Opportunity for Solvency II reform is ‘significant’ – Amanda Blanc

New investment capital from the insurance industry that the government’s Solvency II regulation reforms intend to unlock will present “significant” opportunities, according to Aviva group chief executive Amanda Blanc.

Speaking to Insurance Times yesterday (10 March 2023) during a media briefing on the insurer’s full year results for 2022, Blanc said: “On Solvency II, the opportunity for the reform is significant.

“We see the opportunity of Solvency II as the fact that we will be able to invest more into UK infrastructure without being penalised and more into other green type assets with confirmed income over a period of time.”

Published last year and backed by UK chancellor of the exchequer Jeremy Hunt (17 November 2022), the UK government’s reforms to Solvency II would reduce the risk margin for general insurance businesses by 30%.

Current Solvency II regulation requires insurers to hold a solvency capital ratio of at least 100%, meaning they must hold eligible assets in reserve to the value of 100% of what they could be liable to lose over the next year.

The government’s plan to lower this threshold by 30% would mean that insurers would only be required to hold a SCR of 70%.

In its most recent financial results, Aviva posted a SCR of 212% – a 32 percentage point drop from 2021’s SCR of 244%.

Explaining Aviva’s strategy to operate with a SCR higher than required, Blanc said: “We would expect to operate around the 180% mark – we are in excess of that at the moment because we’re in a pretty volatile market.

“We would expect to see [an SCR in excess of that target] for the near future, until economic conditions settle down.”

Regulatory opportunities?

When the final reform plan for Solvency II was set out, Chancellor Jeremy Hunt said the government’s plan would “unlock tens of billions of pounds of investment for our growth enhancing industries”.

At the time, Blanc estimated that the reform would allow Aviva to invest “at least £25bn over the next 10 years across the UK, including in critical areas such as social housing, schools, hospitals and green energy projects”.

However, research published by GlobalData in November 2022 showed that five of the UK’s top 10 general insurers – Aviva, Axa, Allianz, AIG and Admiral – all operated with SCRs of at least 145% in 2021.

These insurer’s SCRs are well above the government’s current minimum requirement, raising questions over the need for reform.

As Blanc explained, however, market-wide volatile economic conditions have influenced decisions to keep SCRs higher.

However, Ben Carey-Evans, senior insurance analyst at GlobalData, said: “Rules that allow [insurers] to invest even more of their capital are not an urgent requirement, as insurers could invest considerably more than they are at present if they wanted to.

“Most insurers are not close to the limit at present, so the government would need to encourage – and possibly incentivise – insurers to trigger the increased investment it is hoping for.”