The Bank of England (BoE) has issued a warning that the risk of life insurance business failing under new Solvency II rules would increase by 20% in a given year.
In a letter dated 22 February and addressed to Harriett Baldwin MP, chair of the Treasury Committee, the BoE governor Andrew Bailey outlined the estimated impact on the UK insurance sector of the proposed changes to the Solvency II regime.
Focusing on the life insurance sector to represent the risk to the wider insurance market, as "these are the firms most affected by these changes," Bailey outlined that based on BoE estimates there is "a relative increase in the probability of failure of around 20%."
Announced by the government in November last year, the proposed reform package incorporates reducing required risk margins by 65% for long-term life insurance providers, designed to introduce a "simpler, clearer, and much more tailored regime".
While some insurers have welcomed the reform, Bailey detailed that using figures from year-end 2022, the risk margin for the life insurance sector stood at £22bn. Following the introduction of Solvency II changes, BoE estimates this would fall to £8bn, a release of £14bn once transactional measures have run off.
Based on this, Bailey stated the annual probability of failure within the life insurance sector would increase by approximately 0.1 percentage points.
"This means that over a one-year period (if a firm just met the minimum regulatory standard), the probability that a life insurance firm would hold sufficient capital to withstand the solvency standard stress level will be 99.4% when compared to the current level," Bailey wrote.
"Insurer failure is complex and involves policyholder obligations over long durations. The Equitable Life case is an example of one specific failure. If a future failure occurs, it would be difficult to predict the quantum of losses, nor is it certain that it would be limited to a single firm."
The Treasury Committee will be questioning the Prudential Regulatory Authority and members of the Prudential Regulation Committee today (7 March) to discuss the proposed reforms.
