Bank of England gives insurers wiggle room on capital rule

By Huw Jones

LONDON (Reuters) - The Bank of England (BoE) has given insurers more wiggle room in how they value assets on their books in volatile markets, a step the industry said could lead to savings on capital.

The BoE's Prudential Regulation Authority (PRA) said it would make it easier for insurers to use the "dynamic volatility adjustment" tool that is part of the European Union's capital requirements for the sector.

The dynamic "VA" tool aims to dampen the impact of short-term market swings on the price of assets held for the long term, which in turn would affect the amount of capital held to cover risks associated with those assets.

 

The PRA said on Wednesday that applying for permission to use VA was more cumbersome than necessary, but cautioned it was not a tool for cutting capital requirements.

"The PRA therefore proposed that firms should consider, before submitting an application, whether the application is consistent with the intended purpose of the VA," the watchdog said in a statement.

The Association of British Insurers (ABI) said the change brought Britain into line with what other national regulators and the EU's insurance watchdog EIOPA already permitted.

In a stinging report a year ago, British lawmakers said the PRA must be more flexible towards insurers to keep London competitive as a financial centre after Brexit.

Insurance industry officials said the change could lead to a material reduction in capital requirements.

"It's taken almost three years, a parliamentary inquiry and an EIOPA Opinion, but at long last the PRA will now permit UK insurers to use a dynamic volatility adjustment under Solvency II, something insurers on the continent have been able to do since Day 1," said Steven Findlay, head of prudential regulation at the ABI.

The PRA's announcement on Wednesday included lighter annual reporting requirements for smaller firms on their solvency, but no change to the so-called risk margin, a surcharge to cover what a third party would need to take over an insolvent insurer's policies.

Lawmakers have said the surcharge has pushed some business overseas.

"This should not be the end of the PRA's improvements: more can still be done, such as fixing the risk margin and simplifying transitional measures," ABI's Findlay said.

(Reporting by Huw Jones; Editing by Mark Potter)