Regulators need to work with insurers to ensure the incoming European rules lead to the best outcome for the industry and its customers, an influential group of MPs has said.
The Treasury Committee has published a report on the Solvency II Directive - a harmonised EU-wide insurance regulatory scheme - which acknowledges practical difficulties within the rules, and recommends that the Prudential Regulation Authority (PRA) speak with the insurance industry about the scope for amendments.
The Solvency II Directive primarily concerns the amount of capital that EU insurance companies must hold to reduce the risk of insolvency.
The Treasury Committee highlighted evidence already submitted which raised the issue of problems "both with the legislation as drafted and with the way it has been implemented in the UK by the Prudential Regulation Authority (PRA)".
The Committee accepted that "while some differences of opinion are to be expected, the current Committee is as concerned as its predecessor at the extent of disagreement between the PRA and industry on matters that should be relatively factual".
It gave the example of the availability of investment grade long-term assets.
The Committee also focused on how, post-Brexit, the PRA can act on its own initiative in a number of policy areas, whereas in others it currently has to act within the EU legal framework.
Its concern is that the PRA and industry differ as to precisely where this line is drawn.
It therefore strongly encouraged the insurance industry and the PRA to come to an understanding on what aspects of Solvency II can be changed unilaterally while the UK remains an EU member state.
Where there are areas that the PRA cannot act on its own initiative it may look to discuss changes as part of the ongoing review of Solvency II initiated by the European Insurance and Occupational Pensions Authority (EIOPA), the Committee agreed.
It said that it will be helpful and constructive if EU member states can agree changes together because, regardless of Brexit, there is a value to harmonisation of the industry’s regulation.
As well as the PRA’s primary objectives, it has a secondary objective, which is to ‘facilitate effective competition’. The Committee recommends that the Treasury should consider giving this objective equal primacy.
The Committee said that the overriding priority however is to develop a system of regulation which is right for the UK insurance industry, and which meets all the current and future needs of consumers, providing a prudent regulatory structure without stifling competition and innovation.
The report said: "We would expect the UK regulators—with close input from the industry and HM Treasury—to work on this task. It will be desirable to keep in step with the EU and other international initiatives as far as this is possible."
The Rt Hon. Nicky Morgan MP, chair of the Treasury Committee, said: “The UK insurance industry managed investments of over £1.9tn in 2016 and paid nearly £12bn in taxes to the government. We should not ignore the consequences of Brexit on this important UK industry, nor the way that it is regulated irrespective of Brexit."
