My Lords, I beg to move that the Committee considers the Solvency 2 (Group Supervision) (Amendment) Regulations 2021. This instrument is being made to address deficiencies in retained EU law relating to the supervision of UK insurance groups under the insurance prudential regime known as Solvency II.
The onshoring of large amounts of EU legislation into domestic law was a vast, complex and time-pressured process. I hardly need remind your Lordships that over 60 statutory instruments were passed; one of these related to Solvency II. This was not an easy feat, since Solvency II is a particularly technical and complex regime, so it is unsurprising that, among the sheer volume of complicated work, there was an oversight that means a technical fix now needs to be made. By this instrument, we are taking action now to ensure that this oversight is addressed well before any potential issues materialise from 1 April 2022.
I will explain what the instrument does and why it prevents a cliff edge on 1 April 2022. The UK Government have made equivalence decisions which assess that the insurance group supervision regime in another country, a so-called third country, is equivalent to the UK. To date, Bermuda, Switzerland and the EEA countries have been determined to be equivalent to the UK for the purpose of insurance group supervision. This instrument will ensure that the UK Government’s equivalence decisions achieve in full the objective of avoiding unnecessary duplication of supervisory work.
I will give a practical example of the type of duplication this instrument seeks to remove. Where a waiver is granted by the PRA, a UK subgroup that is supervised at ultimate parent level by an equivalent supervisor will not need to submit quarterly and annual group reporting templates to the PRA, or prepare an annual report known as the “own risk and solvency assessment”, or publish an annual group report known as the “solvency and financial condition report”.
Using a typical large insurer as an example, I will illustrate how extensive these submissions are and the time and cost savings this instrument may achieve. The solvency financial and condition report of a large insurer can be over 100 pages long. It has qualitative and quantitative materials and sets out aspects of the insurer’s business and performance, system of governance, risk profile, valuation methods used for solvency purposes, and capital management practices. The production of such a report requires analysis and co-ordination by experts in multiple disciplines such as actuarial, finance, accounting, internal audit, IT and risk management, not to mention board and senior management input and review. I stress that this is only one example of the supervisory compliance materials that we are seeking to remove.
The costs of duplication would vary from firm to firm but comprise initial one-off costs as well as ongoing costs as high as £500,000 per annum. Without this instrument, the UK subgroup must duplicate these materials at the UK subgroup level, when its parent already produces equivalent materials for submission to the third country supervisory authorities. The advantages are: reduced regulatory compliance cost for the insurance groups; reduced supervisory cost for the PRA; and reduced need for co-ordination between third country supervisory authorities and the PRA where duplicative materials are being reviewed.