UK Government Announces Post-Brexit Solvency II Reforms

As part of its departure from the European Union (Brexit), the United Kingdom is moving away from key EU insurance prudential regulatory standards, including by liberalizing the EU Solvency II regime. These reforms can be seen as political as well as regulatory — and if you’re an insurance professional, it is important to understand what these changes mean and how they may impact you.

The Solvency II regime came into force in the UK in 2016. The government announced a review of the regime in June 2020, followed by a range of proposed amendments this year.

The reformed regime — which will be called Solvency UK — is meant to boost innovation in the sector and assist the government’s drive for investment.

This is the first episode of “The Standard Formula,” a podcast from Skadden covering subjects of interest for UK and European insurance professionals in the Solvency II world. Host Robert A. Chaplin — a partner at Skadden — is joined in this episode by Azad as they discuss the UK’s recently announced post-Brexit Solvency II reforms.

🗝️ Key Points 🗝️

Top takeaways from this episode

• Risk margin. In the government’s final proposals, the risk margin is reduced, using a modified cost of capital method, by around 65% for life carriers and 30% for non-life carriers.
• Matching adjustment (fundamental spread). There will be no change to the design and calibration of the fundamental spread, save for an increase in risk sensitivity to allow a ‘notched’ approach within credit steps.
• Additional proposals. Other reforms in the final proposals concern MA (including various steps to liberalize the MA eligibility criteria), requirements for UK branches of foreign insurers, the application thresholds for Solvency UK and a new regime for startup insurers.
• The full impact remains unknown. Azad speculates that the reforms will bring a number of market impacts, like a degree of investment in infrastructure and clean energy, a new boost for bulk annuity pension deals, innovative approaches to non-conventional assets and more.

💡 Meet Your Host 💡

Name: Robert A. Chaplin

Title: Partner at Skadden

Practice: Robert focuses primarily on transactional and advisory work in the insurance sector. His practice includes advising on mergers, acquisitions, disposals and joint ventures, in addition to regulatory matters.

Connect: LinkedIn

💡 Featured Guest 💡

Name: Azad Ali

What he does: Azad leads Skadden’s UK and EU financial services regulation practice, which covers a wide spectrum of sectors, including banking, investment banking, market infrastructure, fintech, asset management, insurance and regulated businesses generally in the London and European markets.

Organization: Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates

Connect: LinkedIn

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The Standard Formula is a podcast by Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates. This podcast is provided for educational and informational purposes only and is not intended and should not be construed as legal advice. This podcast is considered advertising under applicable state laws.