Insurance policies should take precedence over policy holders over politics

That the arcane world of insurance regulation has emerged in the race for the next UK prime minister may come as a surprise. But as the contest increasingly opens up tax cuts against public spending as a way to solve Britain’s rising cost of living crisis, the promise of freeing tens of billions of pounds from the chains of Brussels red tape may be too enticing for the next leader of the ruling Conservative party: almost the proverbial magic money tree. Rishi Sunak, the former chancellor who advocated overhauling EU insurance policies called Solvency II, is now one of the leaders in becoming the next prime minister. One rival, Tom Tugendhat, this week described Solvency II reform as one of Brexit’s biggest potential benefits.

The battle for this niche of post-Brexit regulation is predictable. A well-organized industry has lobbied hard to dismantle what it sees as excessive restrictions on EU rules, so that it can deploy as much capital as it sees fit. Insurers ’promises to invest in projects like leveling up, infrastructure and green assets are music to the ears of the Boris Johnson government-which deserves to launch a reform consultation, which will run until the end of July – and is likely to appeal to his successor. . Meanwhile, supervisors at the Bank of England are eager not to breach policyholder protections for the benefit of shareholders. Government briefings indicate that the BoE is less of a watchdog than a “dog in the manger”.

Everyone agrees that Solvency II needs to change, even Brussels. The EU’s own reform efforts give insurers the opportunity to describe it as a race: the UK is in danger of being left behind by clunky rules that the EU will remove. A penalty on Brexit rather than a dividend.

After Brexit, Britain was free to write its own rules to better regulate a local market of heavy -duty insurers specializing in annuities. Elements of Solvency II does not equal the penalty in this group. The current battlefield is part of a regime called “matching adjustment”, which specifies what assets insurers can use to repay their long -term liabilities.

The BoE’s Prudential Regulation Authority, which oversees insurers, said it was prepared to reduce bureaucracy and some Solvency II capital requirements-to the tune of up to £ 90bn that could be released for investment-but only if the adjustment is also recalibrated. Sam Woods, the head of the PRA, said on Friday that the regulator had concerns that the calculation of the EU adjustment match was too centered on the historical performance of corporate and government bonds. It may not fully capture the risks inherent in new, more diverse portfolios – where infrastructure, for example, plays a heavier role. Insurers are now concerned that the bonanza released by the return of a Solvency II requirement could be erased by PRA’s strict approach to others.

The bigger risk is the government’s overrule of technical specialists on the altar of political expedency. The effectiveness of the PRA is potentially compromised by government measures that ensure it is competitive in the UK, along with its existing statutory objectives such as protecting policy holders and ensuring the well -being of companies. Advocacy in the UK is the job of government groups and lobbying, not watchdogs.

At stake are the life savings of retirees and policy owners, which, if they are not properly invested, can lead to annoying choices between policy owner haircuts and bailouts. of the taxpayer that a government may need after it ends, whoever rules it. Avoiding such dilemmas is one reason Britain set up arms’s-length regulators in the first place; that PRA can be cautious when it comes to lifetime savings is how it should be. Prudential by name, prudential by nature.