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UK insurers have benefited from £60bn worth of waivers from the Bank of England in connection with European Union rules that came into force last year.
The BoE’s Prudential Regulation Authority has allowed insurers to accrue benefits worth nearly half their entire capital base through work-arounds to the Brussels rules, the head of the PRA told the Treasury Select Committee on Wednesday.
Sam Woods, who is also a BoE deputy governor, told the select committee that under the EU rules, known as Solvency II, firms have benefitted to the tune of £59bn under the so-called matching adjustment, with an additional £1bn coming under another waiver called the volatility adjustment. That compares to a total capital base of UK insurers under Solvency II of £126bn, he said.
Mr Woods was giving testimony to the committee after industry titans such as Nigel Wilson, the head of Legal & General, and Julian Adams, group regulatory director at Prudential, used earlier hearings to criticise Solvency II. They say that the PRA has gold-plated the regime and that rules have not been applied equally across the EU, blaming it for driving insurance business overseas. They see Brexit as an opportunity to reform regulation in the UK.
Mr Woods said that the industry was “putting their case too strongly” and said broadly that the regime was sensible.
He conceded that “there are some bugs to be ironed out. On the matching adjustment, I would maybe do some things differently.”
The matching adjustment was designed as a way to make it easier for UK life insurers to invest in long-term assets such as infrastructure. The insurers say the PRA’s interpretation of the matching adjustment is too restrictive and cancels out many of the potential benefits of the measure.
The PRA counters that the Brussels directive stipulates that assets must have “fixed” cash flows to be eligible.
Mr Woods defended the PRA’s stance in general towards insurers, agreeing with Andrew Tyrie, the chairman of the select committee, that they posed less of a threat to financial stability than banks did.