Introduction

Thank you to Insurance Asset Risk for hosting this webinar today. This is my first speech since taking over in May as Executive Director for Insurance Supervision at the PRA. I’ll be talking today about where we are with the reforms to Solvency II, which I have worked on closely with my predecessor Charlotte Gerken over the last few years.

I’ll start with where we have landed on our final policy on the matching adjustment (MA) reforms, then cover our approach to implementation. I’ll say a few words about potential further reforms, and close with how these reforms fit into our wider supervisory priorities for the insurance sector and the PRA’s approach to competitiveness more broadly.

Final MA policy

The newly reformed regime for the Matching Adjustment went live ten days ago, on 30 June. This followed various stages of policy development and consultation culminating in the publication of our Policy Statement 10/24. We’re very pleased to have reached this important milestone. In line with the PRA’s secondary objective, the reforms have been designed to support UK competitiveness and growth, particularly through the investment decisions insurers make to support the UK economy.

The MA reforms are the culmination of several years of effort, across the PRA, HM Treasury and industry. They are a package of measures focused on three key goals: improving insurers’ investment flexibility, increasing responsiveness of the regime to risk, and enhancing insurers’ responsibility for risk management. We have implemented this package faithfully in a manner consistent with our statutory objectives, and in line with the legislative framework Parliament has set.

The MA reforms widen the scope of eligible assets and liabilities that can be included in MA portfolios, streamline the steps needed by insurers in their MA applications, and enable the PRA to make quicker decisions. In doing so, the reforms advance the PRA’s secondary objectives to facilitate effective competition and support international competitiveness and long-term growth. They should also help facilitate the commitments the insurance sector made throughout the Solvency II Review to invest more in long-term UK productive assets, such as UK social property and housing initiatives, and green energy supply.

Throughout the reforms, we have also sought to advance our primary objectives: to promote the safety and soundness of firms and secure appropriate policyholder protection. Indeed, this was one of the three objectives for the Solvency II review. The reforms emphasise policyholder protection where it should start: in a firm’s own standards and processes. They include some new measures designed to help us in this respect. For example, for the first time, insurers will be expected to explicitly stand by their assessments through the introduction of the new MA attestation requirement.

The reforms have expanded significantly the types of investments insurers can include in their MA portfolios, and have made it quicker and easier to secure the permission they need to include them. As you know, the MA allows insurers to recognise upfront part of the return they will earn on assets in future, where these assets are well-matched to their liabilities. This is a significant benefit on insurers’ balance sheets, and it may increase further under the reforms. So it is important insurers are confident that the MA benefit is appropriate for their assets, and supported in practice by close asset-liability matching. We therefore consider the new attestation requirement to be an essential part of the new framework.

As with the rest of our reforms, our expectations of firms will nevertheless be proportionate to the level of risk. We listened carefully to consultation feedback on our proposals, and made adjustments to our final policy where appropriate. For example, we made attestation more straightforward in the case of more liquid assets with standard market features.

We also made changes to the final policy where we received evidence that the original proposals could have led to unintended consequences. For example:

• we clarified that the reforms do not change the treatment of firms’ existing assets with ‘fixed’ cash flows;
• we amended our rules to ensure all in-payment income protection business and in-payment group dependant annuities can be MA eligible;
• we clarified triggers for new applications, so that maintaining MA permissions is as efficient as possible for both the PRA and firms; and
• we recalibrated our matching tests for new types of assets, to avoid restricting firms’ additional investment capacity while ensuring they remain closely matched.

Where insurers need PRA approval to include these new assets and liabilities in the MA, we also recognised firms would like clarity on this quickly. So, we have also streamlined MA applications – reducing the level of documentation we will expect firms to submit, and increasing the reliance we will place on firms’ own processes and controls.

We also recognised the desire for transparency in how we exercise our powers and make decisions. We will report regularly in future on how we are doing, including the number of application decisions we make, and the time we take to reach those decisions.

Our stakeholder engagement on the MA reforms was wide-ranging and extended beyond the formal responses to our consultation. For example, last year we convened some Subject Expert Groups (SEGs), with representatives from a range of firms, to help us gather information to inform the development of our proposals. We are keen to maintain that type of engagement in future, to help us understand how well the reforms are achieving their objectives.

We also brought the MA reforms into effect ahead of other Solvency UK changes, to help insurers deliver their investment commitments as soon as possible. But we also recognised that in some cases firms would need some additional time to deliver our new expectations in full. So in our final policy we gave more flexibility on when some new expectations on firms should take effect.

From policy to implementation

So with the new regime in effect, we have passed an important milestone. But the PRA and the industry will still have a critical role in the coming months in ensuring the objectives of the Solvency UK reforms are achieved in practice.

Alongside our policy work, we have made sure we are ready in Supervision to deliver our part in implementing the new MA regime. We have engaged with firms with in-flight MA applications already with us, to ensure a smooth transition. We also have good sight of the pipeline of new MA applications, some of which are either already with us or due imminently. A dedicated MA team is in place within my Directorate to deliver our part in a new streamlined review process. We expect this new approach to materially improve the application process. It will allow firms to take advantage quickly of the wider universe of MA-eligible assets, including investments which directly contribute to UK economic growth. At the same time, it will enable us to make sure firms meet the required standards on MA eligibility.

