Brexit Blamed by the BoE For Not Changing EU Insurance Rule

Photo by George Rex from Flickr

Call from insurers and lawmakers in the United Kingdom to ease an insurance capital requirement rule that was made by the European Union were rejected by The Bank of England (BoE). The BoE blamed Brexit uncertainty.

Sam Woods, the Deputy Governor of the BoE,  has analysed some potential changes to how the “risk margin” is determined in the rules of the European Union that are known as Solvency II. The rule refers to what a third party would be required to take over policies of an insurer once it went bust.

Last October, the lawmakers on the Treasury Select Committee of the parliament said that the rule should be changed since it was forcing the insurers in the United Kingdom to reinsure business offshore to benefit from the lower capital charges.

The BoE has not been able to persuade the European Union to make quick changes to the rule, leaving the bank with an option of a unilateral action that Woods has ruled out on Wednesday, while he cited Brexit.

Woods considered some ways to mitigate the effect of the risk margin and how it was calculated.

In a letter to the Treasury Committee, Woods stated: “However, in the context of the ongoing uncertainty about our future relationship with the EU in relation to financial services we do not yet see a durable way to implement a change with sufficient certainty for firms to be able to rely on it for pricing, capital planning and use of reinsurance.

“We will keep this position under review and will update the committee as soon as we can see a clear way forward.”

Last March, insurers in Britain urged the BoE to ease the rule. They say that it costs them 50 billion pounds ($67 billion) in additional capital charges.

On Wednesday, the director general of the Association of British Insurers, Huw Evans, said that he was very disappointed.

Even stated: “While it is a step forward for them to confirm a technical solution to the problem exists within the current Solvency II framework, that only makes it more frustrating to hear that uncertainty about Brexit has prevented the regulator acting in a way that makes sense for UK plc.”

He said that the build-up of the stock of offshore reinsurance is considered as an unintended consequence of the risk margin rule and, if it is left unconstrained, it would become a vital prudential concern.

He added: “Our supervisory reviews of firms’ reinsurance activities have not, however, brought to light significant immediate concerns about the way in which that reinsurance is being conducted.”

He said that it appears that there are no harmful effects on the policyholders via the annuity prices either.