May 2015
Prudential Regulation Authority (PRA) CEO Andrew Bailey has said insurers in the UK require more time to comply fully with the new Solvency II capital rules, as the January 2016 deadline approaches.
Speaking at the Reuters Financial Regulation Summit, Bailey said a downward shift in the risk-free interest rate curves was affecting capital requirements, and that more insurers were likely to make use of the transitional relief allowed by the EU as a result.
According to Reuters, Bailey, who is also deputy governor for prudential regulation at the Bank of England, said: “As long as the risk-free curves remain where they are, then firms will be making greater use of the transitional capital structure in Solvency II than they thought they would.”
Under EU rules, regulators can allow insurers to apply a transitional adjustment to a risk-free interest rate term structure for up to 16 years to ensure they are compliant with Solvency II.
The deduction is the difference between the current rate and the Solvency II rate, and decreases in linear fashion over a 16-year period.
While the UK has reliable sterling market rate projections extending up to 50 years in advance, the Eurozone can only project 20 years ahead – after which it uses a rate calculated by the regulators.
Because the rate determined by regulators increases sooner than the sterling rate, Eurozone insurers could have an advantage over their UK counterparts.
“I would prefer it if everybody was done on the same basis, frankly,” commented Bailey.
“We can’t have one set of firms benefiting from one set of treatments and another set benefit from a slightly different set of treatments.”
Bailey also said that the PRA was likely to make a statement on the use of the transitional period before January 2016.
