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Solvency II Review: Willis Towers Watson’s response to HM Treasury Call for Evidence

By Kenneth McIvor , Kamran Foroughi , Paul Hewett and Gavin Hill | February 19, 2021

With the Brexit transition period now expired, HM Treasury is considering areas of Solvency II that could better reflect the particular structures, products and business models of the UK insurance sector. This article sets out Willis Towers Watson’s response to the UK Government’s call for evidence.
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Willis Towers Watson supports the stated objectives of HM Treasury’s review, which are to make sure that the UK’s future regulatory regime supports an internationally competitive insurance sector, protects policyholders and supports insurance firms to provide long-term capital to support growth. In our detailed response to HM Treasury, available in the full report download below, we have five key recommendations for change:

  1. Improvements to reporting and disclosures: Public disclosures should continue to be improved in the areas of sensitivities and analysis of movement, with unnecessary information requirements reduced.
  2. Transition to Sterling Overnight Index Average (SONIA) swaps for the basic risk-free rate: The transition to SONIA swaps is a missed opportunity to allow Gilts as an option for the discount rate basis. Incentivisation towards one reference rate over another creates the potential for distortion.
  3. Asset eligibility criteria and design of the Matching Adjustment: Greater flexibility and balance is needed when setting the criteria for the eligibility of assets that can be used to back insurers’ long-term liabilities.
  4. Underlying principle and calibration of the Risk Margin: We advocate a revisit of the Risk Margin principle, reflecting that liabilities and backing assets are managed and transacted as blocks of business.
  5. Standard Formula suitability and the operation of Internal Models: A better tailored Standard Formula approach is necessary to reduce pressure to adopt an Internal Model. The PRA should also be able to give a capital add-on without triggering a disproportionate requirement for a firm to develop an Internal Model.

Go to: download the full report

As context to this response, we refer the reader to our previous correspondence on this topic. Willis Towers Watson provided a response to the Treasury Committee inquiry into Solvency II in light of the Brexit vote on 14 November 2016. Since 2016, valuable lessons have been learnt about Solvency II, which are reflected in our remarks in this letter.

In the previous correspondence, we stated our view that an effective insurance regulatory framework should meet the needs of three major stakeholders:

  1. Consumers;
  2. Capital providers; and
  3. Government, working on behalf of society as a whole.

These stakeholders remain at the heart of our thinking about the UK insurance market’s future regulatory framework and are a central theme in our responses to the call for evidence. The challenges we describe for these three stakeholders in the following sections apply across Life and Non-Life insurance, albeit some are more material for long-term insurers.

Our focus on these three major stakeholders aligns with the three objectives underpinning the Solvency II review: to spur a thriving insurance sector, protect policyholders and provide long-term capital to promote growth.

Title File Type File Size
WTW Response to HMT Call for Evidence PDF .2 MB

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Senior Director, Insurance Consulting and Technology
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Paul Hewett
Director, Insurance Consulting and Technology
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Gavin Hill
Director, Insurance Consulting and Technology
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