Cut EU red tape to unleash £95bn investment wave, say insurers
The industry claims the EU's Solvency 2 rules discourage long term investment in climate-friendly infrastructure projects
Ministers should slash Brussels red tape in the insurance market to free up £95bn of capital to turbocharge Britain's green energy infrastructure drive, industry chiefs have said.
Bosses are calling for the Government to take advantage of Brexit by overhauling the EU’s Solvency 2 rulebook for UK firms, which forces insurers to hold vast sums of money in ultra-low risk assets.
A £95bn investment spree could be unleashed while still leaving the industry with enough reserves to withstand a one-in-200-year shock, according to a report by KPMG which was commissioned by the Association of British Insurers (ABI).
The cash could be used to support Prime Minister Boris Johnson's levelling up agenda, the ABI said, as well as providing funds vitals for the switch to wind power and electric cars.
It came as banks urged UK regulators to co-operate with foreign watchdogs to improve market access amid fears business is leaving London due to Brexit.
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.
The Government is reviewing Solvency 2, which the UK played an instrumental role in writing, to determine whether it can be trimmed down to boost insurers and increase investment.
ABI chief Huw Evans said the so-called risk margin governing capital use is the most difficult aspect of the regulations.
Industry bosses have complained that they are forced to hold a disproportionate amount of capital in an ultra-low interest rate environment, tying up billions of pounds of assets that could otherwise be invested in the real economy.
Insurers’ reserves have remained resilient during the pandemic despite a crash in the value of their assets and a surge in claims, although the industry has resisted paying out on thousands of Covid-related claims.
Bosses also want to shake up the “matching adjustment” mechanism used to account for long term investments.
Insurers say that the existing system makes it harder to back long-term projects, including climate-friendly infrastructure such as wind farms, and pushes them to hold low-yielding corporate and sovereign bonds.
The changes would add as much as £16.6bn to the UK’s annual economic output by 2051 delivering a £1.4bn boost to the Treasury tax receipts by 2030, the KPMG report finds.
A 50-page study published on Monday by bank lobby group UK Finance called on the Bank of England and the Financial Conduct Authority to work more closely with their international peers to promote cooperation and encourage other countries to open their markets to UK institutions.
It also argued that new trade agreements should be used to unlock market access for financial services in key markets such as Japan and the United States, while it said cross-border trading models based on recognition could be agreed with a small number of jurisdictions.
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