Written evidence submitted by Aviva


Aviva provides life insurance, general insurance, health insurance and asset management to 33 million customers worldwide.  In the UK we are the leading insurer, serving one in every four households.  We help more than five million people save for and live in, retirement, and meet the pension needs of more than 20,000 companies, ranging from large multinationals to small start-ups.  Our global asset management business - Aviva Investors- manages assets in excess of £350 billion.

Aviva is one of the UK’s leading green and social investors and we are committed to playing our role in tackling the climate crisis. We have invested £6bn in green assets since 2015 and we are a member of the UN Net Zero Asset Owner Alliance. Our investment will support the UK as it transitions towards net zero and delivers on its wider economic priorities, including expanding infrastructure investment across the country. Our support will be underpinned by our recent commitment to invest £10bn in UK infrastructure and property over the next three years

The Financial Services (FS) sector makes up 10% of our economy and provides critical services to the other 90%. The insurance sector plays an important role in this:  it allows the public, and firms to transfer risk. It helps people and firms mitigate risk to property, health, ageing, legal liability, and financial loss. It also channels funds into long term investments. This activity supports real economic activity and growth. The technical rules governing insurance can have a profound impact on the availability and cost of these core services. For this reason, FS regulation, and the wider regulatory framework, should be seen as a key element of economic and social policy.

We welcome the opportunity to respond to the Treasury Select Committees inquiry into the future of financial services. We have also responded in a similar vein to the Treasury consultations into the future regulatory framework and call for evidence on the Solvency II regime.

What changes should be made to the UK’s financial services regulations and regulatory framework once the UK is independent of the European Union?

Changes to the regulatory framework

The UK needs a regulatory framework in which Government and Parliament clearly set policy direction in legislation and retain sufficient oversight of the regime in practice, while preserving the ability of regulators to operate independently and to set the technical rules within the legislative framework.

Given the major policy implications of many of the detailed technical rules, this is a difficult balance to get right. This can be achieved using the existing division of responsibilities between Parliament, government, and the regulators. However, given the significant increase in responsibilities and rule-making discretion the regulators have (now the UK has exclusive competence for FS regulation) in practice we believe it will need:

Sufficient detail in legislation

We do not advocate anything like the detail that was contained in EU legislation being retained in UK law and we are supportive of the government’s plan to transfer responsibility for the vast bulk of technical rules to the regulators. But we also need a proportionate approach and to recognise that the detail of financial services legislation has significant public policy implications, whether this be the type of financial services sector in the UK, the scale of lending and investment in the UK economy, or the ease of access to retail financial services. These are questions that should be debated and decided in Whitehall and Westminster.

In our view, the legislation that provides direction to regulators needs to be specific enough to:

1) give Parliament and government control of the macro policy agenda and outcomes,

2) allow the public policy decisions that are connected to the regime to be taken at the appropriate political level,

3) provide Parliament with sufficient detail to enable Regulators to be meaningfully held to account; and

4) create enough specificity to empower genuine legal review.

If the legislation does not provide this substantive input, then political and legal accountability will be significantly impaired as the approach set in legislation will be too high level and vague to effectively assess the regulators against. On the flip-side the legislation must also be “open” enough to enable the regulators to get on with their job (without fear of frivolous legal challenge). This presents a delicate balancing act.

As an example, we have considered how to achieve this balance for the prudential regime for insurance. The model we have explored recognises that the vast majority of financial services legislation is technical and is best managed by the regulator, but it also acknowledges that there are key public policy choices that should be made by governments and politicians. Our proposal would require sufficient detail on the face of legislation to allow for debate and decision on the overall intention of policy and to allow for regulators to be held to account in delivering that framework.

The core design features of the regime set in legislation should ensure that the government’s intention for the regulation of insurers, as expressed in the Treasury’s Solvency II review, are effectively reflected within regulations subsequently written by the PRA. This will give space for Parliament to identify, debate and decide the key topics. Direct references in legislation to the main features of the regime, and to the tools used to achieve certain outcomes (such as the risk margin or matching adjustment), will facilitate this discussion.

Proposed legislative approach to insurance regulation

The current Solvency II regime consists of three pillars – Pillar 1: Quantitative requirements; Pillar 2: Governance and Risk Management; Pillar 3: Reporting and Transparency. The main design features and desired policy outcomes of each Pillar should be described in the legislation. Further, certain characteristics or criteria should be included – particularly where the choice of approach can have a major impact on the provision of vital services to the wider economy. For example, the eligibility criteria for the current Matching Adjustment or the purpose of the Risk Margin (see below) can have profound effects on the investment behaviour of insurance companies. Sufficient reference in legislation allows the purpose and intent of these tools to be set by policymakers but still leaves significant latitude to the PRA in the design and operation of the rules, albeit within the clear parameters set in legislation. Furthermore, should the rules not function as intended, these elements of the legislation can be amended in the future.