The new MA application process will feel different, and firms will also need to adapt their own approaches to take advantage of these reforms and help us ensure the process runs smoothly. In short:

• we will triage MA applications to ensure we focus our review time and resource on the biggest potential risks to our objectives;
• we will streamline our approach, where possible, to be more targeted and risk-based on MA eligibility in our application reviews. We will review other areas such as the appropriateness of a firm’s approach to internal ratings as part of ongoing supervisory activity; and
• we have made sure that the new framework includes simple and pragmatic ways for firms to allow for increased uncertainty in respect of some new MA assets. If used properly, these should help firms and the PRA get comfortable more quickly with any additional uncertainties in more complex assets, and keep our reviews focussed and proportionate.

Our ability to deliver quicker decisions for firms in practice will also depend on the quality and content of firms’ submissions. So, we have published updated materials to help insurers understand the information we expect to receive to assess an MA application.^{footnote [1]} The more firms can provide this in a way that is clear and accessible, the easier it will be for us to complete our reviews quickly.

All in all, we think the reforms can materially shift the dial for insurers to include new assets into the MA in line with the objectives of the reforms. If insurers respond appropriately, this could bring big potential benefits to the UK economy. We are committed to play our part in implementing these reforms effectively.

But to meet the objectives of the Solvency II Review to support UK growth, insurers will need to play their part too. Insurers have choices to make in how they use the capital resources freed up from the wider Solvency UK reforms, and in how they deploy the wider investment flexibility they now have. Their decisions will affect whether the reforms achieve the wider objective that insurers provide more long-term capital to support UK economic growth.

Accelerating further innovation

In a fast-moving world, we also recognise the need to continue to keep our approach under review as the external environment changes, and as insurers and markets innovate.

The PRA is committed to supporting safe innovation and to engaging with stakeholders to better understand the role it can play. In this vein, the PRA is convening a pilot roundtable with industry leaders later this month to discuss what other steps we can take to foster innovation more generally across our policy framework.^{footnote [2]}

As a specific example in a life insurance context, we are also thinking about how the MA framework and processes could evolve further in the future, to help support innovation and UK productivity, while ensuring continued safety and soundness.

One recent debate has been whether one or more forms of a ‘sandbox’ concept might help in this respect.^{footnote [3]} The PRA and the ABI established a joint SEG earlier this year to look at the potential benefits different sandbox variants could bring, over and above the benefits from the significant reforms we have already delivered.

A particular proposal we have considered is an MA ‘Accelerator’, which could allow firms to self-certify eligibility for MA of a limited portion of assets, in advance of seeking formal approval from the PRA. Of all the ideas we have looked at, this has received the broadest support across the industry as something which could help firms take advantage even more quickly of new investment opportunities. We are considering the timing of any further policy development in this area, against other policy priorities. But with appropriate safeguards I think such an Accelerator could be a useful future enhancement to the regime, while ensuring appropriate eligibility standards are still met.

Some commentators have also continued to argue for other proposals involving a further widening of MA eligibility, beyond the significant widening just delivered as part of the Solvency II Review. We are committed to assessing over time the impact of the reforms that we have just implemented, and to reviewing their effectiveness in practice. And we recognise the importance of prudential regulation keeping pace with future changes in the critical services that the wider economy demands of the financial sector – in this case, certain forms of long-term productive investment. But there is less consensus on these other proposals and they would need more work.

In addition, there is a risk that in seeking to focus debate now on how the regime might evolve further, we lose sight of what has already been delivered. The reforms implemented last month already given insurers significant new investment flexibility within the MA, which I think is in line with current demands on the sector.

Indeed, at the outset of the Solvency II Review, it’s worth remembering that life insurers argued that their capacity to support UK productive investment could be achieved if the review delivered three things. Those were: (i) a significant reduction in the risk margin, (ii) maintaining the current structure of the MA framework, and (iii) widening MA eligibility to include assets with highly predictable cashflows. All these changes have, of course, now been delivered through the Solvency UK reforms. These reforms have already delivered a significant boost to life insurers’ solvency positions, from the reduction in the risk margin of around 60% on average^{footnote [4]}. This has freed up additional capital resources that insurers can use to support additional investment if they choose. The MA framework has indeed been maintained. And asset eligibility has been widened to help insurers invest more in assets with highly predictable cashflows.

So while it is right that we keep under review how the regime might evolve further in future, we should not lose sight of what has already been delivered. There is already plenty of scope for insurers to use the existing reforms to support their plans for increased productive investment, and I’d encourage insurers to focus on what they can do already under the new reforms. My team is ready to engage on their applications and there is no need to wait for future changes.

Placing the MA reforms in context

While the MA changes are a significant milestone for the new Solvency UK regime, they are only part of the regulatory reform package this year. In February we confirmed the final details of other Solvency UK reforms that will be take effect at the end of the year for all insurers^{footnote [5]}. These broader reforms streamline many aspects of the UK regime, make it easier for new entrants to enter the market, and ensure we have a more efficient and flexible framework for both the PRA and the industry to work within. They deliver significant simplifications and improved flexibility for all insurers, helping competitiveness and growth while maintaining safety and soundness and policyholder protection.

