The Lex Newsletter: solvency switch frees capital regardless of Brexit

The Lex Newsletter: solvency switch frees capital regardless of Brexit

Dear reader,

City minister John Glen told the Association of British Insurers what they already knew at the organisation’s annual dinner this week. That EU rules still in place under Solvency II regulations are not working for Britain. Attendees know this partly because the EU has already put its own reforms to the same rules in writing.

Even so, the UK’s Conservative government is trying to talk up insurance deregulation as part of a putative “Brexit dividend”. Customers and shareholders of the UK’s big life insurers such as Aviva and Legal & General should benefit when rules are phased in over the coming years.

The goal of UK and EU regulators is broadly the same. Promote the pool of permanent capital in the insurance industry to finance assets that are less liquid than corporate and government bonds. Low interest rates and the search for yield mean this has been happening anyway.

Infrastructure investments keep everyone happy. These generate the long-term returns that match the liabilities of insurers. The government, meanwhile, gets private sector capital to pay for new things such as green power generation.

The first step for the UK in unlocking this treasure trove is to lower capital requirements for life insurers. This will