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Insurance firms poised to pour billions into energy security following post-Brexit overhaul

·3-min read
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City insurers are poised to pour billions of pounds into Britain's energy security following a post-Brexit overhaul of EU rules.

Rishi Sunak, the Chancellor, launched a consultation on Thursday aimed at radically changing the Solvency II rulebook governing British insurers.

The reforms will allow FTSE 100 insurance giants such as Aviva, Legal & General and Phoenix to collectively plough more than £80bn into the economy, including into assets such as green energy infrastructure.

John Glen, the City minister and economic secretary to the Treasury, said the move was part of the government’s commitment to “capitalise on the benefits of Brexit”.

He added: “Our reforms will unlock tens of billions of pounds of investment in the UK economy, spur innovation in the market while protecting policy holders – and will cement the UK’s position as a global hub for financial services.”

Solvency II was introduced by the European Union in 2016 after years of fraught negotiations in Brussels and requires UK insurers to hold vast sums of cash on their balance sheets.

The rules were adopted by ministers once the UK left the bloc, but Mr Sunak had placed the rulebook under review to determine whether it could be relaxed to boost British insurers and increase investment in areas such as off-shore wind farms.

It comes weeks after ministers published the UK’s new energy security strategy which aims to boost the development of offshore wind, solar and nuclear power to help cut reliance on imports of Russian oil and gas.

The changes are expected to reduce the reporting and administration burden on businesses, increase their flexibility to invest in long-term assets including infrastructure, and free up funds by reducing the risk margin insurers face.

At the same time the “matching adjustment” mechanism covering long-term investments will also be tweaked. The industry says the mechanism pushes it away from projects such as wind farms and into low-yielding sovereign and corporate bonds.

The Bank of England’s Prudential Regulation Authority (PRA) previously sounded a more cautious note on reforms to the rulebook, warning against an overhaul that “materially decapitalises the insurance sector”.

On Thursday it said that while the overhaul “would involve an increase in the risk of insurer failure compared to the current position”, the capital requirements could be eased “while continuing to ensure the UK regime provides an appropriate level of safety and soundness”.

The EU announced its own proposed changes to its own solvency regime in September, sparking fears in the City and in Whitehall that the UK was moving too slowly to overhaul the rulebook and risked being eclipsed by Brussels.

Insurance has been touted for years as an industry that could benefit from relaxing the EU rules introduced to make financial institutions safer after the 2008 financial crash.

Matthew Francis, insurance director at KPMG UK, said: “These reforms present a once-in-a-generation opportunity to construct a regulatory regime which is better tailored to the UK insurance market.

“This will be the biggest set of changes for a decade and firms and boards will want to be confident that they have got them right.”

In December, Andrew Bailey, the governor of the Bank of England, said “the case for reform is clear”, adding that Solvency II was “never well suited” to the UK market, as it threatens the financial soundness of insurers and the protection of policyholders.

Shares in British insurers such as Aviva, L&G and Phoenix jumped more than 1pc on Thursday following the announcement.

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