We are also currently consulting on one final piece of the jigsaw – which is to move to our rulebook everything else which is still currently locked in legislation. Once this process has completed, the Solvency UK regime will be fully in the PRA’s policy materials. We will then have the flexibility to evolve the regime in future as needed in ways that we have not previously been able to do. We remain on track to complete this work by the end of 2024.

Beyond Solvency UK, there are also other important structural shifts underway which create both opportunities and risks for the insurance sector. In our supervision we remain very focused on these. Our annual ‘supervisory priorities’ letter from January 2024 sets out our key areas of focus for both the life and the general insurance sectors, and these are the issues that I remain very focused on in my new role.^{footnote [6]}

Specifically for the life sector, we have spoken extensively about the continued shift in UK defined benefit pension liabilities into the insurance sector through bulk purchase annuities (BPAs). As my colleague Lisa Leaman set out recently,^{footnote [7]} demand for BPAs is growing at an ever-greater pace. Our MA reforms will allow insurers wider options about how they invest the assets backing the liabilities they assume through BPA transactions. But the market remains very competitive, and insurers need to maintain high standards of risk management and pricing discipline at this point in the cycle. Insurers’ ability to meet these significant, long-term commitments to policyholders will depend on the pricing and credit risk decisions they make today, and the impact of these decisions on their long-term financial resilience.

The growth of BPA has also brought changes to the dynamics of the market. For example, the implications of the recent rapid growth of ‘asset-intensive’ (or ‘funded’) reinsurance remains high on our supervisory and policy agenda. High levels of funded reinsurance transactions bring particular risk management challenges, concentration risks and cross-border complexity which life insurers need to manage carefully. We have been reviewing the responses to our recent consultation proposals in this area,^{footnote [8]} and you can expect us to provide further details on our final policy expectations shortly.

Given the risks we see, we will maintain a high level of scrutiny of UK insurers’ use of these transactions, at an individual firm level and across the sector. We are also continuing to work closely with other regulators internationally on this issue, given the similar trends and issues being seen in other jurisdictions and the cross-border nature of the risk transfer involved. We will monitor further market developments, and we stand ready to consider further measures if required to mitigate the risks to UK insurers or their policyholders.

Finally, we are also taking forward our plans for our next round of insurance stress testing in 2025. For life insurers, this will also include a funded reinsurance stress scenario, to examine the potential issues that might arise if a UK life insurer had to recapture assets onto its own balance sheet if one of these transactions had to unwind. Stress testing is an important component of our supervisory work testing firms’ vulnerabilities to different scenarios, using a different lens to our standard solvency framework. Our plans to publish individual firm results for the largest UK life insurers will also help to support market discipline, complementing the MA attestation requirements I have already discussed. You will not have long to wait to hear more on our approach; we will be publishing more details on our approach to the 2025 stress test tomorrow for life insurers, and next week for general insurers.

Conclusion

To conclude, I am pleased that we are nearing the end of the journey on the Solvency UK reforms. It has been a long and complex process of policy development and I’d like to thank all my colleagues who have worked hard on this alongside the valuable input we have received from external stakeholders. We are committed to realising the benefits and opportunities provided by the reforms, and we are open for business having completed all the work needed internally to implement them.

As I have emphasised today, our development of the new regulatory regime has been guided, as all PRA work is, by our statutory objectives. We have sought to maintain safety and soundness and policyholder protection, while facilitating competition and competitiveness wherever possible.

On competitiveness specifically, the PRA will publish shortly its first annual report on its new secondary objective. We have previously described^{footnote [9]} three essential components through which we think the PRA can influence the UK’s international competitiveness and advance this objective. These are: (i) maintaining trust in the UK prudential framework, (ii) adopting effective regulatory processes and engagement, and (iii) adopting a responsive approach to UK risks, opportunities and innovation. I hope it is clear that these three components have played an important role in shaping the MA framework and the opportunities it provides to the UK insurance sector that I have discussed today, and they will continue to inform our future work.

Let me close with a construction analogy, given the emphasis in the Solvency UK reforms on supporting insurers’ capacity to invest more in UK infrastructure and other types of productive finance.

Every successful building project starts with some sturdy foundations. In the regulatory construction project that has been the Solvency II Review, we spent time early on carefully surveying the site, to examine its potential and to see what obstacles we would need to clear. Through our consultations, we have identified and tested the regulatory foundations we will need in future. We made sure they can accommodate a range of potential structures that might be built upon them, and we have given these foundations time to set.

That work is now complete, and we’ve opened up the site for others to use. It’s now time for the insurance sector to decide what exactly should take shape above ground. We will look with interest to see what sort of developments emerge, and we hope they will enhance the surrounding area. In short, it is time to build.

I would like to thank Saoirse Carberry, James French, Jemima Ayton and Cameron Thomas for their assistance in preparing these remarks. I am also grateful to Alan Sheppard for his helpful comments.