Whitehall’s plans aim to free up £90bn of investment by reducing the amount insurers need to keep in reserve to protect against default. But it has been at loggerheads with the Bank of England over the extent of the reforms and how much money insurers should keep on their books, with industry insiders accusing the regulator of threatening future investment. Sam Woods, head of the Prudential Regulation Authority (PRA), said on Friday that the industry’s reaction to his group’s proposals had been “largely negative”. As the row escalates, we explain how the government plans to use its post-Brexit freedoms in the insurance industry.
What are the pre-Brexit rules governing the UK insurance industry?
The European Union’s Solvency II law was introduced in 2016 in all member states of the bloc, including the United Kingdom. Regulations for insurers cover a range of activities, from governance and accountability to risk assessment and management.
Why is the UK still following this EU law?
When Britain left the EU, it didn’t throw away all its laws. Instead, the government passed an act that keeps EU law on its books after Brexit, with the intention of gradually diverging from the other 27 member states. Amid post-Brexit turmoil, Downing Street has said it will ease the regulatory burden on various financial services sectors to make Britain more globally competitive. In practice, this means that fewer policies will be enshrined in legislation, with the Bank taking a more active role in regulating key industries. As a result, regulatory powers were transferred from the EU institutions to UK regulators.
Why did the reforms cause controversy?
The Treasury has given the PRA – which comes under the Bank of England – permission to cut red tape after Brexit. It was hoped this would make the insurance sector more competitive and support £90bn of new investment such as infrastructure. By relaxing regulations, insurers can take on more risk and allow more capital to flow into the economy. But critics have accused the PRA of delaying reforms and point to a perceived bias against seizing post-Brexit opportunities to rewrite European rules.
