Given the leaden pace of a post-Brexit overhaul of financial regulation, London market executives could have been forgiven for losing interest, especially after some equivocating and U-turning by City Minister Andrew Griffith on the proposals.
Two events last week, however, which signalled practical changes that will take effect in 2024 and beyond, proved worthy of attention.
One was a conference hosted by the Prudential Regulation Authority (PRA) on the new duty to enable economic growth and support the UK financial sector's competitiveness. This mandate became law in June.
At the other event, the Bank of America Financials Conference, a PRA director provided a summary of Solvency II reforms.
The PRA-hosted event brought together CEOs from both financial regulators, Lloyd's, investment banks, economists and academics, to discuss foundations for how the new growth duty will be implemented.
More importantly, it provided a platform to discuss metrics that would enable the government and financial sector to hold the watchdogs accountable on achieving the objective.
While this event featured some verbose, interminable and frankly quite dull expositions of economic theories and regulatory freedoms, Insurance Insider has compiled here the salient points, slicing them down to proposed metrics and rule changes at the PRA that will take effect during the next 18 months.
Given that many of the reforms are subject to a seemingly infinite consultation and feedback loop, it is difficult at this stage to pinpoint when exactly each change will take effect.
1. A mobilisation option for new insurers
Under Solvency II reforms, the PRA will introduce an optional mobilisation stage for new insurers.
This will involve modified entry requirements for new insurers and more proportionate oversight. It will take the form of a lower capital floor of £1mn, lower expectations for key personnel and governance structures, and exemptions from some reporting rules. It should mirror a similar regime previously created for banks.
The PRA has said that mobilisation will give new insurers the certainty of being authorised as they complete the final aspects of setting up – such as securing investment and recruiting. This change is due to take effect at the end of 2024.
2. New Solvency II thresholds
Another measure to help new entrants will involve lifting the Solvency thresholds around GWP that apply to new or smaller insurers, relieving them of significant burdens. This also won't take effect until December 31 next year.
Currently, Solvency II rules apply to a firm with just EUR 5mn GWP, but this will be converted to sterling, and increased to £15mn.
The PRA said that higher thresholds will remove barriers for new entrants, while "enabling new and existing firms to grow larger under relatively simpler prudential rules."
3. Fewer quarterly reporting burdens
Following a consultation that closed in May, the PRA is forging ahead with plans to delete, lower the frequency, and change the application threshold of Solvency II quarterly reporting templates (QRTs) and the PRA’s own national specific templates (NSTs).
The PRA has said its proposals will reduce ongoing reporting costs for firms, thereby "improving competitiveness and proportionality”.
A total of 12 reporting templates will be deleted, which include information on premiums, claims and expenses by line of business; structured products; special purpose vehicles; Lloyd's solvency capital requirements; and non-life distribution of underwriting risks.
Frequency of reporting will also be reduced for non-life technical provisions and collective investment undertakings. It is likely all these changes will not take effect until late December 2024.
“We want to report on our efforts to make the rulebook more accessible, for example tracking its size”
Vicky Saporta, executive director, prudential regulation, PRA
4. Rigorous reviews of existing rules
As part of reforms under the Financial Services and Markets Act, the PRA will conduct more thorough reviews of its rules, which it has said could "lead to major changes or minor adjustments to the rulebook", depending on the evidence.
Rules may be reviewed for various reasons, including if they have led to unintended consequences, the PRA has said, and it will create a webpage to demonstrate the outcomes of reviews.
A consultation inviting views on how rule reviews should be conducted is open until Friday September 29.
5. Reinsurance and Lloyd's reporting changes
The PRA is also looking to "reduce areas of undue complexity and increase the clarity of what firms are required to report", relating to non-life outwards reinsurance contracts.
The regulator will ditch templates for non-life facultative reinsurance contracts, and amend the 'S.30.03' and 'S.30.04' templates on outgoing reinsurance overviews.
Requirements to report on exposures to SPVs and intra-group reinsurance transactions will also be removed.
A new template on "reinsurer and collateral provider entity" information will be introduced to eliminate duplication of this data set.
To address what it called "deficiencies" in the NS.12 and NS.13 templates required from the Lloyd's Corporation on solvency and minimum capital requirements, the PRA will combine the two.
A new annual template however will be introduced requiring primary carriers to report on cyber risk coverages they provide and potential accumulations.
All these changes are not expected to take effect until late next year.
6. Unburdening UK branches of overseas firms
The PRA will remove the requirement for UK branches of overseas firms to calculate and report branch capital requirements, as well as the localised solvency capital requirement for these branches.
The regulator said these changes represent a more "proportionate approach", given that a branch cannot fail independently of its parent.
Its consultation on these proposals added: "Removing these requirements would raise the attractiveness of the UK as a destination for branches of third-country insurers by making it easier and less costly to set up a UK branch."
The changes however are not due to take effect until December 31 next year.
7. Accountability metrics for the PRA
At the PRA event last week, executive director of prudential policy Vicky Saporta presented options for accountability metrics on the statutory objective to aid economic growth and competitiveness.
One related to data requests. The PRA has set up a transformation programme with the Financial Conduct Authority (FCA) to collect data in a more proportionate way from firms and at the lowest cost. The PRA is exploring metrics to establish how data requests have been streamlined, and if there has been a reduction in regulatory burdens.
The PRA is already publishing operational metrics each quarter, for example timeframes for determinations of new authorisations, change in control applications and senior manager approvals. The data is also broken down by firm type.
The PRA is also considering enhancing these, for example with clearer data on numbers of new authorisations and more detail about each stage of the authorisation process.
As well as performance metrics, indicators are being considered, for example levels of foreign direct investment.
A consultation (yet another one) on these metrics and implementing the growth objective will be published later this year.
8. Streamlined rulebook
It has been acknowledged by the PRA that its rulebook is not the most accessible.
To resolve this, the regulator will bring its policies together on one "user-friendly" website, as it transfers EU rules to its own rulebook.
Saporta said the plan is to streamline the PRA's materials, and "adopt a coherent approach to the structure and language we use". She told delegates last week: "We also want to report on our efforts to make the rulebook more accessible, for example tracking its size."
9. Evolved stress tests
The PRA has signalled a shift under Solvency II to start disclosing results for individual insurers from stress tests, a change that will start with the disclosure of individual results for life insurers where balance sheet vulnerabilities are most material.
For general insurers, the PRA's approach to disclosure for its next stress test will remain on an aggregate basis. Details on the next stress test for GI insurers will be set out over the next month.
The regulator will look at how to evolve its broader approach after individual disclosures are made in a separate stress test of life insurers.
10. Cost benefit analysis of rules
As part of the reforms, there will be new cost-benefit analyses (CBA) on the impact of proposed rules, which will be published for the industry to interrogate.
At the PRA event last week, Saporta said: "We are setting up an independent CBA panel that should keep our feet to the fire on ensuring our CBAs, given our new objectives and responsibilities, continue to be of high quality."
The CBA panel, which will have a new chair in the next two months, will be reporting annually on its activities including on any qualitative and quantitative metrics it introduces.
Next steps
Aside from all other reforms listed above, which largely take effect at the end of next year, the PRA intends to consult in early 2024 on transferring any remaining Solvency II requirements from EU law into its rulebook.
Another change, that applies mainly to life insurers, will come into effect in June 2024. In this case an amendment to the matching adjustment will, according to the government, enable those carriers to invest £100bn in green infrastructure. The PRA has said though that it cannot guarantee this outcome.
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