset assessments are robust. While this requirement is important for maintaining policyholder protection, it also adds to the administrative burden for firms, potentially offsetting some of the perceived flexibility introduced by the reforms.
Moreover, Trunan’s mention of a potential MA “Accelerator”—a mechanism that would allow firms to self-certify the eligibility of certain assets before seeking formal approval—raises the possibility of easing the process further. However, this idea is still in the exploratory phase, and it remains to be seen how it will function in practice. The PRA’s emphasis on maintaining high standards of risk management and pricing discipline, particularly in markets like bulk purchase annuities, suggests that the regulator will not take a purely hands-off approach to implementation. While these measures are important for safeguarding policyholders, they could also inhibit the speed and scope of innovation that insurers may seek to achieve.
While the MA reforms introduce welcome changes that could, in time, enhance the flexibility and investment capacity of insurers, the optimism surrounding their potential to drive significant growth might be somewhat overstated. Insurers will need to navigate prescriptive MA requirements, and their ability to effectively leverage these reforms will ultimately depend on PRA approval.
2. Third Country Branches (TCBs)
The PRA’s changes to the regulation of TCBs are among the more significant elements of the Solvency UK reforms. By removing the requirement for TCBs to calculate and report branch-specific capital requirements such as the Solvency Capital Requirement (SCR) and Minimum Capital Requirements (MCR), and eliminating rules related to branch risk margins and the obligation to hold assets in the UK to cover the SCR, the PRA aims to reduce compliance costs and make the UK more attractive to foreign insurers.
While these reforms are presented as a means to enhance the UK’s appeal as a hub for international insurance business, their potential to truly drive growth in the sector is questionable. One of the primary concerns is that the removal of capital requirement obligations could weaken the level of policyholder protection, particularly in the event of a winding-up. Industry critics argue that the safeguards outlined by the PRA—such as the requirement that a TCB cannot be authorised unless its home jurisdiction has a supervisory regime broadly equivalent to the UK’s—are insufficient to guarantee the safety of UK policyholders. In addition, the PRA has eliminated the SCR localisation requirement, which previously required insurers to hold assets in the UK to cover potential liabilities.
The immediate beneficiaries of these reforms will likely be the approximately 130+ TCBs that the PRA say are currently operating in the UK, who will experience reduced administrative and capital compliance burdens. This, in theory, could make the UK a more attractive destination for international branches, particularly those based in jurisdictions with less stringent regulatory regimes. However, whether this increased attraction will translate into substantial long-term growth for the UK insurance sector is still uncertain at this stage.
3. Mobilisation Regime
The PRA will introduce a new mobilisation regime for startup insurers with proportionate regulatory requirements for firms that opt in, including a reduction of the absolute floor to the minimum capital requirement to £1 million, lower expectations for key personnel and governance structures, and exemptions from some reporting requirements. A firm is expected to remain in the mobilisation period for up to 12 months, during which time a new insurer would operate with the certainty of being authorised as it completes the final stages of setting up (i.e., builds up its systems and resources, recruits new personnel, and secures further investment). Firms will need to apply for a Variation of Permission to exit mobilisation, demonstrating that they can meet regulatory requirements in full going forward, including applicable capital requirements.
To qualify initially, firms must meet the following criteria: a total net policy exposure of £50,000 or less, and the policies must be short-term (with a maximum term of two years), free from liability, large or long-tail risks, and issued on a “claims-made” basis.
The mobilisation regime should make it easier for potential start-up firms to raise the capital they need for authorisation and market entry, in particular insurtech businesses which often specialise in a specific product area. The PRA says that its proposed new regime for insurers borrows some of the principles of the analogous mobilisation regime for banks, which has existed since 2013 and saw a doubling of the rate of new bank authorisations in the three years following its inception. However, there remains uncertainty around exactly how the regime will operate, for example how insurers will ‘graduate’ from mobilisation: discretion lies with the PRA and FCA who will consider each application on a case-by-case basis. The PRA expects to publish information and guidance on the new regime before the end of this year.
4. Thresholds for application of Solvency UK
The PRA proposes to increase the annual gross written premiums threshold at which Solvency UK will apply from £15 million to £25 million (i.e., £10 million more than the threshold proposed in CP 12/23). Firms with technical provisions exceeding £50 million will fall under Solvency II, double the current threshold. This is aimed at promoting insurtech businesses.
Further, the PRA has increased the thresholds for reinsurance operations such that a firm will be subject to Solvency UK if its business includes reinsurance operations exceeding £2.5 million of its gross written premium income, or £5 million of its gross technical provisions rather than the previously lower thresholds of £530,000 or £2.4 million, respectively.
Insurers will benefit from the Solvency UK exemption to the extent that they do not exceed the thresholds for three consecutive years and do not expect to exceed the thresholds in the following five years. Those insurers operating underneath the Solvency II thresholds can choose to operate under NDF rules, which are tailored to smaller firms, or remain within Solvency II regime. It is important for insurers to consider the costs and benefits of operating under NDF rules and the transition period, which will need to take place before the end of 2024.
The impact of the threshold reforms will be felt by smaller firms, who will benefit from the ability to write more business without suffering the administrative burdens of extensive reporting and capital regulations that Solvency UK entails. These reforms are aimed at giving small firms, insurtechs and new entrants the opportunity to grow and help create a more competitive market. The PRA has calculated that its final policy will enable a total of around 15 firms to move out of the Solvency UK regime.
Assessing the Growth Potential of Solvency UK
While the government’s projection of unlocking £100 billion for productive assets is ambitious, the Solvency UK reforms—such as the flexibility introduced by the MA reforms and increased thresholds for smaller insurers—could encourage more green investment by insurers and foster greater competition. However, the actual impact may be more gradual than anticipated, as insurers will still need to navigate PRA requirements, including approval processes for new assets under the MA framework, which could slow their ability to fully capitalise on these opportunities.
Despite the promise of positive change, scepticism lingers in the industry about whether the reforms will drive sustained, long-term growth. For example, removing capital requirements for third-country branches could attract international insurers, but it also raises concerns about fostering a "light-touch" regulatory environment. Similarly, the new mobilisation regime for start-ups may lower entry barriers for insurtech firms, but its success depends on how smoothly businesses transition out of the mobilisation phase and comply with ongoing regulations. In summary, while Solvency UK sets the stage for market expansion, its full growth potential will depend on the industry’s ability to navigate the PRA’s new rules and the substantial volume of guidance that accompanies them.
