Draft Insurance and Reinsurance Undertakings (Prudential Requirements) (Amendment and Miscellaneous Provisions) Regulations 2024
(1 day, 13 hours ago)
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The Economic Secretary to the Treasury (Tulip Siddiq)
I beg to move,
That the Committee has considered the draft Insurance and Reinsurance Undertakings (Prudential Requirements) (Amendment and Miscellaneous Provisions) Regulations 2024.
It is a pleasure to serve under your chairmanship, Mr Dowd. The UK’s financial services sector is central to driving growth in the wider UK economy. The Government have committed to reinvigorating the UK’s capital markets, driving innovation and investment in the economy, and enabling the growth and scale-up of innovative green technologies. To that end, we are taking action to address barriers to both the supply of and demand for UK productive investments.
This statutory instrument forms part of a package of reforms to the assimilated EU law that governs the rules that maintain the safety and soundness of UK insurance firms, known as Solvency II. The reforms address demand-side barriers by reducing insurers’ regulatory capital requirements, releasing billions into firms’ balance sheets and incentivising insurers to invest in the UK. These legislative reforms were announced in November 2022 and came into force on 31 December 2023 and 30 June 2024. This statutory instrument makes necessary provision to maintain the reforms and the wider regulatory regime on the revocation of the relevant assimilated EU law on 31 December 2024.
In summary, this statutory instrument preserves a significant cut in the regulatory capital buffer known as the risk margin, maintains the regulatory requirements on insurance groups and undertakings in Gibraltar, and makes further amendments required as a result of changes to the Financial Services and Markets Act 2000 and other legislation.
I will now turn to the detail of what the regulations do. They restate provisions on the calculation of the capital buffer known as the risk margin that would otherwise be repealed at the end of this year. They also affirm the Prudential Regulation Authority’s power to make rules permitting insurers to adopt proportionate approaches to determine the risk margin. The regulations provide that UK supervisory arrangements for Gibraltarian firms will continue unchanged until the broader Gibraltar authorisation regime, legislated for in the Financial Services Act 2021, comes into force.
The regulations empower the PRA to publish results for individual firms within scope of the PRA’s life insurance stress tests, which are generally the largest firms in the life sector. That is in addition to the sector-level results that the PRA has been publishing since 2019. This safeguard provides additional transparency to the market around the resilience of life insurers. It mirrors the approach taken for the results of stress tests for banks.
Finally, the regulations make a number of technical amendments to existing legislation, including the Financial Services and Markets Act 2000, to support implementation of the Government’s package of Solvency II reforms. For example, the regulations amend the definition of both insurance and reinsurance, undertaking to remove references to assimilated EU law. They also remove the definitions of third-country insurance undertaking and third-country reinsurance undertaking, which are not relevant now that the UK is not part of the EU.
Other parts of the regulations make changes that are consequential to the proper functioning of the reformed regime, including for the necessary retention of the risk margin and Gibraltar regulations that I have already noted.
The regulations may sound quite technical, but they are an essential component to complete reforms to the prudential regulatory regime for insurers by the end of this year. The hon. Member for Havant, who sat on the Government side when we went through the entire Financial Services and Markets Act, will be well briefed on what we are doing. I hope the Committee will join me in supporting the regulations and I commend them to the House.
Alan Mak (Havant) (Con)
It is a pleasure to serve under your chairmanship, Mr Dowd. I am pleased to inform the Committee that we intend to support today’s statutory instrument, because it continues the essential reforms to Solvency II started by the previous Conservative Government, as the Minister said, of which I was a member.
The financial services industry employs more than 2 million people in the UK. While two thirds of the workforce operates outside of the south-east, financial services have made London the world’s largest international financial centre. Prudential regulation ensures that insurance firms act safely and reduces the chance of them getting into financial difficulty. It is therefore vital that Solvency II, the framework governing the prudential regulation of insurance firms, reflects the unique structural features of the UK insurance sector. The financial services sector must have the right architecture to provide the best possible security for investors and sufficient capital for businesses.
Following close engagement with industry, the Conservative Government developed detailed plans to reform Solvency II. These reforms were designed to ensure a vibrant and prosperous insurance sector, striking a careful balance between boosting growth and maintaining high standards of policyholder protection. They help ensure the safety and soundness of firms, requiring insurers to hold enough capital to withstand a one in 200-year shock, and could help spur a vibrant, innovative and internationally competitive insurance sector, unlocking £100 billion of productive investment to grow the economy over the next 10 years.
We on the Conservative Benches welcome the Government’s decision to continue our plans to reform Solvency II; we therefore support this statutory instrument and will not divide the Committee.
Daisy Cooper (St Albans) (LD)
It is a pleasure to serve under your chairmanship, Mr Dowd. We Liberal Democrats agree in principle that Solvency II had to be reformed in the UK to encourage more productive investment. Our EU counterparts clearly felt the same, reforming Solvency II in their jurisdiction as well.
Were it up to us, we might have placed a greater emphasis on dynamic alignment with the EU, to make it easier to do business across borders and to prevent the creation of additional red tape that could come from the extra reporting costs that may face firms. Additionally, we might have placed a greater emphasis on encouraging specific tax investments as well—for example, in green infrastructure. None the less, we are where we are. We welcome the fact that the reforms should lead to, in theory, more productive investment.
One issue I would flag to the Minister is that it is currently not clear whether the new regime will end up being more risky than the new EU regime, partly because a lot will depend on how the respective rules are implemented but also because different types of insurance are bought in the EU and the UK. I would be grateful if the Minister could reassure us that there are plans in place, or that they would consider putting plans in place, to review the risk that may emerge from this in years to come.
Tulip Siddiq
I associate myself with the comments of the hon. Member for Havant on the ambition and resilience of our financial services sector. I agree that we should be very proud of it.
In response to the point made by the hon. Member for St Albans, I will keep an eye on and will review the risk she mentions. She will be pleased to know that this Government are resetting the relationship with the EU, by not ramping up divisive rhetoric with our closest trading partners. We are making sure we have a productive relationship with them. I will keep an eye on the risk she mentions.
I thank both hon. Members for sharing our ambition in Solvency II. I know that the reforms are technical in nature, but they are an important step in our shared hope, across the Chamber, to reform the UK’s insurance sector. We all want to generate growth and investment in our country and I hope the Committee will support me in supporting these reforms. We want to have a smooth transition to the reformed Solvency II regime by the end of this year.
Question put and agreed to.