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Insurers/Solvency II: relaxing rules will not enhance competitiveness

Almost a year on, the Brexit show gets mixed reviews. Some industries, such as insurance, that expected a momentous deregulation push have had to wait longer than expected. Westminster’s talk of enhanced competitiveness has been received politely by wary regulators, including the Prudential Regulation Authority, overseers of insurance. The latter are right to be wary.

This comes at a time when the UK government has big plans for decarbonising the economy. In this respect, there is little deviation from the EU’s goals. But Brexit should have brought added nimbleness to the UK’s effort.

A government eager to encourage local investment in renewable energy infrastructure has challenged pension funds to put up some of the hundreds of billions of pounds required. In August, an open letter from Prime Minister Boris Johnson moaned that 80 per cent of defined contribution pension plans sat in listed securities, which represent just a fifth of UK assets.

Insurers such as the Phoenix Group want to help. Phoenix says it has up to £50bn to put into the pot, about 15 per cent of its assets under management. But the vagaries of Solvency II regulations on insurers’ capital requirements can slow it down.

Making some of the illiquid investments that the government has in mind requires matching adjustments to its capital base to compensate for any added riskiness. Worse, getting approval for these changes can take months.

That is where competitiveness comes in. International asset owners, such as the Canada Pension Plan, also want to invest in the UK’s infrastructure. But without the same regulatory capital hindrances, CPP can move quicker. It has more than £10bn in its UK portfolio alone. Having to hold less matching capital would enable UK insurers to better fight off rivals for these assets.

Understandably, the PRA sees things a little differently. Earlier this year, the head of the regulator Sam Woods told insurers what he thought of allowing a capital release, or some dilution of the rules at the very least. Not much. He has called the estimates of the available capital for investment a bit “speculative”.

A government that asks pension managers to go that extra mile faces a regulator that fears giving an inch to financial institutions will lead them to taking that mile and more. That is no bad thing. History favours prudence.

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