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Correspondence published on Solvency II

30 April 2013

The Treasury Committee has today published a series of letters between its Chairman, Andrew Tyrie MP, and the Executive Director of the Prudential Regulation Authority, Andrew Bailey, discussing Solvency II.

Mr Bailey’s original submission was made to the Parliamentary Commission on Banking Standards. This letter has also been published today on the Banking Standards website.

Chairman of the Treasury Committee, Andrew Tyrie MP, said:

Mr Bailey describes the history of the EU decision-making process on Solvency II as ‘shocking’. He is right to do so.

For the best part of 10 years it has been mired in uncertainty, at great cost to the regulators, insurers and, ultimately, consumers.

Solvency II is an object lesson in how not to make law.

Strengthening and harmonising the prudential regulation of the insurance sector across the EU could bring significant benefits. But we haven’t seen any yet. Even now, no one can be sure what it will add.

Sufficient flexibility must be built into any proposals to allow national regulators to exercise judgement. The PRA should implement them in a way which maximises the protection from risk whilst guarding against the temptation to engage in unnecessary gold-plating. 

The PRA has decided to use ‘early warning indicators’ to assess potential threats to solvency, apparently notwithstanding the risk of EU challenge. This is probably necessary; complex models are all too easily gamed.  A strong UK backstop must be in operation.

It is the role of the regulator to make sure that insurance companies, just like the banks, are adequately capitalised.

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