The table below is an illustrative and non-exhaustive overview of the main issues that we believe should be set in legislation for the Pillar 1 section of a UK Solvency framework.


Prudential Regime for Insurance Illustrative example of what should be included in legislation


Own funds and technical provisions

  • We do not think that this needs to be covered in detail but we do think legislation should state the structure of the insurance prudential regime, for example the requirement to hold technical provisions and that the valuation of assets and liabilities is on a market consistent basis.


The risk margin

  • Define the intention of the risk margin and the approach to be used (for example, whether reform is based on the current model or an alternative approach).
  • This would allow reflection on the overall capital impact and policy issues such as the interaction with the provision of long-term retirement products and the use of longevity reinsurance.


Long term guarantee package

  • Set out the components of the long-term guarantee package and the matching adjustment.
  • This would facilitate discussion on the role of insurers as long-term investors and how this is shaped by the regime, including how the regime treats different asset classes.
  • We use the matching adjustment as an example of what would need to be said for each component.


Matching adjustment example


  • In our view the legislation needs to say the following about the rules that the PRA would make on the matching adjustment:


  1. There must be a matching adjustment
  2. The matching adjustment should be subject to supervisory approval.
  3. Insurers should be allowed to apply a matching adjustment to the relevant risk-free interest rate term structure for the calculation of the best estimate in line with the spread movements of their assets.
  4. The application of a matching adjustment should be allowed where the cashflows of assets are predictable and match the corresponding liabilities. Those assets should also be managed in accordance with the prudent person principle.



  • The matching adjustment is one of the most important elements of the regime. Directly referencing it in legislation provides certainty that it will be included and allows it to be debated as legislation is made.
  • This illustrative text would direct regulators to widen asset eligibility and therefore support long term investment by referring to “predictable” rather than “fixed” payments and the reference to the “prudent person principle”.
  • The intent of the rules is clear, but the regulator would still have significant latitude to design the technical detail.


Solvency Capital Requirement (SCR) and internal models

  • The structure of the SCR, including that it is based on a 99.5% confidence level. 
  • The existence of internal models and the parameters for their use.
  • The approach to capital add-ons, can they be used and if so, on what basis?


Minimum Capital Requirement (MCR)

  • The existence and function of the MCR, the ladder of intervention, supervisory responsibilities.



Targeted changes to Solvency II regulations

There is an opportunity, following our departure from the EU, to make some targeted adjustments to the current regime to ensure that it better reflects the risks faced by UK insurers investing largely in UK assets, and reflects the needs of the UK, including policyholders (who ultimately pay higher prices if regulation is unnecessarily restrictive). We think that this is a very clear example of how the UK can use its regulatory freedom to deliver tangible benefit for the UK economy and consumers while maintaining the highest regulatory standards.

There are three targeted measures we would propose:

Should the mandate and statutory objectives of the financial services regulators change to include wider public policy issues?

Under the government’s proposals, the regulators would be given significant new responsibility for areas that were until recently the responsibility of the EU Parliament and Council. This would require the regulators to balance complex and competing policy objectives that have been the preserve of democratically accountable bodies. The most effective way to ensure that the regulators are able to balance competing policy objectives transparently and effectively is to establish a new statutory objective to promote economic growth.

A new Economic Growth objective should be broad enough to ensure that the regulators take full account of the critical role of Financial Services in economic growth, in particular:

Without a statutory objective, the regulators would effectively be the sole judge of whether they have given sufficient consideration to wider public policy objectives, and the critical role of Financial Services in promoting economic growth will consequently always be subservient to policyholder protection and stability. On the other hand, if the regulators are given an objective that requires them to more explicitly manage those trade-offs, they can then be properly scrutinised and held to account for the decisions they make in this respect.

We also think there is a very strong case for a new objective to ensure that the financial system supports efforts to tackle climate change. This is the biggest global challenge facing policymakers and the financial regulatory system can play a significant role. It would show global leadership for the UK and its regulators to ensures alignment with the UK’s target of net-zero emissions by 2050, and with the goals of the Paris Agreement.

How should new UK financial regulations be scrutinised?

We believe that Parliamentary scrutiny should focus on:

(i)                  outcomesie. whether regulator policy met the intended policy objectives and standards;

(ii)                 broader performance against the statutory objectives and regulatory principles - particularly the efficiency of regulation and extent to which regulators act to avoid unnecessary burdens;

(iii)               supervisory effectiveness, including the consistency of application of regulator rules.

In order to support effective scrutiny, we think there are a number of steps that should be considered to enhance transparency and provide Parliament with the information that it needs to properly hold the regulators to account. These might include:

How important is the independence of regulators and how might this best be protected?

We support the concept of regulatory independence, within the parameters set in legislation. This is important to foster a stable regulatory and supervisory environment.


February 2021