The Prudential Regulation Authority has set out to bust some myths around the implementation of EU solvency rules, stating that they will firms plenty of time to adapt to the new regime and not use them to increase capital requirements across the sector.
In a speech at the Association of British Insurer’s Solvency II event yesterday (9 July), executive director for insurance supervision Sam Woods also sought to reassure the industry that the regulator was not looking to simply keep the current Icas regime alive.
He stated that the immediate priority was to ensure a smooth transition to the new regulations from 1 January 2016 and added that providers will have plenty of time to adjust.
“The industry has made a tremendous effort to make the transition a successful one. The circumstances have been difficult, with a delay to political agreement on important aspects of the new regime compressing the time that the industry has had to prepare,” said Mr Woods, adding that the delay also added to the costs of implementation.
The PRA is focused on an orderly transition and Mr Woods admitted that recent changes in the microstructure of some financial markets have reduced liquidity and made them more susceptible to disorderly trading even in response to small shocks.
“It is not yet clear how much impact Solvency II will have on the asset side of insurers’ balance sheets, but given that UK insurance firms manage in the region of £200bn in assets, it would seem wise to implement the new regime carefully.”
He continued that this is why capital requirements are so crucial, citing problems the banking sector had when trying to implement CRDIV, the European vehicle for Basel III.
“The financial crisis had made it abundantly clear that our capital regime for banks was wholly inadequate,” Mr Woods noted.
“European legislators foresaw this and therefore (very sensibly in my view) included within the directive transitional measures which allow firms significant breathing space as they adapt to the new regime.”
The Bank of England will allow full use of transitional measures by those firms that qualify to use them, with the ABI’s director general Huw Evans welcoming their use.
“The transitional measures are a key part of the new regulatory regime and it is reassuring to receive formal confirmation that the PRA will allow the full use of these measures to firms, including for the payment of dividends,” he said.
In his speech Mr Woods had again clarified the PRA’s position, explaining that when they consider whether or not firms are in a position to pay dividends, one of the main quantitative yardsticks used is capital levels after the benefit of transitionals.
peter.walker@ft.com
