UBS has offered its insights into the Prudential Regulation Authority (PRA)’s consultation paper on Solvency II regulatory requirements for insurance firms and groups.
UBS noted that margin reforms are expected to be implemented by the end of 2023, with the primary benefactors of an expected 65% reduction in the risk margin for life insurers being the UK annuity writers.
As such, Aviva plc, Phoenix, M&G plc and L&G should all expect mid-single-digit percentage point improvements to their solvency ratio benefits.
However, these benefits are likely to be offset by a recalculation of the transitional measure on technical provisions (TMTP).
Under Solvency II, insurance companies are required to calculate their technical provisions, which represent the present value of the company's estimated future liabilities towards policyholders.
UBS anticipates changes to the matching adjustment (MA, which allows insurance companies to use a higher discount rate than the risk-free rate, provided certain conditions are met).
“Although no details were provided in today's consultation paper, we expect the MA change to expand the universe of private assets that annuity writers can use to back their annuity liabilities.
“However, we expect these ‘new assets’ to still be restricted to a low proportion of overall annuity asset portfolios and to not lead to a reduction in the quality of cash flow matching,” said analysts.
The PRA also aims to ease rules for new entrants into the UK insurance market, while also relaxing regulations for third-country branches operating in the UK and overseas sub-groups of PRA-regulated companies.