Twenty per cent higher chance of insurance firms collapsing due to Solvency II reforms, Bank of England tells Treasury Committee
6 March 2023
Government proposals to reduce how much capital life insurers must hold to protect themselves against bankruptcy increase the annual chance of a firm collapsing by around 20 per cent, from 0.5 to 0.6 per cent, the Bank of England reveals in correspondence to the Treasury Committee.
In a letter published today, the Governor of the Bank of England outlines that the Government’s plans to overhaul Solvency II rules, which govern the ‘buffer’ of assets an insurer must keep on its balance sheet, increase the probability of a failure in the life insurance sector.
The annual risk of a failure will rise from 0.5 to 0.6 per cent if the changes are implemented, a “relative increase in the probability of failure of around 20 per cent”, according to the Bank. The Governor claims the Government’s plans increase the risk by twice compared to the Bank’s preferred reforms.
It comes as the Committee prepares to question senior leaders of the Prudential Regulation Authority (PRA) and members of the Prudential Regulation Committee at 10am on Tuesday 7 March.
The PRA is responsible for the prudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms.
In the session, MPs are likely to discuss the Government’s proposed reforms to Solvency II, as well as changes to financial services regulations, including the ring-fencing regime, which separates a firm’s retail banking services from the rest of their business, and the senior managers regime, through which regulators hold individual senior managers to account.
The Government is also proposing that regulators are to be given a new secondary objective to promote ‘growth and competitiveness’. Witnesses’ views are likely to be sought on how this will change the operation of the PRA and whether financial regulation currently constrains the UK’s growth.
MPs are also likely to discuss the lessons learned from last autumn’s collapse in LDI funds, and whether the stability of the UK’s financial system is risked by cryptocurrencies and a ‘digital pound’.
The work of the Prudential Regulation Authority (PRA)
Tuesday 7 March at 10am, Wilson Room, Portcullis House, Houses of Parliament
Watch live on parliamentlive.tv
- Sam Woods, Deputy Governor for Prudential Regulation and Chief Executive Officer, Prudential Regulation Authority, Bank of England
- Vicky Saporta, Executive Director of Prudential Policy Directorate, Bank of England
- Julia Black, external member, Prudential Regulation Committee, Bank of England