Government calls for early review of Solvency II amid competition fears

The UK government is pushing for changes to be made to Solvency II raising concerns that is making some companies less competitive.

The Treasury and the bank of England have written to the European Commission, highlighting areas that they would like to see altered, with the government calling for a wider and earlier review of the rules than is planned.

Solvency II, which took 13 years to develop and cost billions of pounds to develop and implement, came into force on 1 January.

In its submission the UK Treasury wrote: “An initial review of the rules’ impact is due to take place in 2018.

“Our experience of implementing Solvency II to date is already raising issues around the impact of the framework on long-term investment and competitiveness of the European insurance industry.”

The Bank of England in its submission focused on more technical aspects, such as the ultimate forward rate — a measure used to calculate insurers’ very long-term liabilities — and the treatment of sovereign bonds.

In its submission, the Bank of England complained that the “risk margin”, a measure that adds to the capital requirement for some products, was too volatile, and could lead to pro-cyclical investment behaviour from the insurers, the FT reports.

The Bank of England and the Treasury said that Solvency II had already altered the way insurers did business, but they said the rules posed particular difficulties for life insurers, especially those that sell annuities — with many complaining that longevity risk in annuities is assessed too harshly.