(p43) - 140. Vicky Saporta, Executive Director, Prudential Policy Directorate, Prudential Regulation Authority (PRA), and Charlotte Clark, Director of Regulation at the Association of British Insurers (ABI), both told us that the risk margin was too high and too volatile,186 and Vicky Saporta told us that the PRA expected the proposed reforms to the risk margin “to lead to a reduction for life insurers—particularly those that offer long-term products.”187
In a speech, John Glen MP, the Economic Secretary to the Treasury, has said that the Treasury intends to cut the risk margin by “60–70 per cent for long term life insurers.”188
142. The PRA has said, in an article in October 2021, that the purpose of the matching adjustment is to recognise that “insurance firms that meet certain conditions—including close ‘matching’ of long-term assets and liabilities—are less exposed to price movements related to liquidity and allows them to value their liabilities at a higher than risk-free rate.”
This gives “high balance sheet stability but low risk sensitivity” and “the current design is insensitive to market signals from changes in credit spreads, and might miss some of the risks that insurers face, which in turn could lead to lower policyholder protection.”190
(p44) - 144. When the Economic Secretary announced the proposed changes to Solvency II, he stated that their combined impact could release “possibly as much as 10% or even 15% of the capital currently held by life insurers allowing them to put tens of billions of pounds into long-term productive assets, with multiple benefits country-wide.”191
145. Charlotte Clark, Head of Regulation at the Association of British Insurers, told us that the matching adjustment should be expanded to include more kinds of illiquid assets.192
She told us that this would enable insurers to invest in illiquid assets with “predictable returns”, such as housing and green infrastructure, more quickly and more easily.193
146. However, Vicky Saporta, Executive Director, Prudential Policy Directorate, Prudential
Regulation Authority (PRA), told us that making such changes was not without risk.
The benefit that the insurance industry as a whole was gaining from its use of the matching adjustment enabling it to reduce the capital it was holding, was greater than the total capital requirement for the life insurance industry.
She explained: We are concerned that currently the matching adjustment benefit itself— by the way, that stands at a staggering £81 billion as at the end of the year 2020, above the total capital requirement for the life industry, which is £76 billion—might be too high. [ … ]
We would like to see an adjustment to the matching adjustment benefit for the sake of protecting the annuitants and the policyholders.194