The head of the Prudential Regulation Authority (PRA) has claimed Solvency II will be “vastly expensive” and do little to make the insurance industry safer.
In a letter to Treasury Committee chairman Andrew Tyrie, PRA chief executive Andrew Bailey Bailey described the history of the EU decision-making process on Solvency II as “shocking”, and added it was unlikely regulators would ever agree to EU-wide rules that were “prudentially acceptable”. German insurers would take at least 10 years to meet the new standards, he added.
Solvency II is designed to improve insurers’ matching of the assets they hold with the risks they take. It has far-reaching implications for the types of policies insurance groups write, as well as risk management practices and corporate governance.
However, Bailey said efforts to finalise the regulations had “ground to a halt” due to conflicting national interests.
He has previously complained about the cost of implementing the regulation, estimated to be at least £3bn for UK companies alone, saying earlier this year they were “frankly indefensible”.
Responding to the letter, Tyrie 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.”
Tyrie added that 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, he said.
“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,” he added.
“It is the role of the regulator to make sure that insurance companies, just like the banks, are adequately capitalised.”
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