More than a year after Brexit came into force, Great Britain has announced concrete steps to revise the EU insurance directive Solvency II, which are intended to help the industry through deregulation.

The EU regulation, a compromise between the 28 countries, "never worked properly" for British insurers, said Minister for City and Financial Regulation John Glen.

Philip Krohn

Editor in business, responsible for "People and Business".

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Philip Pickert

Business correspondent based in London.

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Glen announced at the annual meeting of the Association of British Insurers (ABI) that London would replace the "inflexible and burdensome regulatory framework" of the European Union with rules that are tailored to its own needs and more easily adaptable.

The new law "Brexit Freedoms Bill" allows relaxed rules to facilitate market developments.

Thanks to easier regulation for life insurers, they should also be able to invest tens of billions in long-term investments.

In concrete terms, this is to be done through lower regulations for special capital buffers and capital backing of financial investments.

Jacob Rees-Mogg, the new Minister for "Brexit Opportunities", had previously described Solvency II as "particularly bad EU regulation".

The new reform is well received

The directive on the European regulatory framework was published in 2009, but it took until 2016 for it to come into force (with long transition periods for insurers).

Whereas the companies' capital requirements were previously determined statically depending on sums insured, Solvency II created a risk-based supervisory law based on market values.

Every single risk that insurers took – be it in their own insurance portfolio or in investments – was backed by individual capital requirements.

Larger insurers in particular were able to use internal models to take their respective risk profiles into account for national supervision.

The introduction resulted in significant adjustments, especially for German life insurers.

After Brexit, the British insurance industry initially tried to keep regulation close to the Brussels directive in order to give insurers from the island access to the EU market.

Apparently, however, this hope was dashed.

The Glens Association of Insurers has now welcomed announcements that its own regulations will be relaxed.

"This announcement is a positive step," said Charlotte Clark, the ABI director of regulatory affairs.

The government is launching a package "that will deliver additional investment in the UK without undermining the high standards that protect policyholders," she said.

The CEO of the insurer Legal & General, Nigel Wilson, praised the announced reform.

It allows the FTSE100 group to invest billions more.

London strengthens the supervisor

According to the details given by Glen, the London government plans in particular to sharply reduce the so-called risk margin.

The capital buffer regulations are to be reduced “by 60 to 70 percent” for long-term life insurers, according to the Minister from the Treasury.

The risk margin required in the EU is excessive.

There are enough other capital buffer requirements in Solvency II to deal with economic shocks, which have a 1 in 200 probability of occurring.

When introducing Solvency II, the British government initially strengthened some principles that are not appreciated in all EU countries.

This includes the market value orientation, which leads to greater fluctuations in the value of capital investments.

Principles-based supervision, in which fewer rules are set in advance by the regulator and the EU Commission, also tends to follow the British tradition.

However, in the tough talks that preceded its introduction, this principle was gradually softened and the continental European tradition of rules-based supervision was at least strengthened.

EU supervisory systems are becoming more individual

With the future supervisory law, the British government intends to depict credit risks more realistically again.

It should also help to invest more flexible capital in infrastructure and other long-term investments.

In addition, London is reacting to complaints from other countries that Solvency II has made the reporting requirements excessive, especially for small and medium-sized insurers.

A revision of the EU regulations is also currently pending in Brussels.

The proportionality of the requirements from supervisory law, especially for smaller insurance companies, plays an important role.

Finance Regulation Secretary John Glen expects that the new rules could free up 10 to 15 percent of life insurers' equity and make it available for other insurance business or for more promising investments.

Its cornerstones read like a fundamental criticism of the design of Solvency II. While there had been a convergence of the supervisory systems between the EU, Switzerland, the United States and Asia in recent years, the British decision is leading to individualisation.