November 2022 UK HMG Solvency Framework Changes (Solvency II Changes)

Who said Trussenomics was dead?

In my view, its last vestiges can be seen twitching and are deeply embedded in the Government’s insurance and shareholder friendly reform package announced 17 November 2022.

You might reasonably ask me what is ‘Trussenomics’ in this context?

My take is that it means you are going to do something for a specific purpose and then admit that the actions which you are going to take, will not actually satisfy that purpose. But, you are still going to take the actions all the same.

And so it is, I believe, with the Solvency changes.

From what I read (and I am happy to be corrected where I err) a central driver of the Solvency II changes is to “to [allow insurers to] invest tens of billions of pounds in long-term [UK] productive assets” (paragraph 1.8). The government wants insurers to be able to invest “in economic infrastructure, such as clean energy, transport, digital, water and waste and to support the transition to net zero” (4.1) and 1.12: “These steps ………….will enable insurers to increase their investment in productive assets, fuelling the UK economy.”

So, the changes will result in more money to be put into UK plc; no doubt, to pursue growth.

My immediate thought is that I was not aware that UK pension policyholders should be an involuntary source of funds for the UK Government to access in order to fund its preferred projects, just like I didn’t think Daily Mirror workers should have been a forced source of funds for Maxwell’s pet projects.

But let’s put that to one side and concentrate on the Government’s primary aim of “fuelling” growth for UK plc.
Question 2.5 asks if the benefits of the Solvency changes will actually drive more investment in the Government’s preferred UK growth projects. To be fair, this specific response is couched in the Risk Margin detail but, in my opinion, the Government’s conclusion can be applied to all the proposed changes.

Paragraph 2.12: “The Government has no intention to restrict commercial decisions about capital allocation.”

I think that says the Government’s primary aim of UK plc becoming a preferred beneficiary of involuntary policyholder largesse will rank behind, perish the thought, dividends to shareholders, since the insurance companies will be the ultimate arbiter as to where to spend the billions of capital so released.

The changes might (might) lead to cheaper policies (generic good for the future UK pensioner?), but then that is completely consistent: insurance policies should be cheaper going forwards because the embedded risks for policyholders envisaged by the Solvency changes are indeed greater! And this is, de facto, very bad news for those that have already paid out their expensive premiums. You see, there is no undertaking by the insurance industry to carry on doing what they said they would, when you took out your policy.

So, I am left with the question of why is such an insurer shareholder friendly (and, therefore policyholder unfriendly) package, which is not going to achieve its UK growth fuelling aims, being championed by this Government?

For once I do not have an answer (but I do have an opinion).

With regard to the rest of the document, policyholders should always note that net money out of an insurer (and allowing riskier assets in) without any consequent changes in liabilities means more risk to policyholders (and more upside to equity holders).

The Solvency changes have some interesting intentions stated which result in a simple question to ask your advisor:

Which of the following proposed measures makes my policy more secure?
a) Reducing Risk Margin (in effect a current policyholder protection) which releases ~10-15% of total capital held?
b) Intent to review the Financial Services Compensation Scheme (FSCS), including the levy paid by insurers (today the risk levy is £0)?
c) Reducing the harsh capital impact of a credit downgrade from BBB to BB, making it possible to hold onto BB assets and invest in weak BBB assets?
d) Reforming fundamental spread?
e) Allowing non-contractual cashflow assets into the matching adjustment book?
f) Allowing more time to rectify any problems in the matching adjustment book?
g) Removing reporting burdens?
h) Fast-tracking internal model changes through the Prudential Regulatory Authority (PRA)?
i) Fast-tracking matching adjustment book asset qualification through the PRA?

I must admit this is, in my humble opinion, a trick question.

For those already a policyholder, this is what you irrevocably signed up for. Uncontrollable change. As Prudential policyholders have discovered.

For those considering committing to an irrevocable transaction, you might wonder what the 2025 version of UK Solvency changes are going to be (FSCS cover reduced to the same level as a bank account?).

And to all those that think I may have made mistakes in this blog, please let me know where and I will gladly correct them. As I said, most of this stuff is way above my pay grade.